From Socialist Voice, July 2010

“Negative equity”: more people facing massive debt


It has been reported recently that Permanent TSB, Irish Nationwide and Bank of Ireland are planning to release a new form of mortgage onto the market. “Negative equity” mortgages, as they are being called, will allow the mortgage-owner to transfer the negative equity part of their existing mortgage to the new mortgage.
     Essentially, it will enable them to carry massive debt on their existing property into a new mortgage without hugely affecting the amount they can borrow for their new property.
     It is not possible to examine all the details of these proposals here. However, a few points are worth making.
     Firstly, the banks are arguing that this will help revitalise the mortgage market. But with so many properties on the market, and empty housing, the slump in prices is likely to continue for some time. Consequently, the number of people in negative equity will increase, and the people who use this product will face further negative equity in their new home, so leaving more and more people facing massive debt.
     Secondly, the product is at least superficially marketed on the grounds that house prices will rise again. However, for people in negative equity from the peak of the housing boom, for that debt to be made void a rise in house prices to the level of 2006 would be necessary. As described previously in Socialist Voice, using the analysis of the economist Morgan Kelly, to reach 2006 prices we would need a similar release of cheap credit into the market.
     This is highly unlikely, because of the massive debts of the banks themselves. Nor is the sort of increase in house prices desirable for the vast majority of people, given the false economic growth and public indebtedness it brings with it.
     Thirdly, if theoretical arguments don’t convince, allow practical evidence to demonstrate. The now infamous Northern Rock introduced negative-equity mortgages at the height of the boom in Britain, and it is widely acknowledged that this contributed to the bank’s particular exposure.
     There is little doubt that if these types of mortgage are allowed and become commonplace they will leave banks facing the kind of exposure to bad debt that development loans have done this time—perhaps not on the same scale, but the next crisis will not have to be on the same scale to tip the balance of both banks and the state, which sit on the edge of total bankruptcy. While they may be introduced only on a case-by-case specialised basis, our experience of capitalism tells us that they could very quickly become the norm—just as 100 per cent or 110 per cent mortgages did.
     These are the types of risky and destabilising financial products that finance capital needs to create, package and sell for finance to once again serve its purpose of masking a stagnant “real economy,” providing the outlet for accumulated capital to preserve the privilege of the few.
[NL]

Home page  >  Publications  >  Socialist Voice  >  July 2010  >  “Negative equity”: more people facing massive debt
Baile  >  Foilseacháin  >  Socialist Voice  >  Iúil 2010  >  “Negative equity”: more people facing massive debt