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Payments on mortgages to be suspended across Italy after coronavirus outbreak
- nabla9 7y agoIt seems like obvious decision during national emergency. The whole country is in quarantine. You can't expect household and small companies to pay interest like nothing has changed.
- 101404 7y agoI just wonder how this works upstream. Don't the banks also owe that money to somebody? After all, value isn't just money, it's money plus time.
- Phenix88be 7y agoI think banks "create" (out of "no where" I mean) the money they loan. So they don't owe anyone.
- xxs 7y agoof course this is not true, the credits are sold and resold, etc.
- 6510 7y agoIt involves a lot more parties but the level of control over the game mechanics is almost the same as a video game. It is actually a very constructive way of looking at it. All rules of the game can be suspended when it hurts gameplay.
- ptah 7y agonot sure why you are being downvoted as if fractional reserve banking is not the status quo
- gruez 7y agoThat's not relevant in the context of this discussion because at the end of the day, someone is not getting those interest payments. Sure, you can argue the money is still there (in the form of debt), but that doesn't help whatever entity that requires the cash now.
- ianleeclark 7y agoWhy do you believe some entity needs the cash now?
- robjan 7y agoOther entities may not forgive the banks for failing to make repayments on their loans. There are also instruments such as bonds and fixed income which may be backed by mortgages.
- deleted 7y ago[deleted]
- ptah 7y agothe money is not from other entities. it is literally made up based on a fraction of the reserves the bank holds. https://en.wikipedia.org/wiki/Fractional-reserve_banking https://en.wikipedia.org/wiki/Fractional-reserve_banking
- jonplackett 7y agoAnyone who wants to understand this insanity, I recommend MONEY AS DEBT https://www.youtube.com/watch?v=2nBPN-MKefA https://www.youtube.com/watch?v=2nBPN-MKefA The first time I saw it I thought it was a luny conspiracy theory, but NO. It's all true.
- aguyfromnb 7y ago>It's all true. This is not a surprise to anyone who understands how a modern monetary system works. I guess this is why Bitcoin and its "there's a set amount of currency and we know exactly what it is" is so popular with people of a certain mindset; they expect that's how money works.
- jonplackett 7y agoThat's my point though - most people have no idea how the modern monetary system works. Most people have no idea banks have the power to create money. They think they're lending other people's money.
- Scarblac 7y agoNot quite. They get money from somewhere, that they loan out. But because much of the money they got from somewhere can be requested at will (people can still remove money from their accounts), it is still liquid and still counts as money. So money is "created" this way. That is how they create money. They don't literally just create whatever they need, only central banks can do that.
- nicky0 7y agoActually the banks do just create the money. They put an entry on the balance sheet "they owe us this much" and call it an asset.
- afiori 7y agoThat is creating liquidity, what they are doing is essentially selling debt. It is different from just creating money.
- glofish 7y agoYou are pre-selling your own work and productivity. That value that backs up that money will be created by you.
- Kiro 7y agohttps://en.wikipedia.org/wiki/Fractional-reserve_banking https://en.wikipedia.org/wiki/Fractional-reserve_banking
- aguyfromnb 7y agoIf one actually reads this article (and other links on Wikipedia) one would realize that "fractional reserve banking" is irrelevant in the modern economy. In the EU and US, requirements are too low, and have too many exception to matter, while other advanced nations don't have reserve requirements at all.
