Thursday, August 1, 2013

1/8/2013: Strategic defaults...

This is "I am not drowning puppies for fun" note concerning my view on the problem of 'strategic defaults':
  1. I do not allege there are no 'strategic defaults' in Ireland.
  2. I do state that at this moment, there is no evidence of these defaults being a systemic problem of specific dimension.
  3. Absence of evidence is not, in my view, an evidence of absence. 
  4. I am aware that some people prioritise payments of unsecured debt over secured debt.
  5. However, (4) does not automatically imply that a person doing so is out to 'game the system' to their advantage. They might be prioritising payment of unsecured debt for a number of reasons, other than personal gain, e.g.: (a) their credit cards or small credit union loans fund their day-to-day living expenses and as such they need their credit flowing to survive, or (b) their unsecured creditors exerted more pressure on them and they simply caved in, etc.
  6. I do not allege that doing (4) above (including for the reasons outlined in (5))  is a correct or a good or an acceptable course of action. In fact, in my opinion, it is not. However, presently, the Irish authorities have failed to secure a clear, accessible and definitive pathway for resolving the conflict between secured and unsecured debt obligations for distressed borrowers. As the result of such a failure, we cannot fault people opting for acting according to (5) above, regardless of what we might think.
  7. I am aware of at least one instance where an organisation I am working came across a case of a wilful and strategic default. As the case was brought to us for an independent external assessment and was not represented by us on a client basis, we advised to pursue all legally available courses of action to stop the person from continuing to engage in such activity and we advised the borrower to immediately cease such activities.
  8. I am aware of the study that used US research (not US data) to extrapolate to the Irish situation. I find such an approach a good starting point for a debate, but I do not accept it as a robust evidence to base any policy design or analysis on. It is not an evidence and thus (2) and (3) above continue to apply.
  9. I am aware of the statements by media and analysts that the problem of 'strategic defaults' in Ireland is growing and is already significant. 
  10. My view is that (9) represent unsubstantiated claims, not backed by any real evidence and as such these claims have to be treated as speculative conjectures. Anyone is free to make a conjecture. Some might even opt to be so kind as to seek evidence to back one up. None have a right to impose their conjecture onto actual solution or policy mechanism.
I hope this explains my position on the issue and ends the nonsensical accusations that I am denying the problem. 

My personal conjecture on the topic (backed by anecdotal evidence, so not different from any conjectures on the topic presented in the media to-date) is that there are, most likely, some borrowers attempting to game the system. We do not know how many there are. We do not know who they are. We do not have a means for rigorously identifying them. The correct way for dealing with them is to penalise them at the point of discovery, make such penalty known in advance of any actions to give them a  chance to alter their behaviour.

If the resolution of onerous arrears requires repossession of the property, repossession is justified. It is not my position to argue that all repossessions are unjustified. It is my view that repossessions of family homes should be minimised and, crucially, all repossessions should be preceded by the full, binding and voluntary agreement between the borrower and the lender on how the residual debts, remaining post-repossession action, are to be settled.

Before a point of discovery of their guilt, however, everyone is innocent. 


Bunbury said...

I don't know the extent of the problem but I can confirm that a close relative with several BTL's in Dublin has 'strategically defaulted' for the past two years or more. He didn't give personal guarantees and is collecting the rents and using them to fund his living expenses and pay off a commercial loan on a (vastly overpriced) business property for which he had given a personal guarantee. He is quite willing to hand over the keys of the BTL's (all in very rentable locations) but PTSB has just written to him with vague threats which he duly ignored. Not saying this proves anything but any BTL investors who haven't given personal guarantees may not be exactly quaking in their boots with thoughts of the new legislation.

Joe R said...

Mr Blogger.

There is strategic default in Ireland. The figures are clear about it. If I can put ny view forward.

There has been a mess in the banking system, with them seeking money back from first small businesses and then the government since 2008. More critically perhaps there is a huge delay in an already slow court system, and has been since 2008 too.

As a consequence many people have learned that there is no consequence for not paying. Bills, wages, rents and for houses too.

Solicitors in particular are aware of it. The consequence is that there is a shunting of defaults along the line. Some are deliberate, some are involuntary.

What I am saying that in midst of the real and genuine distress there have been people who have used the confusion not to pay. The poor mouth, an beal bocht, has been hauled out by people who could pay but are utilising the narrative of the genuine distress of the many to avoid paying.

I have had repeated direct experience of this.In private I would be willing to elaborate.

On the subject of mortgages there have been no mass evictions in Ireland, no repossessions and no mass distressed sales and still there is no strong real threat of any of this.

If I can give the example of Spain, on the other hand which has many parallels to Ireland in terms of the nature of its property related crash has a just a 4% distressed mortgages rate but the unemployment level there is far ,far higher. Practically double the Irish rate. And in general wages and benefits are lower. Spain should be worse than Ireland but it isn´t.

(Link follows in Spanish).

Evictions, repossessions and distressed sales do exist there. This is a major difference, though not the only one.