A mortgage reduction plan would be cheaper than the alternative

Vilhjalm A is back on the subject of mortgage reductions. Sounds a whole lot more thought through than the throwing around of percentages that the politicians running have been offering. 

Here goes: 

Back to the costs of such a mortgage reduction plan for Iceland:

“Tryggvi Thor Herbertsson and the Progressive party have introduced ideas of 20 percent write off of the debts of the homes and companies… The twenty percent write off of the debts of the homes and companies would cost 800 billion krona according to the calculation of the Frettabladid. It may be expected that the housing debts of roughly 78 thousand homes are in total around 1300 billion krona and that was calculated from information about the distribution of housing debts which the central bank of Iceland has published. There of are close to half, or around 600 billion krona housing loans of homes in poor position of owners equity, that is homes that have little or negative financial part of their homes.
The owners equity says nothing about the payment ability of the homes. As well as the fund loans of the pension funds 165 billion krona. 20 percent write off of the housing debts only would so cost 300 billion krona.
The debts of the companies in the new banks are around 2500 billion krona and the same write off of their debts would cost 500 billion krona. Around 3000 billion krona of company debts were left behind in the old banks.
Only the part of housing debts are in the three banks. As well as the 165 billion krona from the pension funds are the loans of the housing financing fund at least 140 billion krona. Then the savings funds banks loans are still left out. The part of the three banks in real estate matters is less than half of the housing loans and so most of the write off would be used to pay off loans elsewhere, not the banks. ”

So – a minimal mortgage-reduction plan for homes most in danger of default would cost:
– at 20% reduction, 120 billion ISK
– at 50% reduction, 300 billion ISK

A larger mortgage-reduction plan would cost:
– at 20% reduction, 260 billion ISK
– at 50% reduction, 650 billion ISk

Even with the large mortgage deduction, the write-off is not all that large. It’s a little less than the Icesave debt.
If you add conditions to the debt-reduction, then the amount would be smaller. For instance, the total assets of the homeowner could be factored in. If the homeowner has eg more than 200 thousand euros total assets, then they wouldn’t qualify, or if they have 100 thousand euros assets then they they would only get a 25% reduction. Or mortgage debt would be forgiven as a percentage of the homeowners’ total assets.
Or the mortgage write-down could be concentrated on those homes purchased during the bubble years, say, 2004-2008.
Also, those owing a relatively small amount of mortgage debt are not likely to trade 50% of future profits for a reduced mortgage.
You get the idea – it’s possible to alter the formula so that mortgage relief goes to those who need it the most, or according to what would be acceptable to the government’s budget.
One objection might be that homeowners would just immediately sell their house and buy the house next door, or buy no house at all. I suppose this could be fixed by putting in a condition that the mortgage-reduction is nullified if the house is sold within, say, 2-3 years.
Also, factor in the costs of lost state revenue if large numbers of people emigrate or go bankrupt:
– if the owners in danger of default go bankrupt, then the state would lose at least 300 billion
– if 40,000 working people emigrate, then the state could lose, for instance 20 thousand euros tax per year @ 30 years = 800,000,000 euros
– if lots of people go bankrupt or emigrate, then this drives down the housing market even more, and then there will be more defaults, banruptcies and emigration.


1 Response to “A mortgage reduction plan would be cheaper than the alternative”

  1. 1 Vilhjalm A. March 23, 2009 at 7:51 am

    Here’s a long article with all the statistics about Icelanders’ debts:
    “Skuldir heimilanna um 2000 milljarðar”

    And here’s a blog post discussing the topic and various alternatives:
    “Færa þarf höfuðstól lánanna niður”

    The “alternatives” proposed by Icelanders are little more than Band-Aid solutions, for instance, freezing mortgage payments or extending the length of the mortgages or providing low-interest loans to make the payments.
    These do not address the main problem. Home prices are not likely to increase at any time in the near future, or perhaps ever, unless there is very high inflation.

    Some of the specific objections to a flat debt or mrtgage reduction plan are:
    1) the cost is too high and the state can’t afford it
    2) the State Loan Fund has only 100 billion ISK funds
    3) the “new” banks who hold the mortgages have very little margin and a 20% reduction would make them insolvent
    4) foreign creditors would insist that the mortgage reduction would have to be repaid by the Icelandic government in the future

    I have discussed the cost issue before. The other problems would be solved by reducing the first mortgage and issuing a second (conditional) mortgage, which contains the right to collect future profits if/when the house is sold. A second mortgage is a valid note, as valid as the first note, and can be transferred to third paries as money. Also, conditional mortgages, although a relatively new phenomenon, are as valid as any non-conditional mortgage.

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