- CGamesPlay 7y agoYes, the banks owe the money to their account holders. As long as the account holders don't all simultaneously try to withdraw the money, they will never notice the bank doesn't actually have it. If everyone did try to get their money at the same time, it would be called a "bank run". https://en.wikipedia.org/wiki/Bank_run https://en.wikipedia.org/wiki/Bank_run
- fennecfoxen 7y agoIt's not quite so clear. The banks do owe deposited money to depositors, but they can also sell the mortgages themselves as bonds, and other entities buy the bonds. In that case, the homeowners owe money to bondholders (including other banks in Italy and around Europe, private and public pension funds, university endowments, and others.) Even when the bank holds the mortgages directly, the bank does not owe the mortgage income to deposit account holders. The bank may owe interest to those accountholders... but today, that is likely at or near 0% rates. If payments on the loan are suspended for N months, the people who lose out are the bank's shareholders. In either case, this loss could be modeled as putting this month's interest payments at the end of the loan life, up to 30 years later, and discounting the amount received by the time value of money over that interval... or, alternatively, by moving all the interest payments back by N months over the lifetime of the loan and performing the discount that way; I think it works out to the same loss either way. (To be clear, this is a real loss, in the same way that if I took $500,000 from your savings and retirement accounts, and bought myself a home, and lived in it rent-free for 5 years, and give you back the same $500,000, you have suffered a loss, and I have enjoyed a gain.) It's notable that European bank shareholders haven't been doing well recently — for a variety of reasons. There may fundamentally be too many of them, with too many inefficient processes, being propped up by governments instead of failing in an orderly fashion and being consolidated. But that's a different policy discussion.
- qubex 7y agoYes, except fractional reserve banking hasn’t been the basis of banking since at least the mid 1930s.
- 7y ago
- beefield 7y agoThe article was a bit light in details, but here is my educated guess depending of the details: 1. (most likely) The interest is still paid, but the outstanding notional payments are deferred. This causes no actual losses to banks, but may cause liquidity issues. VCentral bank can sort those easily. 2. (A bit less likely) Even interest rates are deferred, but they are capitalized to the loan so that your loan amount increases if you do not pay the interest. As above, no losses to the bank, but maybe liquidity issues. 3. (Least likely) Banks actually waive the payments. In this scenario it is primarily the shareholders that take the loss, but I would strongly expect that in this scenario government covers the losses of the bank.
- igravious 7y agoAnd renters?
- martin-adams 7y agoI wonder if landlords who have a mortgage will get that suspended, but still be collecting rent
- caymanjim 7y agoYour landlord has bills to pay too.
- igravious 7y agoClearly – but if homeowners get mortgage relief why shouldn't tenants get rent relief? Covid-19 doesn't distinguish between homeowner and tenant. Seems kind of two-tiered to me.
- gshdg 7y agoOf course, hopefully mortgage relief will make it possible for more landlords to offer rent relief.
- nothrabannosir 7y agoYeah, the mortgage. Cited as the number one bill for the landlord to pay whenever that comes up. Op asked a very relevant question.
- Mvandenbergh 7y agoWell if your renters have no money to pay rent through no fault of their own at the same time that many other renters are in the same situation then you're better off just cutting rent way down for a few months / delaying part of the rent payment. Either way you're not getting your money now. Note that Italy has strong renter's protections. If you tried to evict based on non-payment during the quarantine, you'd fail legally and the consequences to your reputation would be severe.
- 7y ago
- orangepanda 7y agoAlthough not quite the same, ironic how Rome does have a _long_ history of debt forgiveness during times of crisis [0] [0] https://fee.org/articles/the-slow-motion-financial-suicide-of-the-roman-empire https://fee.org/articles/the-slow-motion-financial-suicide-o...
- bilekas 7y agoIronic ?
- StavrosK 7y ago"Ironic" in the sense of "completely expected due to them behaving like this consistently in the past".
- bilekas 7y agoI'm not sure if you consider this a bad thing though
- cowsandmilk 7y agosounds like agreeing with you in questioning why someone would call it ironic...
- lifeisstillgood 7y agoWow there is an article with it's agenda clearly emblazoned on its sleeve. No messing :-) The Roman Empire's collapse had dozens of interacting causes, from slavery and expansionism-collapse to leadership failures that make any corrupt politician today seem laughable. To boil it all down to "Welfare" seems, disingenuous at best, and hopelessly partisan at the midpoint. That said, yes, many societies have tried to make up for their systemic unfairness with debt forgiveness. Unless you fix the underlying causes however, the debt comes back.
- 6510 7y ago
- esotericn 7y agoWon't this result in new mortgage rates spiking massively (not only now, but after the crisis is resolved, because it's a newly identified form of tail risk?) Not that it's important right now, but it seems like an interesting side-effect.
