We normally say that a company “went bankrupt,” implying that it had no choice. But when, recently, American Airlines filed for bankruptcy, it did so deliberately. The airline had four billion dollars in the bank and could have kept paying its bills. But it has been losing money for a while, and its board decided that it was foolish to keep throwing good money after bad. Declaring bankruptcy will trim American’s debt load and allow it to break its union contracts, so that it can slim down and cut costs.
American wasn’t stigmatized for the move. Instead, analysts hailed it as “very smart.” It is now generally accepted that when it’s economically irrational for a company to keep paying its debts it will try to renegotiate them or, failing that, default. For creditors, that’s just the price of business. But when it comes to another set of borrowers the norms are very different. The bursting of the housing bubble has left millions of homeowners across the country owing more than their homes are worth. In some areas, well over half of mortgages are underwater, many so deeply that people owe forty or fifty per cent more than the value of their homes. In other words, a good percentage of Americans are in much the same position as American Airlines: they can still pay their debts, but doing so is like setting a pile of money on fire every month.
These people have no hope of ever making a return on their investment in their homes. So for many of them the rational solution would be a “strategic default”—walking away from the mortgage and letting the bank take the house. Yet the vast majority of underwater borrowers keep faithfully paying their mortgages; studies suggest that perhaps only a quarter of all foreclosures are strategic. Given how much housing prices have fallen, the question is why more people aren’t just walking away.
Part of the answer is practical. Defaulting (even in so-called non-recourse states) is still a lot of trouble, and to most people it’s scary. In addition, homeowners are slow to recognize how much the value of their homes has dropped, and have inflated expectations of how much it will rise in the future. The biggest hurdle, though, is social: while companies get called “very smart” for restructuring their contracts, there’s a real stigma attached to defaulting on your mortgage. According to one study, eighty-one per cent of Americans think it’s immoral not to pay your mortgage when you can, and the idea of default is shaped by what Brent White, a law professor at the University of Arizona, calls a discourse of “shame, guilt, and fear.” When the housing bubble burst, the banking industry was terrified by the possibility that homeowners might walk away en masse, since that would have stuck lenders with large losses and a huge number of marked-down homes. So strategic default was portrayed as the act of dishonorable deadbeats. David Walker, of the Peterson Foundation, waxed nostalgic about debtors’ prisons, and John Courson, the head of the Mortgage Bankers Association, argued that defaulters were sending the wrong message “to their family and their kids and their friends.”
Paying your debts is, as a rule, a good thing. But the double standard here is obvious and offensive. Homeowners are getting lambasted for doing what companies do on a regular basis. Walking away from real-estate obligations in particular is common in the corporate world, and real-estate developers are notorious for abandoning properties that no longer make economic sense. Sometimes the hypocrisy is staggering: last winter, the Mortgage Bankers Association—the very body whose president attacked defaulters for betraying their families and their communities—got its creditors to let it do a short sale of its headquarters, dumping it for thirty-four million dollars less than the value of the building’s mortgage.
When it comes to debt, then, the corporate attitude is do as I say, not as I do. And, while homeowners are cautioned to think of more than the bottom line, banks, naturally, have done business in coldly rational terms. They could have helped keep people in their homes by writing down mortgages (the equivalent of the restructuring that American Airlines’ debt holders will now be confronting). And there are plenty of useful ideas out there for how banks could do this without taxpayer subsidies and without rewarding the irresponsible. For instance, Eric Posner and Luigi Zingales, of the University of Chicago, suggest that, in exchange for writing down mortgages in hard-hit areas, lenders would take an ownership stake in a house, getting a percentage of the capital gain when it was eventually sold. Lenders, though, have avoided such schemes and haven’t done mortgage modifications on any meaningful scale. It’s their right to act in their own interest, but it makes it awfully hard to take seriously complaints about homeowners’ lack of social responsibility.
Of course, many borrowers made bad decisions and acted irresponsibly. But so did lenders—by handing out too much money and not requiring sensible down payments. So far, banks have been partially insulated from the consequences of those bad decisions, because Americans have been so obliging about paying off overinflated mortgages. Strategic defaults would help distribute the pain more evenly and, if they became more common, would force lenders to be more responsible in the future. It’s also possible that a wave of strategic defaults—a De-Occupy Your House movement—would get banks to take mortgage modification more seriously, which would be all for the better. The truth is that banks have been relying on homeowners to do the right thing. It might be time for homeowners to do the smart thing instead. ♦
ILLUSTRATION: Christoph Niemann
Wednesday, December 21, 2011
American Airlines, Bankruptcy, and the Housing Bubble : The New Yorker>>> It's different in America!
