Mortgages…here and there…

There’s a piece in the Sunday Business Post this weekend from Jon Ihle which is of some interest. It notes that:

Modifying the terms of mortgages to help struggling borrowers pay back their debts more easily can increase delinquency rates by as much as 20 per cent, according to new research from Columbia University.

The authors of the report, who studied a loan interest rate adjustment programme at US lender Countrywide Financial, found the probability of arrears increased 13 percent within three months of agreeing softer repayment terms.

The probability actually rose to 20 per cent for borrowers with other sources of credit and equity in their homes, the study showed.

And concludes that:

The findings suggest a significant number of borrowers will strategically use mortgage adjustments to buy time, but ultimately will cost the lender more money as the loans go bad again.

‘‘Give people an incentive not to pay their mortgage and some of them will decide – not to pay their mortgage,” the authors wrote in their executive summary.

The piece suggests that:

The news has implications for Irish lenders and the Financial Regulator, which have been working together to prevent repossessions where homeowners go into default on their mortgages.

Nearly 50,000 Irish borrowers are behind on their mortgages by more than 90 days, according to the latest quarterly figures from the Central Bank.

Of these, more than 35,000 are at least six months behind on their payments. About 63,000 loans representing €11 billion more than half of which were in arrears have been restructured.

But putting aside what are, by any metric, pretty dismal figures – and ones that have grown substantially since the Central Bank started collating this data, I wonder though if the US figures are necessarily transferable to an Irish context.

It’s not that they’re entirely inapplicable, but the US mortgage environment differs substantially from the Irish one in a very specific fashion.

In the US mortgage borrowers in a significant number of states can turn to – depending on which state it is – two mechanisms to ease their plight when things turn catastrophic. In 12 states, including populous ones such as California, Texas and Florida, there is what is known as a non-recourse mortgage.

This means that:

… borrowers are not held personally liable for more than the home’s value at the time that the loan is repaid. The lender may recoup some of its loss through foreclosure. However, the lender may not sue the borrower for additional funds. If the foreclosure sale does not generate enough money to satisfy the loan, the lender must accept the loss.

This is where the term ‘jingle post’ has come from when borrowers simply post the keys back to the mortgage provider and the debt ends there.

The second mechanism is termed a ‘one-action’, which means essentially that:

… lenders are only permitted a single lawsuit to collect mortgage debt. This plays out differently depending on the state’s laws. In New York, for example, a lender must choose between the actions of foreclosing on the property or suing to collect the debt.

Should you be fortunate enough to live in California, Idaho, Montana, Nevada, New York and Utah, you can avail of this.

Obviously in both instances borrowers are in a better – though hardly stellar – situation. They still will have up to seven years where their credit rating will be simply nonexistent. But they also have the opportunity to start afresh on different terms.

Of course, as we know only too well, in this state a different model is followed where both the property and the loan are both taken by the mortgage provider in extremis with that debt following people around long after. In a sense the US model, by contrast, is a form of limited liability and is regarded as such.

It seems to me to make a considerable amount of sense.

On the broader issue it strikes me that this may play havoc with attempting to use the US experience as a guide for Irish borrowers. If I know that I can walk away from a property without a further liability following me around then the chances are that in a debt forgiveness situation on one part of my debts I will concentrate on the other more intractable part of it – in other words precisely the dynamic described in the report will come into operation.

But in the Irish context that’s simply not an option. For Irish borrowers arguably anything other than the mortgage is less intractable and not to remain congniscent of that is to ignore the structures within which they work. And even if measures are introduced that ameliorate the mortgage side they cannot, at least in the context of current legislation, position the mortgage in the way it is in the states noted above in the US.

Granted the report in the SBP doesn’t break this down into component parts and it may be that the original report has taken this into account, but as a general guide it shows how cautious people should be in terms of such analyses.