Unresolved debt overhang clearly chills the borrower’s incentive to improve their situation and can have devastating effects on borrower wellbeing. If a lender does not deal with such situations, their loan-loss experience is likely to be worsened. Many Keane options not available at scale The Government’s Keane report (2011) set out a number of options for long-term restructuring which could be employed by banks.
Several of these involved Governmentfinanced subsidies to the banks. In view of the constrained condition of the public finances, the availability of these subsidies will be quantitatively small, and they are likely to be focused (as they should be) on households in low income circumstances. Therefore most of the mortgage restructuring (in terms of total value) will have to be done without subsidy.