WANTED: Irish estate agents. No, it’s not Irish property buyers out seeking revenge, but a recruitment agency which is holding a roadshow in Dublin in January aimed at finding agents to work in the London property market.
Property recruitment specialist Deverell Smith Recruitment has found jobs for more than 30 Irish agents in 2011 alone, including placing “a dozen into top-tier brands in Mayfair, Chelsea, Kensington, earning five to six times what they could in Dublin”, says managing director Andrew Deverell Smith.
The agency is, apparently, the first port of call for international firms such as Knight Frank, Savills and Hamptons when they’re looking for property employees.
So on the weekend of January 14th and 15th, two consultants from the agency will come to Dublin to interview prospective candidates, who should make contact now to get an appointment.
Why London? “It’s where the demand is, where money can be made,” says Deverell Smith.
What they’re looking for, he says, is all kinds of agents “who’ve been successful, have great CVs, references and commitment”. He adds, “Irish charm goes a long way.”
Having qualifications is good “and we’ve placed a lot of graduates, but when push comes to shove, experience and character and charisma is what counts. We’re looking for people with experience, credibility, drive and a commitment to relocating.”
If on top of having the above, an agent can speak (in this order) Russian, Chinese, Hindi, Italian or Greek, it could give them an edge.
The rewards can be high: agents typically charge vendors 2 per cent of the sale price. “If you sell a property worth £5 million , that’s £100,000 ,” says Deverell Smith.
Interviews in January will be “an informal half-hour chat”.
By Siobhan Creaton
Friday December 16 2011
BANK of Ireland has taken control of three prestigious buildings in Dublin's Merrion Square owned by a Celtic Tiger couple who amassed a €1bn global property empire.
Solicitor Brian O'Donnell and his wife Mary Pat own 61 and 62 Merrion Square, two five-storey period buildings, and an adjoining property at Fitzwilliam Lane. The three properties, which are interconnected and are rented out as offices, are up for sale.
The O'Donnells put them on the market as part of their efforts to repay Bank of Ireland €71.5m, which the High Court has ruled that they owe. The properties were valued at €30m in 2005.
Speaking to the Irish Independent this week, Mr O'Donnell said he was "stunned" by the bank's lack of communication with him and his wife.
He said the couple were "seeking a solution" to their massive financial challenges but the bank was aggressively pursuing the debt.
This newspaper has learned that the bank appointed Tom Kavanagh of Kavanagh Fennell as receiver to the three Dublin offices recently. Mr O'Donnell is said to have learned of his appointment from the couple's tenants after Mr Kavanagh had arrived to tell them that the complex was in receivership.
Mr Kavanagh did not return calls last night.
The O'Donnells also own 84 Ailesbury Road, another prestigious property that is expected to be put up for sale by the bank.
The O'Donnells believe that Bank of Ireland's relentless pursuit of them is designed to scare other lawyers, doctors and professionals who owe it money.
The bank is expected to move to repossess their luxury home, now that it has secured judgments for €71.5m. Under an agreement that the bank says has been breached, it can move to take their palatial Killiney home, 'Gorse Hill' on the Vico Road, in the coming months.
The 9,000sq.ft property overlooks the sea and has a swimming pool, tennis court, stables, gym and sauna. The couple purchased the 1.25 acre site in 1997 and extensively developed it.
- Siobhan Creaton
By JEROME REILLY
Sunday December 18 2011
A GOVERNMENT quango set up to investigate rogue estate agents has not carried out a single investigation despite costing the taxpayer more than €4m, not including lavish new offices.
The National Property Services (Regulation) Authority (NPSRA), which has nine staff including a chief executive designate, was set up in 2006 and was a child of the Celtic Tiger.
Its job is to investigate and punish errant estate agents, property management companies and auctioneers who break the rules, but legislation granting it those powers was not passed by the Dail until last month.
The authority's first job will be preparation of a property register, giving all details of residential sales in 2010 and 2011. But the delay in passing the legislation means millions of euro has already been wasted.
The NPSRA's budget for this year totalled €738,000, which does not include the cost of accommodation -- rent, service charges, maintenance -- which is paid for by the OPW, which is locked into a controversial upward-only rent review agreement on the building.
The agency has been headquartered at the Abbey Mall premises in Navan rented to the OPW.
