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Editor’s Note: It’s not final but it looks like Ireland is going to do pretty much the same thing that Iceland did, except this one is based upon the heart of the crisis — housing and bad mortgages, falsely presented to lenders and borrowers alike. The answer? Reduction in the balance due on mortgages that were falsely presented in the first place.

It is the obvious answer. Homeowners and lenders were BOTH fooled into believing that normal underwriting practices were at work. The originators even charged more for no-doc loans because they were taking a higher risk than the usual requirements of tax returns, confirmation of employment and income, and verification of the value of the property and the ability of the borrower to repay the loan.

The banks took the money from investors, promising to deposit those funds into a “trust” account for funding mortgages or acquiring mortgages within the prescribed period of time (90 days). The banks didn’t deposit the funds in any such account and instead commingled all the investor money to intentionally obscure the theft and the nature of the Ponzi scheme they were running.

The homeowner is said to be at fault for borrowing more money than they could afford to repay, but the bank sales machine expanded the offering of mortgages from 4-5 different types to over 450 different types of loans, along with assurances that the bank had reviewed the loan, and was satisfied that the loan could be repaid and that was because of rising prices in real estate fueled mostly by a flood of money and the boom in new house building where builders were only too happy to raise their prices as much as 20% per month, for appraisers to “use” in comparing property values. The truth is that the appraisers were under threat of either coming in with an appraisal at least over $20,000 more than the contract price, or they would never work again.

Yet somehow in the mind of policy makers and bankers (and the courts)  it was cheating when they gave those appraisals (indirectly) to investors but stupid on the part of borrowers who accepted the approvals. So the borrowers, who were cheated out of the deal they they were getting are stuck and the investors who are cheated out of the deal they thought they were getting, are getting settlements.

As Iceland has shown, the issue isn’t blame anymore. It is survival. And as Iceland as shown, the issue is whether the economy can be re-started and become robust once again. The answer is yes, as long as we turn a deaf ear to the bankers whose information and data is used by policy makers.

6 Years I ago I proposed that the answer to this problem was amnesty for everyone, with everyone taking a share of the loss. That still seems like a good idea. Iceland is putting bankers in jail and maybe that is where they belong. But I am more concerned with the health of our society, not the revenge against individual bankers.

Ireland Plans Bold Measures to Lift Housing

By PETER EAVIS, NY Times

DUBLIN – With its economy still reeling from the housing crash, Ireland is making a bold move to help tens of thousands of struggling homeowners.

The Irish government expects to pass a law this year that could encourage banks to substantially cut the amount that borrowers owe on their mortgages, a step that no major country has been willing to take on a broad scale.

The initiative, which would lower a borrower’s monthly payment, could prevent a tide of foreclosures, an uncertainty that has been hanging over the Irish housing market for years. If it works, the plan could provide a road map for other troubled countries.

Without the proposed law, Laura Crowley, a nurse who lives in a village 30 miles west of Dublin, figures she will lose her home. In 2007, Ms. Crowley and her husband bought a small home for the equivalent of $420,000. But they can no longer afford the $1,400 monthly payment. Her husband, a construction worker, is earning far less and her take-home pay has been cut by the country’s new austerity measures, which include new taxes. “This bill is the only light at the end of the tunnel for us,” she said.

Most countries that have suffered housing busts, including the United States, have made limited use of so-called mortgage write-downs, the process of forgiving a portion of the principal on the loan. The worry has been that some borrowers who can afford their mortgages will stop making payments to take advantage of a bailout. Banks have also been reluctant since they could face unexpected losses.

Ireland is different from the United States and most countries. During the financial crisis, Ireland bailed out the banks, and the government still has large ownership stakes in some of the biggest mortgage lenders. So taxpayers are already responsible for mortgage losses. In other countries, the burden of principal forgiveness would largely fall on privately owned banks.

But the debate is the same: whether to push lenders to take losses now, in hopes that things will get better faster, or wait for the housing market to heal on its own, which could cloud the economy for years to come.

Countries suffering from a housing hangover will most likely be watching Ireland closely to see how the law works. Spain, swamped with mortgage defaults, introduced a measure in March that allows for debt forgiveness, though under strict conditions.

In many ways, Ireland has to try something audacious. House prices are still 50 percent below their peak, compared with 30 percent in the United States. And more than half of Irish mortgages are underwater, meaning the house is worth less than the outstanding debt. While some of those borrowers can afford to keep making payments, more than a quarter of mortgage debt on first homes, roughly $39 billion, is in default or has been modified by lenders.

The housing market is now in a state of limbo as the government and the banks have made little effort to clean up the mortgage mess.

Unlike in the United States, Irish banks have foreclosed on very few borrowers. While Ireland’s leaders have considered it socially unacceptable for banks to seize large numbers of homes, they also feared the fiscal cost of foreclosures.

This approach creates doubt about the true level of bad mortgages at Irish banks. And borrowers, unsure of whether they will keep their homes, remain in a state of financial paralysis.

The new law aims to end this stalemate by overhauling Ireland’s consumer debt and bankruptcy laws.

While banks aren’t required to reduce the mortgage debt, the legislation gives them a powerful incentive to write down mortgages for troubled borrowers. Under the new rules, it will be less onerous to declare bankruptcy, making it easier for people to walk away from their homes altogether. As the threat rises, banks are more likely to reduce homeowners’ debt, rather than risk losing the monthly income and getting stuck with the property.

“For the banks, where there are losses, they have to be recognized,” said Alan Shatter, Ireland’s justice minister, who has sponsored the new law, called the Personal Insolvency Bill. “This legislation gives homeowners hope for their future.”

The legislation is intended, in part, to reach homeowners who are on the verge of running into trouble, as Geraldine Daly is.

A health care worker, Ms. Daly bought a home in 2009 in Belmayne, a new development in northern Dublin. Until last month, Ms. Daly said, she has been making her $1,200 payment. Then she fell behind after some unexpected expenses, including a car repair.

Ms. Daly estimates that her finances would become manageable if her monthly mortgage payments were cut to around $900. “Right now, I am a slave to this dog box.”

Critics contend the law could have unintended consequences.

One fear is that banks won’t have the money to absorb the potential losses on the mortgages. A big mystery is the level of defaults on so-called buy-to-let mortgages, loans that many Irish people took out to buy second homes to rent. In theory, the insolvency bill allows for write-offs on this type of mortgage, and analysts expect defaults on such loans to be higher than on first homes. Ireland’s central bank is expected to release the data soon.

To qualify, borrowers will have to prove that they are in a precarious financial position and cannot afford to pay. Analysts are concerned that the bill may actually be too restrictive and homeowners will continue to default. “There are so many layers that borrowers have to go through to get a write-down,” said Paul Joyce, senior policy researcher at Free Legal Advice Centers, a legal rights group that has supported moves to make Irish bankruptcy law more lenient. For instance, borrowers will most likely have to pay a big fee upfront to the person who handles their case.

John Chubb, a former construction worker who lives on a quiet cul-de-sac on the outskirts of Dublin, isn’t too worried about the process right now. He just wants to save his home.

Since having an operation for colon cancer in 2004, Mr. Chubb has lived primarily on government disability payments, and the bank has allowed him to pay only mortgage interest. But the lender is in the process of deciding whether to foreclose.

“I am expecting the word any day now,” he said. “I don’t know if I will be out on the front path before the bill passes.”

Filed under: bubble, CDO, CORRUPTION, currency, Eviction, foreclosure, GTC | Honor, Investor, Mortgage, securities fraud | Tagged: appraisal fraud, correction of principal, ICELAND, Ireland, reduction of principal, underwriting |