Sir, – Complementing Seán Ryan’s article (“Apply American solutions to the many Irish property problems”, Business supplement,April 23rd), I am astonished that amid all the general discussion of the failure of the Irish banking system’s approach to mortgages, no one has noted what is, perhaps, the most important difference between American and Irish mortgages.
In the US, mortgages are not open-ended personal loans that include property as a security. They are loans to finance property, secured by that property whose recovery is limited to the value of that property. This difference in the extent of liability means that: 1. Banks must be much more careful in appraising the value of a property on which they give a mortgage and 2. Homeowners in difficulty with extreme negative equity can abandon their home without facing the consequences of bankruptcy. While the second would have short-circuited the attempts of the banks and their friends in government to limit the “moral hazard” of a reasonable bankruptcy regime, it is worth noting that no such “moral hazard” even exists if the banks must properly assess their risk before granting mortgages, since an unlimited claim on the client is not created by the loan. The fact that the mortgages are “security-based” rather than “personal-liability-based” makes programmes like those by the Federal Housing Administration and other insured mortgage schemes more practical, since there is no expectation that one must pursue debtors for more than the return of property.
Other important differences in the structure of mortgages in the US include the following: the mortgage system does not use “variable” mortgages – its concept of a “variable” mortgage is called a “tracker” mortgage in Ireland; and 25-40 year fixed-term mortgages, which avoid the problems of ballooning or refinancing, are probably the most common arrangements. These kinds of mortgages also penalise banks for failure to properly assess property. Had the Irish banks been more careful, the property bubble might not have been so disastrous.
I know the Irish debate is framed by the history of what is familiar and based far more on the kind of personal relationships among gentry than is the more commercial structure of that in the US, but I am surprised at the utter silence in the media and government on the subject of fixing root problems such as these. – Yours, etc,
WILLIAM HARRISON,
Fellow Emeritus,
School of Computer Science
& Statistics,
Trinity College,
Dublin 2.