A number of other state bodies are housed in the building on a 20-year, upward-only rent agreement which began in January 2008 -- on which a further €9,781,120 will be paid out by the time the lease is up.
A spokeswoman at the Department of Justice told the Sunday Independent: "The functions of the authority will include the investigation of complaints against licensees (ie auctioneers, estate agents and property management agents) and the imposition of sanctions in respect of improper conduct. It will also carry out investigations on its own volition."
The spokeswoman said that in advance of it becoming a statutory body, the authority has been "very active in putting in place a solid foundation for the organisation".
"This is to enable the authority to hit the ground running when the bill becomes law," she said.
The NPSRA website says that it will have the power to issue sanctions against estate agents, auctioneers etc, up to and including the revocation of a licence, and may also impose fines of up to €250,000.
A director designate was appointed in June 2006 and nine staff appointed.
The office was allocated a budget of €700,000 for 2007, €930,000 for 2008, €657,000 for 2009, €738,000 for 2010 and €738,000 for this year.
- JEROME REILLY
Wednesday, December 14, 2011
We are currently offering a site at Queen St, Clonmel. It is a Landmark Town Centre site, formerly a Chadwicks store and yard which was sold for development in 2004. We are guiding €750,000 with final expressions of interest by 20th Dec next. The property comprises 0.67HA(1.66acres) with c.2,800sq m (30,000sq ft) covered space. It is Zoned objective C “to provide for commercial development and related uses.”
€uro50 opened in Clonmel’s Ormonde Centre today. It is their second store in Ireland, following opening in the Ilac centre last month.
They occupy 8,000sq ft retail plus 3,500sq ft storage. They join DV8 and 6th Sense in the Ormonde Centre, which is a town centre redevelopment of the former Tesco store, on Gladstone St, beside the main town car-park (and opposite our office!).
About 200 people queued for the 10am opening and the crowd built rapidly thereafter.
Following a successful year of letting at the centre, we have just 7,000sq ft left of the original 30,000sq ft, with lots of interest in the remainder.
Don’t forget to call us for any information...:)
Thursday, December 8, 2011
- Stamp Duty – Reduction from 6% to 2% for commercial property effective midnight 6th.
- No change to current Stamp Duty regime for residential property.
- Consanguinity relief on transfers of non-residential properties to be retained for intra-family transfers to end-2014. Abolished after 1 January 2015.
- Capital Gains Tax incentive for property purchased between midnight 6th December 2011 and the end of 2013;
- Gains relieved from CGT provided property purchased during this period is held for at least 7 years.
Mortgage Interest Relief
- Increase in the rate of mortgage interest relief to 30 per cent for first time buyers who took out their first mortgage in the period from 2004 to 2008;
- First Time Buyers who buy a home in 2012 will get mortgage interest relief at a rate of 25 per cent
- Non First Time Buyers who buy a home in 2012 will benefit from Mortgage Interest relief at 15 per cent
- Mortgage interest relief will no longer be available to house purchasers who purchase after the end of 2012 and will be fully abolished from 2018;
Legacy Property Tax Reliefs
- Effective from 1 January 2012 a property relief surcharge of 5 per cent will be imposed on investors with an annual gross income over €100,000. This will apply on the amount of income sheltered by property reliefs in a given year.
- Investors in Accelerated Capital Allowance schemes will no longer be able to use any capital allowance beyond the tax life of the particular scheme where that tax life ends after 1 January 2015. Where the tax life of a scheme has ended before 1 January 2015, no carry forward of allowances into 2015 will be allowed.
- The current rate of 25% is being increased to 30%. This increase applies in respect of gifts or inheritances taken after 6 December 2011;
- The current Group A (parent to child) tax-free threshold is being reduced from €332,084 to €250,000 . This reduction applies in respect of gifts or inheritances taken after 6 December 2011.
- A household charge of €100 is being introduced in 2012;
- This is an interim measure pending design and implementation of a full property tax, which will apply in 2014.
- increase in headline rate of CGT has increased from 25% to 30%
- The Minister has decided not to proceed with proposed changes to legislation affecting commercial property leases entered into prior to 28th February 2010, in terms of interfering with upward only rent reviews.
- NAMA has a policy guidance for dealing with tenants’ difficulties arising from upward only rent reviews.
- NAMA may approve rent reductions where it can be shown that rents are in excess of the current market levels and continued viability of the business is threatened. Number of conditions to be satisfied.
- Provision for the appointment of an independent valuation of market rent where necessary.
