The IMF is best known as an emergency lender for countries that can't borrow money. But its research into the best way for countries to deal with their home loan debts may be its most enduring contribution to digging countries out of their boom-time mistakes.
Remarkably, the government here appears to have done little work to examine how to rescue homeowners from their mortgage debts. All attention, instead, has fallen onto relieving the banks of the €90bn – representing half of the annual GDP – they loaned recklessly to commercial property borrowers. Arguably, the significant but much smaller burden of mortgage debt here will stall the economic recovery long after the National Asset Management Agency (Nama) has bought out the troubled commercial property loans.
As the Sunday Tribune first reported, the 28,603 mortgage accounts, worth €5.3bn, the Financial Regulator says are in arrears is probably closer to €8bn when the borrowers who have been allowed to switch to interest-only repayments is accounted for. The amount of Irish mortgage debt distress is large but set beside the scale of the Nama loans ought not to prevent the government designing some sort of bailout scheme for distressed home owners.
In the US, schemes to help homeowners is the hot topic, according to written papers by IMF economists John Kiff and Andrea Maechler.
Experts in the US say that a lot can be learned from the government initiatives to help bail out homeowners there. The housing markets in Europe and the US make for a few complicating twists, however. In most countries if a borrower forecloses on a mortgage loan the lender will go after the remaining assets, meaning the lender has recourse over the outstanding debt.
This is not the case in many states in the US, particularly in the so-called non-recourse states of California and Florida where the borrower has by law protection from being pursued for the outstanding debt.
Many Amercian borrowers who can make their home loan payments, but whose homes are worth a lot less than their outstanding mortgage loans, will hand back their keys and the lender has no recourse for the outstanding home loan balance. Even in so-called recourse states, experts say that people are so blown away by the amounts they owe on their mortgages that the lender knows it is not worth pursuing them for their debts. In effect, the whole of the US home loan market, unlike the majority of Europe, works on the principle of non-recourse lending.
Estimating the losses facing US home loan lenders is complicated by the big number of securitised mortgage loans held off the balance sheets of the US banks but estimates of default rates reach as high as 20% for many sub-prime borrowers.
The IMF, though it has no policy in recommending debt-forgiveness schemes, has rebuked the US for failing to design schemes that focus more on the amounts of negative equity facing homeowners. Studies around the world show that default rates are closely linked to the amount of negative equity facing home borrowers. The Bush and Obama administrations launched two programmes that promised a lot to help homeowners and to persuade borrowers to stay and pay down their home loan commitments. 'Hope for Homeowners' allowed homeowners to refinance existing mortgages into a mortgage that was guaranteed by the Federal Housing Administration. The new Hope loan is refinanced to a level to leave the homeowner with some equity in the house – the outstanding balance sits just slightly below the value of the house. But US home loan experts say that the Hope scheme's insistance the homeowner share any future house appreciation with the government may have led to its failure. Hope for Homeowners failed miserably, with, despite the ballyhoo, fewer than 100 homeowners qualifying for the scheme.
Refinancing loans in the US is notoriously difficult. A borrower may not pay his loan directly to the bank but to a service provider working for the bank. A borrower who gets agreement to refinance from a lender can be refused by the third-party loan service provider.
A new scheme, the Home Affordable Program (HAP), attempted to bring new hope to homeowners but it too may flounder on the issue of who picks up the bill for lenders' forbearance, the scheme's prominent feature. Experts say lenders have also been very reluctant to agree to borrowers reducing the amount they owe on the principal of the loan, another feature of the programme.
Meanwhile, a lively debate has broken out between the US Treasury and the lenders about how the costs of HAP's forbearance should be recognised on banks' balance sheets. The Treasury faces opposition to its preferred plan that the lenders write off the costs of forbearance and then re-insert the loans in their books as income when the forbearance policy period ends.
All schemes designed to help borrowers and banks have to navigate even more obstacles: about half of all troubled mortgages have a second lender and banks with first call on the house want to keep their legal rights.
Experts say that blending the features of Hope and HAP with a programme that recognises the important issue of negative equity would be the best scheme.
Meanwhile, some experts say the policy of forbearance as followed in the US and Ireland could be criticised for 'kicking the can down the road' – hoping that the problems just go away. In the US, HAP appears to have helped slow the fall in foreclosure rates but fears remain that it will only delay the time for the government there tackling the big negative equity debts homeowners face in the US.
In the US, the debate has already started. Here, the government appears to want to wish away the €8bn issue of distressed home debt.