- AzzieElbab 7y agoPossibly, not sure how mortgages insurance is setup in Italy
- sp332 7y agoIt looks like this was done by the banks voluntarily. So it doesn't increase the risk of this happening again in the future as a surprise. Secondly, this probably reduces the amount of defaults, liens, foreclosures etc. happening all at once that a bank really would rather not deal with. Edit: according to https://www.bloomberg.com/news/articles/2020-03-10/italy-negotiating-with-banks-for-mortgage-relief-in-virus-crisis https://www.bloomberg.com/news/articles/2020-03-10/italy-neg... the government negotiated this with the banks, and TFA says that not all banks took the deal. So whatever it was, it probably softened the blow a lot.
- raducu 7y agoSurely not as a surprise, this thing will be back next fall.
- Nasrudith 7y agoWhy would it be massive? I can see a smaller "average restoring" spike at most since thankfully another sufficiently bad epidemic occuring is already a very low probability - once per century pessimisitcally based on data.
- Mvandenbergh 7y agoArguably the tail risk is that something happens which prevents many people paying their mortgages and this risk was already understood. This is a form of control which accepts the inevitable and ensures that there is no messy mass default process.
- crispyporkbites 7y agoWell I for one am glad my mortgage isn't a smart contract on a blockchain right now.
- arnoooooo 7y agoI'm not a fan of blockchains either, but to be fair, they could issue a compensating smart contract for the duration of the suspension.
- killjoywashere 7y agoNever EVER take this sort of offer. Banks made similar offers after Katrina. We seriously considered it, having just bought a house in New Orleans which we could no longer occupy. A quick call with the bank made it clear they weren't forgiving anything. Interest would continue to accrue and recapitalize. Four years later, we had made all our payments and sold at the expected profit. The lender then admitted many people had taken the offer and now found themselves with significant negative value on their homes simply through compound interest. Avoid these offers like the plague.
- apexalpha 7y agoThis is horrible advice. This isn't a private (American) bank making a free offer. It's done by the Italian government. Besides that consumer protection laws in Europe are much stronger anyway.
- lukeqsee 7y agoBased on the article, I’m not sure there’s enough information to even determine if this is a deferred payment scheme (interest continues to accrue) or a postponement without additional interest accrual. Certainly, if this affects you, check with the bank to determine what it actually means. I think directly comparing US and Italian banking is quite misleading, given the relatively large differences in typical consumer protections. Maybe it’s a bum deal, or maybe it’s actually going to be very helpful for the consumer.
- woofie11 7y agoSuspending mortgages and interest is absolutely the economically right way to handle this sort of crisis. You essentially want the economy on hold for 6 months, and then to come back at the end as if nothing happened.
- wjnc 7y agoTbh suspending interest payments as well would kill already struggling Italian banks. For those countries with the appropriate finances, subsidizing this in the long run would indeed be a good way to handle this. Europe would probably allow it even though it's state subsidy of banks (unless some other mechanism is enacted). But the Italian government isn't in that sort of financial situation. I expect a future upward interest shock since the country will lose capacity driving their debt to GDP even higher.
- deleted 7y ago[deleted]
- dillonmckay 7y agoSo, not sure if this is the same, but in Florida, after one of the more recent hurricanes, I was given the option to suspend mortgage payments. All it does is suspend payments, not reduce the amount of payments. So, once payment resumes, you still owe at least the same amount of debt. [edit] As another poster mentioned, interest still accrues.
- dkdbejwi383 7y agoI think it's pretty clear what suspension means in this context. I can't imagine anyone is thinking that the government is making the payment for them in this time or something like that.
- creaghpatr 7y agoWhy though? People suspend rational thinking to believe they're getting free stuff all the time.
- nabla9 7y agoNot directly at least yet. It's clear that government maintain the status quo in financial standing of small companies and individuals if the quarantine continues. The city of Rome has decided to 500 euro per month for all self employed for next three months.
- deleted 7y ago[deleted]