- Minister to establish an Advisory Group (“The Group”) to advise on NAMA’s strategy and its capacity to deliver on that strategy through property disposal and the ongoing management of assets;
- Government established a group to consider necessary actions.
- A formal announcement on the next steps is expected shortly.
Tuesday, December 6, 2011
MORE than 130,000 property investors could face a massive blow in the forthcoming Budget as proposed plans to overhaul the €510m rent supplement scheme could see rents crash.
Joan Burton, Minister for Social Protection, is seeking to cut the €510m annual rental-supplement bill paid by her department as part of the forecast €700m cut to the benefits budget.
Some 95,700 people in the country are in receipt of the rent supplement payment -- which ranges from €500 per month for a family with three children in Leitrim up to €1,100 per month for a similar family in south Dublin.
The number of people receiving the benefit has jumped 60 per cent since 2005, when the total bill was €369m.
It is understood that Ms Burton's department is looking at using its massive buying power to bring down the rents charged by landlords, as well as changing the limits and conditions associated with the benefit.
However, the supplement is believed to massively distort the private rental market as the sheer volume of payments has kept monthly rents artificially high. Rents this year have remained reasonably steady -- rising 0.1 per cent in the third quarter of the year. Private rents fells sharply in 2009 but have been reasonably constant since then.
Cutting the ceiling on rental payments could see monthly rents crash dramatically, according to property analysts. This will cause increased pressure on the middle classes who invested in rental properties during the boom years.
Falling rents, the second-homes tax and crushing negative equity add up to a major problem for owners of apartments. Government figures show that 99,000 people own a second property with a further 35,000 owning three or more properties .
Latest Central Bank figures show that close to 100,000 mortgages are either in arrears or have been restructured by banks -- that's more than one in 12 home loans.
A major fall in rental prices is likely to see investors face more problems in paying loans on rental properties, which may lead to a spike in arrears and an increase in repossessions by banks.
- Nick Webb
by Sunday Business Post 4.12.11
Lloyds plans €1bn Irish sell-off
4 December 2011 by Gavin Daly
British bank Lloyds plans to put €1 billion-worth of Irish property into receivership as it accelerates the closure of the loan book of the former Bank of Scotland (Ireland).
The plan will affect hundreds of properties, including hotels, shops, office blocks and residential developments.
It is understood that the bank will ramp up its receivership activity early in the new year.
Lloyds stuck a deal earlier this year with Irish firm Green Property to manage at least €1 billion worth of Irish loans. However, it has emerged that Lloyds plans to put the companies behind the loans into receivership first, and allow the receivers to decide whether or not to use Green's asset management services.
Some properties are likely to be sold during the seven-year deal with Green, although the bank has not ruled out creating a property fund that could be sold on in one or more pieces. The bank has described the plan as "a medium-to-long-term solution for the Irish property market, where the challenges are significant".
Bank of Scotland (Ireland) banked dozens of hotel developments during the boom years.
It was the lender to Ashford Castle, which was last week put into receivership with the agreement of the hotel's owner, developer Gerry Barrett.
Ireland’s newest discount chain, who recently opened its first store in the heart of Dublin to snaking queues – will open in The Ormonde Centre, Gladstone St, Clonmel next week.
Fit-out is proceeding at a rapid pace, with the ceiling completed, the floor almost. Racking is going in tomorrow, then stock will be put in over the weekend.
The store consists of an 8,000sq ft unit, facing directly onto the main Town Car-Park. €uro 50 joins DV8 and 6th Sense who are already trading very successfully in this town centre location.
The retail chain is part of the 99p Stores Group, which has 150 branches in its portfolio.
Faisal Lalani, Managing Director of €uro 50 Stores, says:
“We are committed to using Irish suppliers throughout our expansion programme and hope to provide new opportunities for Irish suppliers through our existing UK store network".
“We will have more than 4,000 different product lines, many of which will change weekly, so there is always something new every time customers visit.”
The new ‘€uro 50 Stores’ chain sees items at €1.50 or less.
The new stores will see departments from babywear to biscuits ; cosmetics to chilled products ; minerals, sweets and crisps ; hot drinks to DIY; food to fashion ; greeting cards to gifts ; pet-care to party-wear and stationery. The stores will also stock hundreds of themed products like Halloween and Christmas lines.
More than 70% of products will be well known leading household brands such as Colgate, Disney, Johnson’s, Nivea, Palmolive, Pringles and Radox.
This is another great vote of confidence in Clonmel’s town centre, following on the recent opening of Holland & Barratt on the same street.