This article appeared in the Sunday Business Post on the 18th of August 2013
Strategic default is a contentious issue. Some say it doesn’t even exist, although as a day-to-day financial adviser I know that it does – but I cannot say with absolute precision to what extent.
The lack of definition is one problem. There is no universally accepted version of what makes a default strategic.
What we do know are total default numbers, but a full analysis of what lies beneath is not publicly available.
This is why people are quick to claim that banks are wrong and their claims are lacking in evidence. They do have thousands of standard financial statements to work off, but equally, their inability to engage with borrowers has meant that often they are the architects of their own problems – for example, one common driver of default is demanding interest and capital when the person clearly can’t do it.
What they call ‘strategic’ is more like ‘common sense’ to the borrower.
Last week, though, I spoke to a strategic defaulter who was willing to let me interview her. The person in question is a white-collar professional and the director of a company. She agreed to speak to us on the basis that we kept her identity private. The woman has a family home and six investment properties.
Did you make a conscious decision to default on your loans? If so, why?
Yes, because the bank was insisting I go on interest and capital repayments on the investment properties and the figures just wouldn’t add up, so I chose to default.
Do you ever feel the slightest bit of guilt about breaking your contract even though you could be paying the bank?
No, none at all. The banks have broken every other contract not only with people but also with businesses as well. They have no morality card to play on this front.
When you hear about people less well off than you who are getting their homes taken, or who are not as expert at playing off the banks, what do you think?
Such is life. On one hand, I do feel sympathy with them but, on another, people have to face up to their problems with the banks and face up to them. You have to fight fire with fire: the only thing they understand is non-compliance. Being nice about it doesn’t work. If they want to go for your home, then let them, don’t ignore them, engage – but say no early and often.
Has the bank ever threatened you with repossession?
Yes, regularly. The most recent threat was about a month ago. This is one of many, before that they told me in February they were “moving in on me” and there was a threat made in mid 2012 as well. My response has always been “you do what you have to”. Personally I’d be happy to see them repossess the investment properties, but they won’t do that because they don’t want to crystallise their losses – keeping me on the hook suits them.
What is your response to the banks?
I just tell them that personal income has reduced – this is partly true – and that rents didn’t come in, which from time to time is also true. I’m not really over-concerned about what they do or don’t think. This isn’t about them, it’s about me and my decisions. They wanted blood from a stone.
Why do you think they haven’t moved in on you yet?
Because if they move in on me and recognise the loss, the likelihood of getting a penny of the shortfall is slim. I know fully that this is a delaying tactic on their part, not mine, so let them run with their own misguided plans.
Will you go for personal insolvency?
I’d like to come to an informal arrangement, and I do actually want that. I don’t want to opt for personal insolvency: it’s a pain, from what I can see of it. I also don’t want to kick the can down the road, so soon it will be time to make a decision: we make a deal, or they go for me or I go bang on my own. I’ll still be less than age 50 when I’m back out, so I can make some kind of a comeback, I’m hoping. They also know I have time on my side, it isn’t like I’m 65, so the process of dragging it out is their solution, not mine. I’m also not willing to take 100 per cent of the loss. The loans were priced for risk, that risk is at least in part theirs, not all mine.
How much have you put aside by not paying the money you took in?
I have about €12,000 in cash put where the banks won’t find it, but then there are also expenses being covered, and part payments being made from time to time to get them off my back. Sometimes I have vacancies and do try (still) to get properties rented out quickly.
Are the ‘expenses’ all related to the properties or are any personal?
Some are personal, because sometimes my personal income doesn’t cover me so I use the rent. I also stay tax-compliant and have my local property tax up to date. Had I not used the rents I would have had to face Revenue and I’d rather have the banks on my back, to be honest.
You are, by your own admission, a strategic defaulter. Do you think there are many others like you?
Without a doubt, on investment properties it’s endemic. I don’t think it’s fair to paint normal ‘family home’ owners as strategic defaulters, – there probably aren’t many of them. But on the RIPs [residential investment properties] we [landlords] are all at it. If I tried to pay the contractual amount of capital and interest it would be impossible, so instead I’m at this stand-off, which I hope will force the banks into making a more reasonable deal. Ultimately these loans, on a full repayment basis, are unsustainable, so either write them down or get nothing from me, the choice is simple.
When you hear ‘banks are going to get tough’ on borrowers, do you think they are being honest?
No. They won’t repossess me or anybody else. They’ll get wiped if they take all the houses back. Their true plan, the one they won’t talk about publicly, is to keep everybody on contract and pray the property market recovers some day and then, in 15 years or so, move in on people, or at least have borrowers who can break even in a sale. They don’t want to get burned any more than I do.
Karl Deeter writes: My own personal thoughts are simple. In time, the banks will appoint rent receivers, then they’ll bankrupt her. She may be ejected from the professional association of which she is a member. This will mean she has limited options in the near future.
Equally, if the bank vetoes an insolvency (should she go for one), this also diminishes its ability to recourse on the shortfall, because of the effect on employment which bankruptcy would have. So perhaps she is right about the mess now being a giant waiting game.
With our new insolvency regime still an untested system, we simply can’t know until there is enough failure, or success, to say otherwise.
Karl Deeter is a financial adviser/analyst at Irish Mortgage Brokers & Advisors