Thursday, October 10, 2013

10/10/2013: Prof Honohan is correct on 'strategic defaults'... but...

It is good to see Prof Honohan making a substantive and strong statement on the issue of 'strategic' mortgages arrears, contrasting the current 'debate' with some reasoned commentary:
http://www.independent.ie/business/irish/patrick-honohan-some-mortgage-holders-not-paying-up-29649978.html

Prof. Honohan is correct - there are borrowers who are attempting to game the system. This is rational and expected. And often it is abusive. Prof. Honohan is also correct in pointing out that Ireland's environment for insolvency and bankruptcy resolution is different from the US, making comparisons to the US data and evidence incomplete at best.

However, Prof. Honohan is not correct in solely placing the blame for the insolvencies crisis on the shoulders of borrowers. Irish State and banks are to share in responsibility for this crisis as well by:

  1. Banks - due to failing to properly price risks in issuing loans. Banks are paid to price these risks (this is what they collect the lending margins for) and they have not done their work in properly selling loans to some/many households.
  2. State - due to failure to properly supervise loans risk pricing in (1) above and due to failure to protect borrowers from occasionally excessively aggressive loans origination practices of the banks.
  3. Banks - due to failure to secure sustainable funding for loans origination, leading to excessive reliance on short-term borrowings and thus increased exposure to funding risks. These risks, once materialised, have been in part loaded onto the shoulders of borrowers with adjustable rate mortgages, in some cases potentially precipitating and in other exacerbating the extent of the crisis.
  4. State - due to failure to properly regulate and supervise banks risk taking activities in funding markets.
None of the points 1-4 are liability of the borrowers. All of the points 1-4 are contributors to the crisis to some extent. 

There is co-shared responsibility by the State and the Banks and this responsibility must translate into liability to aid homeowners in distress. Such assistance can and should take form of cost-efficient and effective solutions. Unfortunately, current discussion does not even begin tackling this issue and Prof Honohan's comment today is not helping the process either

Note: my recent Sunday Times column on strategic defaults issue is here:
My full position on strategic defaults and related matters of foreclosures is here:

9 comments:

Anonymous said...

I think the banks don't really want reposes houses at this present time due to the slump in the market. I think the belief that this would worsen the slump.
I bet if property starts to rise in a meaningful way you would see large repossessions.

Fergus O'Rourke said...

Constantin,

I largely agree, and have made further comment here: http://bit.ly/19K9C8Y.

One quibble, though.

As you may know, despite resisting the more extreme anti-banker polemics, I do put most of the blame for the financial crisis on the banks.

However, banks did not need to do much selling of residential mortgage loans, or indeed of credit generally. They were - foolishly, incompetently and imprudently - "playing catch-up" with demand pressures for most of the time.

Dr. Constantin Gurdgiev said...

Fergus, no objection to what you say from me. Yes, demand was there. Banks fuelled this demand, not just served it. Evidence - entire marketing push from the banks to increase confidence in the property markets, etc. As I say, the responsibility rests with all - borrowers, lenders, regulators, politicians, even media. Liability, however, so far has befallen only borrowers... That is my main point.

Dr. Constantin Gurdgiev said...

Fergus, no objection to what you say from me. Yes, demand was there. Banks fuelled this demand, not just served it. Evidence - entire marketing push from the banks to increase confidence in the property markets, etc. As I say, the responsibility rests with all - borrowers, lenders, regulators, politicians, even media. Liability, however, so far has befallen only borrowers... That is my main point.

Hugh Sheehy said...

The liability has fallen not just on borrowers. The original shareholders were wiped out.

Now rather than the taxpayer getting stuck with all the rest there were many creditors that should have felt pain, but it's not just borrowers.

Plus, with no building going on the lack of foreclosures is hurting many families by keeping prices and rents higher than they would otherwise be.

Dr. Constantin Gurdgiev said...

Yes, Hugh, as well as some subordinated lenders to the banks. But the actual banks themselves did not shoulder liability. They took some losses, booked them against taxpayers funds. Some senior management retired or exited to greener pastures... but as per real costs - not a loss of future expected bonuses or income - there has been no liability onto the banks.

Hugh Sheehy said...

I'm not sure I understand what you mean by "the banks".

The pre-crisis shareholders were wiped out. Entirely in most cases and mostly in the case of BoI. The management should also all have gone, if for nothing more than the dreadful job they did for shareholders. They haven't and that's a scandal, but the management isn't "the banks".

So what, other than those people, are "the banks" in your view? The loan book? The buildings? The banks, as they were, are broke and bust. Most should be gone. But they're not and what's left is now mostly state owned.

Dr. Constantin Gurdgiev said...

Share holders are not the banks - they are investors/funders of the banks. Management, not only senior, but mid-rank - these are the banks. As I said, being 'retired' or 'let go' (often with compensation) is not a 'burden sharing' - households are being 'let go' with life-long overhang of debt on their shoulders. Also, the banks are institutions, brands. As you say, most should have been gone.

Dr. Constantin Gurdgiev said...

Fergus O'Rourke has added a more extensive comment on the post here: http://www.irish-lawyer.com/journal/2013/10/13/residential-mortgage-arrears-strategy-issues.html?utm_content=buffer0bf3d&utm_source=buffer&utm_medium=twitter&utm_campaign=Buffer

Worth a read, as usual.