Ireland chose to preserve the unsustainable mortgage debt from their housing bubble a decade ago. As a result, nearly half the adult population of Ireland are lifelong debt slaves.

When the service on existing debt exceeds the borrower’s capacity to make payments, the borrower is insolvent. The limit of insolvency is also known as the Ponzi limit because once this threshold is crossed, the only way borrowers pay their debts is through additional infusions of borrowed money. Every dollar loaned to a borrower beyond the threshold of solvency, beyond the Ponzi limit, is a dollar lost by the lender — unless lenders find “innovative solutions” to preserve the debt for another day, which is what Irish lenders accomplished when they warehoused their borrowers’ debts.

When a lender pushes a Ponzi over the limit of solvency, they sentence that borrower to financial death. When a Ponzi dies financially, the lender risks the borrower declaring bankruptcy and wiping out the lenders original loan capital. To avoid taking a loss, lenders offer borrowers better terms including lower interest rates to get them back to the brink of solvency. Loan modifications sentence the borrower to a lifetime of debt servitude, but it keeps the lender from losing money, which is all lenders care about anyway.

The plethora of loan modification programs we’ve seen here in the United States is our bankers’ solution to the problem of widespread borrower insolvency. Lenders lowered mortgage rates from 6.5% to 3.5% to make the payments manageable, and they extended borrowers temporary loan terms similar to the toxic Option ARMs that have 2% teaser rates with a staircased 1% increase each year until the borrower defaults again. The loan modification programs maximize lender revenue while doing little or nothing to retire the original debt or help the debtor. Through these programs, lenders can kick the can long enough for the bubble to reflate when they can toughen their stance on struggling borrowers and force them to pay up or get out.

The Irish mortgage problem

While the US and many other countries around the world inflated housing bubbles, Ireland tried to surpass them all. From 1996 to 2006, house prices in Ireland increased more than 300%! As in the United States, Ireland inflated it’s housing bubble with lender debt. When the toxic brew of mortgages poisoned borrowers, delinquencies mounted, and house prices crashed.

Ireland faces the same problems the United States does. The central bank and government are trying to prop up their banks rather than nationalize them and start over. Since their housing bubble was much larger than ours, they have an even larger problem with “legacy loans” and excessive debt leading to widespread borrower insolvency. Their solution has many similarities to ours, but the obviousness of the debt servitude is more troubling.

In Ireland, the mortgage debts were so large that lenders came up with a solution called warehousing. Just as manufactures store merchandise they can’t sell or use in warehouses, lenders in Ireland evaluated each borrower’s ability to repay their loans, and segregated the excess in a warehouse account. This debt is not being paid by the borrower, as their loan modification is only applied to a portion of their original debt. Instead, this debt just sits on the balance sheets or the banks and the homeowners loanowners until some point in the distant future when it will somehow be paid — at least that’s the theory.

Imagine yourself as an Irish homeowner who’s deeply underwater. You have a loan modification that consumes most of your disposable income, and you know the bank will alter the terms in their favor if you make more money. You have no hope of getting ahead. Further, to make matters worse, you have this huge number sitting in a debt warehouse that’s tied to you and your property. If by some miracle you pay off the portion of the debt subject to your loan modification, you will be asked to chip away at the debt warehouse. It gets worse. If you want to sell your house, you must pay off the debt warehouse, so even if house prices recover, you won’t gain any equity — at least not in your lifetime. In short, you are a debt slave, and you know it.

And why are you a debt slave in Ireland? Because some banker somewhere in Europe doesn’t want to take a loss on your mortgage. You know, that same banker who extended all these trashy loans to inflate a housing bubble and profit from the fees.

If I were an Irish homedebtor, I would be pissed.

