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The New Irish Split Mortgage Solution for Underwater Homeowners

posted by Jason Kilborn

This just in from Ireland:  A large mortgage bank there, AIB, has agreed to a plan to split some mortgages into a "good" tranche, equal to 80% of the current market value of the home (forgiving the other 20% of that tranche) and another, "bad" tranche equal to the remaining, underwater portion of the mortgage loan. The first tranche will be serviced regularly, vastly reducing the monthly payments of eligible borrowers. The second tranche will be "warehoused," not serviced at all and lying dormant, interest-free, for some period of years. There are provisions for offering homeowners incentives to pay down the remaining balances quickly, especially if their financial situations improve unexpectedly.

Sounds like just the type of creative solution the world has been looking for. Alan and other experts on these issues may see some hidden traps that I don't (perhaps strict eilgibility requirements, which are not reported in the story I saw), but this struck me as quite good news on the "actually looking for solutions" front.

Comments

Jason, the Irish central bank has set targets for all banks to achieve sustainable solutions for all mortgages in arrears, as part of a program called the Mortgage Arrears Reduction Strategy. http://www.centralbank.ie/press-area/press-releases/documents/approach%20to%20mortage%20arrears%20resolution%20-.pdf. The "split mortgage" is one of many strategies recommended in the 2011 Keane report http://www.finance.gov.ie/sites/default/files/mortgagearr2.pdf. My understanding is that these are portfolio loans, i.e. not securitized. US banks are actually writing down a fair amount of principal on portfolio mortgages in default. The obstacle to broader writedowns and other creative solutions remains the policy of Fannie, Freddie and FHFA.

Wonder if they will receive 1099-Cs for the "cancelled" debt like they might here in the US.

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