Morgan Kelly predicts further fall in house prices as wave of mortgage defaults are next
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Tuesday November 09, 2010 13:30
by T
ECB keeping Ireland solvent for now
In the latest piece in Monday's Irish Times from Prof. Morgan Kelly who at the height of the boom in 2007 said Anglo had lent over €100 billion and would eventually go bust, now says the country is facing a wave of mortgage defaults and that the country is effectively gone bust already.
Morgan Kelly who flagged up our bubble economy long ago and got bad press for it, has struck again this week with an article in Monday's Irish Times, saying the country is basically bust already and is being quitely kept going for the moment by the European Central Bank (ECB) who are now the main source of funding for our banks.
He was also against the bank bailout all along and says that since September when we had our last chance to get out of it, our fate has effectively been sealed. He also argues if it were not for the bank bailout our deficit would be no worse than any other country like France, and it is the cost of the bank bailout that is the real issue.
As an aside (not covered in the article), a check of the NAMA website on the publications for the first and second tranche of loans to NAMA show 30% of the loans were for property in the UK for tranche 1 and 44% for tranche 2! which all goes to show that despite the mainstream media trying to convince us all it was all caused by people being greedy buying expensive house, in fact the problem was caused by commercial property and a good slice of it abroad.
The point of this though is that Morgan in his article now says the cost for the bailout of AIB and Bank Of Ireland combined will now rise to that of Anglo because of the huge wave of mortgage defaults that will hit soon and so far this has not been counted in anywhere. As he says himself:
The next act of the crisis will rehearse the same themes of bad loans and foreign debt, only this time as tragedy rather than farce. This time the bad loans will be mortgages, and the foreign creditor who cannot be repaid is the ECB. In consequence, the second act promises to be a good deal more traumatic than the first.
Where the first round of the banking crisis centred on a few dozen large developers, the next round will involve hundreds of thousands of families with mortgages. Between negotiated repayment reductions and defaults, at least 100,000 mortgages (one in eight) are already under water, and things have barely started.
Banks have been relying on two dams to block the torrent of defaults – house prices and social stigma – but both have started to crumble alarmingly.
People are going to extraordinary lengths – not paying other bills and borrowing heavily from their parents – to meet mortgage repayments, both out of fear of losing their homes and to avoid the stigma of admitting that they are broke. In a society like ours, where a person’s moral worth is judged – by themselves as much as by others – by the car they drive and the house they own, the idea of admitting that you cannot afford your mortgage is unspeakably shameful.
That will change. The perception growing among borrowers is that while they played by the rules, the banks certainly did not, cynically persuading them into mortgages that they had no hope of affording. Facing a choice between obligations to the banks and to their families – mortgage or food – growing numbers are choosing the latter.
And as regards the situation with the country's solvency and where we are with it, he says:
The other crumbling dam against mass mortgage default is house prices. House prices are driven by the size of mortgages that banks give out. That is why, even though Irish banks face long-run funding costs of at least 8 per cent (if they could find anyone to lend to them), they are still giving out mortgages at 5 per cent, to maintain an artificial floor on house prices. Without this trickle of new mortgages, prices would collapse and mass defaults ensue.
However, once Irish banks pass under direct ECB control next year, they will be forced to stop lending in order to shrink their balance sheets back to a level that can be funded from customer deposits. With no new mortgage lending, the housing market will be driven by cash transactions, and prices will collapse accordingly.
While the current priority of Irish banks is to conceal their mortgage losses, which requires them to go easy on borrowers, their new priority will be to get the ECB’s money back by whatever means necessary. The resulting wave of foreclosures will cause prices to collapse further.
Along with mass mortgage defaults, sorting out our bill with the ECB will define the second stage of the banking crisis. For now it is easier for the ECB to drip feed funding to the Irish State and banks rather than admit publicly that we are bankrupt, and trigger a crisis that could engulf other euro-zone states......
....Ireland faced a painful choice between imposing a resolution on banks that were too big to save or becoming insolvent, and, for whatever reason, chose the latter. Sovereign nations get to make policy choices, and we are no longer a sovereign nation in any meaningful sense of that term.
Full article can be read at the link below
Comments (8 of 8)
Jump To Comment: 1 2 3 4 5 6 7 8Here is a copy of the NAMA publication for the key data for Tranche 1 and 2 loans that have now been transferred onto the tax payers.
It is well worth downloading this document and browsing through the break down of the loans which is given by bank, sector and geographical region. You will find the actual facts don't exactly follow the story we have been given for the last 2 years which is that it is all just about housing. The attached image is a mosaic of two pages from the report showing how much of this debt we will have to pay is actually for loans made in the UK which shows this is not just some couple buying their first house (and get ripped off) but that we are in fact bailing out the wealthy buying commerical property abroad.
Geographical breakdown of tranche 1 & 2 loans to NAMA