A colorful explanation of the Irish banking problems

06-Apr-2016

Over the past few years Ireland’s economy has improved, but the country’s housing market may not be out of the woods just yet. After its bail-out program from the European Union and the International Monetary Fund ended in 2013, Ireland’s GDP growth rate in 2014 and 2015 was the highest among European countries. Unemployment is now below 9%, and residential property prices have been rising since 2013 after years of declines. Despite these positive developments, the housing and mortgage markets are still struggling. Banks continue to delever, their balance sheets still weakened by nonperforming corporate loans and severe residential mortgage arrears. Net residential mortgage lending has been negative since the end of 2009 despite an improving trend, dwelling planning permissions are at 15% of their level in 2000, and house prices nationally are still roughly a third below their peak, according to the Central Statistics Office (CSO).

The United States still suffers the ill effects of the housing bubble and the 2008 meldown. We are in better shape than Ireland because despite our excesses, we weren’t as excessive as they were.

Based on its analysis of more than 100,000 mortgage loans backing residential mortgage-backed securities (RMBS) that it rates, Standard & Poor’s Ratings Services estimates that nearly half of Irish mortgage borrowers are in negative equity. This sample of mortgage loans represents about 18% of the outstanding Irish mortgage market by volume. Given the recent softening of house price growth and the introduction of new macro-prudential measures, we believe assessing the likely prevalence of negative equity may help in understanding Irish RMBS transactions’ performance. Overview We estimate that 43% of mortgage borrowers are still in negative equity.

Of mortgage borrowers, 59% who are in arrears are also in negative equity, a far higher proportion than those who are current on their mortgage payments.

Wow! Over half of the borrowers who are underwater strategically defaulted. That’s a full-blown debt-slave revolt!

Mortgage loans from 2007 and those in the Border and West regions record negative equity percentages at or above 50%. …

In other words, they are so far undewater that they have no hope, which is probably why delinquency rates are so high.

Based on our calculations and forecasts, moderate growth in house prices should lead to a gradual decline in negative equity, with a fifth of mortgage borrowers’ current negative equity positions turning positive within two years.

These people don’t see a light at the end of the tunnel. It is clearly in their best financial interest to strategically default.

More Than 40% Of Irish Mortgage Borrowers Are Still Underwater Negative equity arises when declining property prices make a property’s value lower than the outstanding balance of the mortgage loan. This situation may not in itself be an issue for the borrower but can become a problem if the borrower’s financial circumstances and/or personal situation change (e.g., through job loss or divorce). This is because negative equity can make it difficult for the borrower to refinance or move property. For mortgage lenders, negative equity also increases the loss given default (LGD) on mortgage loan repossession cases. Ireland’s high prevalence of negative equity was primarily driven by the sharp property price decline that followed the financial crisis. The situation has improved over the past few years due to a rebound in property prices since 2012 in Dublin and 2013 in other regions. According to the CSO, house prices fell by 51% from their peak, but have recovered by 35% since the trough, though they still represent only 66% of their peak values.

Las Vegas is still the most deeply underwater market in the United States, but even Las Vegas is far better than the average in Ireland.

Average asking prices published by daft.ie for the top five cities (Dublin, Cork, Galway, Limerick, and Waterford) have also started to improve (see chart 7 in the appendix). Dublin has been leading the recovery in house prices: after declining by 55%, Dublin prices have rebounded by 40%. By contrast, rural areas saw house prices fall by close to 60% and they have only risen by 22% since then. … Almost 60% Of 2007 Vintage Loans Are In Negative Equity We forecast negative equity to further fall to about a third of borrowers in the next two years, on the back of moderate house price growth and stabilizing debt repayments, in addition to diminishing arrears. In February 2015, the CBI rolled out some macro-prudential policy instruments, namely LTV ratio and loan-to-income (LTI) limits, to avoid the negative feedback loop between excessive credit extension leading to unsustainable house price growth, banking sector instability, and a new property bubble.

They instituted their own version of Dodd-Frank.

The populists are coming!

The populist appeal and unexpected success of Bernie Sanders and Donald Trump is due to the widespread suffering of ordinary Americans for the benefit of a select few. In both America and Ireland it’s the financial elites who enjoy the largess of a political system rigged in favor of the one percenters. Americans are fed up enough to nominate a bombastic demagogue for President.

Ireland is sowing the seeds of its own discontent with so many owning so much to so few. Don’t be surprised if a voter revolt brings out the pitchforks.

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