Real Estate /
Foreign investor, properties in Poland, walk away from mortgages? [209]
Before leaving Poland, Jacek had an approved overdraft limit of 50,000 zloty (about 10,500 British pounds) with his bank. Jacek withdrew money, taking him over this limit by 11,684 zloty.
I'm no lawyer or banking expert, but it seems to me this is a case about an unsecuritized debt (i.e. with no assets to back it, which could be reposessed/foreclosed/etc), as opposed to a securitized debt like a mortgage. I also haven't had time to read the whole case so maybe I'm just misinformed - is there also a mortgage or anything else linked in to this same case? It seems to me that defaulting on an unsecuritized overdraft is a bit different ethically and morally (and presumably legally) than defaulting on a securitized mortgage. But again, maybe that's my US bias.
Here's a quote I read this morning from an article in the latest Economist:
In America, where overall debt levels have fallen fastest, a lot of the reduction in household debt has been thanks to mortgage defaults and write-downs. In Britain, where there have been virtually no mortgage write-downs...
All I'm trying to say is, it seems like there is a huge divide in thinking between the US and Europe, and then even between Britain and Poland within Europe. When I start talking about default here, I'm hearing gasps and rebukes of "what kind of person are you", whereas the thinking in the other hemisphere seems to be more one of acceptance of the new reality, that defaults are a natural way of life, and only by taking our medicine and getting them over with, can we get back to a stable foundation to start rebuilding. Anyway that's how I'm coming to terms with all this.
The banks create debt out of thin air and expect hard earned cash back for it.
I don't think it's exactly out of "thin air". Presumably banks have already hedged out (from the sell side) all of their currency exposure on these CHF mortgages, using FX futures/options/swaps etc., and so presumably now they view the CHF mortgages as neutral to currency risk, and so they see them as they see any other mortgage, up and down nominally with interest rates, and at risk of the mortgage customer, and that's it. So while we see vastly fluctuating payments from the buy side, the huge amounts we are paying to the bank each month right now are not seen as massive profits from the bank's point of view - I don't think they've taken a "bet" against us on CHF.
But I guess this is what has been missed in the whole discussion. Everyone keeps asking questions like, "didn't you know how much you were leveraging", "why did you take such a risky 'bet' if you're not willing to face the consequences", etc. I suppose in hindsight I can see now how it's hard to believe anyone could get themselves in such a situation unintentionally, and so yes of course it looks like you just have a bunch of risky gamblers who don't want to fulfill their obligations now.
But let me tell you - honestly - back a few years ago when we were wrapping our heads around this idea, the FX risk did not seem like such a concern, and it did also not seem like the fundamental component of the "bet". We were betting on property growth (i.e. "property always goes up") and on the emerging economy of Poland at the time. Well yes obviously those two things have faltered a bit during the recession, and so fair enough, I would willingly take the pain for making a bad bet on property. But I can tell you we had no intention on being double-leveraged on the FX risk involved with CHF. Now it may seem obvious, but back then, it simply was not.
I know ignorance is a horrible defense to plead, but that's really all there is to it. Back a few years ago, when we were just getting these investments set up, there was so much unfamiliar ground to cover. We made multiple trips to visit Poland, visit building sites, meet with developers, meet with property agents, lawyers, and other experts. Set up Polish bank accounts. Register for Polish taxes and permits. Familiarize ourselves with the (completely foreign) Polish beurocratic processes. Not to mention picking up a foreign language, learn about the country, its different regions, history, culture, and customs. In short, our plate was full, doing all the necessary due diligence in a short time. We simply did not consider that we would also need to become experts in FX hedging. I never received a notice from anyone stating "by the way, you should be aware that you are signing on to an FX instrument with massive risk that potentially multiplies your leverage several times further". I recall at the time even joking to some friends involved in the same scheme, "hmm perhaps we should investigate some FX options or something". But it didn't seem like the major risk or even a point of concern at the time. I remember it seemed like I was the only one who even thought of such a thing. The mortgage brokers, lawyers, property agents, managing agents, etc. - none of them ever mentioned anything about it.
Now after several years of this, I am far more familiar with the whole thing, and I have a much better idea how to not fall in the same trap again. So lesson learned, and I suppose that's the positive side. But to everyone who assumes this is the only thing we needed to research and familiarize ourselves with, and therefore we shouldn't be forgiven for our ignorance - well, just imagine, you decide to go into a foreign country where it seems like some of the best opportunity is and you don't want to miss out, so you do all your research, set up a deal, and follow what seem to be the most common customs. Well, like I said, apparently > 50% of mortgages in Poland are CHF-based, so it does seem quite common. But it is very hard to believe 50% of homeowners in Poland are familiar with FX hedging. If it seems so common, and everyone is doing it, then it's hard to believe that could be the most dangerous component. What I still haven't understood is, how that >50% is still making their payments and not defaulting. I suppose if they are all ignorant about mortgage law, and assume it would be a "crime" to default, well that would probably be a good reason.
Well, what can I say, ignorance is no defense. But I'm sure I'm not the only one, and I'm sure I'm not the most ignorant one either.