A lot of attention has focused in recent days on the potential that mortgage forgiveness should be considered for home owners who are having difficulty in repaying their mortgages and are in negative equity. The recent focus on mortgage forgiveness has arisen from Professor Morgan Kelly’s keynote speech at the recent Irish Society of New Economists conference where he claimed that mortgage forgiveness is affordable and could help stimulate the domestic economy. Propositions have suggested those who cannot afford repayments should have the value of their debt written down or be allowed to walk away from their mortgages without any ramifications.
Proponents of mortgage forgiveness argue that through reducing the repayments individuals have to make on their mortgages they will have more disposable income to spend. They argue that this income will be spent in domestic shops thus stimulating employment and economic growth. While this may work well in theory, the practical elements of how mortgage forgiveness would work have not been addressed in great detail.
There has been relatively little discussion as to how the scheme would actually work. For instance, forgiving debt does not make it disappear. Someone, somewhere will have to cover the losses which are suffered as a result of mortgages being written off. For Irish banks this will most likely be tax payers. While extra capital may not be required to allow these debts to be written off any depletion of banks capital will essentially be a transfer from the state to those in negative equity. As for non-Irish banks, government funding may have to be allocated to repay the losses they would suffer in forgiving debt.
Following this is the problem of identifying who is classified as being able to meet their mortgage payments and those who are not able to make their repayments. While the Central Bank estimates that almost 50,000 mortgages are in arrears of three months there are a substantial number of households who are making severe sacrifices so as to cover their repayments. The introduction of mortgage forgiveness may act as a disincentive these individuals. Why struggle to repay your mortgage when you can potentially avail of a write down in your debt. The introduction of mortgage forgiveness could act to disincentive those struggling as it effectively punishes those who can afford to pay their mortgages.
Then there is the issue of whether those who are granted debt forgiveness lose some of the equity of their house. Essentially meaning that if they choose to sell their house at a later date the bank, or government, obtain a proportion of the value of the sale proportional to the extent of forgiveness they received. Little attention has been paid to whether equity would be taken from houses which avail of debt forgiveness and what the optimal level of equity would actually be. This is likely to be a sensitive issue if implemented as it would require individuals to lose full ownership of their homes.
Alternative mechanisms to debt forgiveness could provide a better solution. One such option is a form of interest holiday. This allows mortgage holders a period of time where they will be exempt from making interest repayments. They would instead concentrate on paying off the principle value of their mortgage. Alternatively, individuals may be facilitated in restructuring their mortgages over a longer time period allowing for a reduction in their monthly repayments. Both of these options result in the individuals having to repay the full extent of their mortgage. However, they appear to offer more realistic and better options than forgiving debt.
Proponents of mortgage forgiveness argue that through reducing the repayments individuals have to make on their mortgages they will have more disposable income to spend. They argue that this income will be spent in domestic shops thus stimulating employment and economic growth. While this may work well in theory, the practical elements of how mortgage forgiveness would work have not been addressed in great detail.
There has been relatively little discussion as to how the scheme would actually work. For instance, forgiving debt does not make it disappear. Someone, somewhere will have to cover the losses which are suffered as a result of mortgages being written off. For Irish banks this will most likely be tax payers. While extra capital may not be required to allow these debts to be written off any depletion of banks capital will essentially be a transfer from the state to those in negative equity. As for non-Irish banks, government funding may have to be allocated to repay the losses they would suffer in forgiving debt.
Following this is the problem of identifying who is classified as being able to meet their mortgage payments and those who are not able to make their repayments. While the Central Bank estimates that almost 50,000 mortgages are in arrears of three months there are a substantial number of households who are making severe sacrifices so as to cover their repayments. The introduction of mortgage forgiveness may act as a disincentive these individuals. Why struggle to repay your mortgage when you can potentially avail of a write down in your debt. The introduction of mortgage forgiveness could act to disincentive those struggling as it effectively punishes those who can afford to pay their mortgages.
Then there is the issue of whether those who are granted debt forgiveness lose some of the equity of their house. Essentially meaning that if they choose to sell their house at a later date the bank, or government, obtain a proportion of the value of the sale proportional to the extent of forgiveness they received. Little attention has been paid to whether equity would be taken from houses which avail of debt forgiveness and what the optimal level of equity would actually be. This is likely to be a sensitive issue if implemented as it would require individuals to lose full ownership of their homes.
Alternative mechanisms to debt forgiveness could provide a better solution. One such option is a form of interest holiday. This allows mortgage holders a period of time where they will be exempt from making interest repayments. They would instead concentrate on paying off the principle value of their mortgage. Alternatively, individuals may be facilitated in restructuring their mortgages over a longer time period allowing for a reduction in their monthly repayments. Both of these options result in the individuals having to repay the full extent of their mortgage. However, they appear to offer more realistic and better options than forgiving debt.
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