13 Dec 2009

What the finance minister has given with one hand – an extension to mortgage interest relief – he has pledged to take away with the other, writes Neil Callanan
Brian Cowen: long-term spending mistakes

Much of the talk in the property industry last week focused on the mortgage interest relief measures being introduced by Brian Lenihan. If you’re in negative equity and were facing a hike in your mortgage repayments whenever your relief expired, you can now continue to claim relief until 2017, when the relief will be entirely abolished.

But in the exchequer’s straitened circumstances, what Brian Lenihan gave with one hand he has to take away with the other, and all property owners are now facing a property tax. This makes sense, given there is a desperate need to broaden our tax base, in part to compensate for the mistakes of Bertie Ahern and Brian Cowen who made disastrous long-term spending decisions based on income such as stamp duty that was not guaranteed past the short term.

A property tax of 0.25% to 0.33% would raise €1.5bn-plus a year and alleviate our fiscal hangover, according to Derek Brawn, former investment banker author of a book about the property bubble, Ireland’s House Party.

Property consultant Knight Frank Ireland, however, said that while it welcomed the extended mortgage interest relief, it is “unhappy that [Lenihan] has introduced a note of uncertainty in announcing plans for a future property tax without any indication as to how this might be applied” and that the uncertainty “may act as a brake to purchasing decisions” until the details are known.

In truth, though, Lenihan has little choice in the matter, although it will be interesting to see how quickly the land registry required to administer the tax can be set up. Anybody who has to trudge from the Valuation Office to the Registry of Deeds to try to find the owners of unregistered land will understand the frustration involved. A computerised solution will have to be found, but one of the upsides is that a realistic house price survey can be done as a result; too many of the indices underestimated the rate of house price increases during the boom and have failed to get even close to the 50% drop on the way down.

Also of potential importance is the National Solidarity Bond, which will reduce the National Treasury Management Agency’s reliance on overseas funding. The bond will allow people to invest in capital investment funding for five, seven or ten years, in return for an interest payment and a final redemption bonus when the fund matures. The Finance Bill will provide the meat on the bones of the proposal. The Construction Industry Federation believes the government’s decision to cut nearly €1bn from its capital investment programme in the budget will hit the exchequer through lost tax income and increased social welfare payments because infrastructure projects are, by their nature, labour-intensive. Targeted spending through the bond will help alleviate that.

The restriction of tax reliefs for the wealthy was also a welcome move. Many of these reliefs led to the construction of unviable properties purely for tax breaks; many were hotels which are now in trouble and which will end up being owned by the taxpayer through Nama. Tax reliefs also played a key role in fuelling the property boom, causing other properties near them to rise in value. In future the use of tax reliefs and exemptions by high earners will increase the effective rate of income tax on income sheltered by such reliefs to 30% from 20% while the entry relief will be halved to €125,000. The question of why these property reliefs were allowed during one of the biggest property bubbles of all time has never been adequately answered.

Also worth keeping an eye on will be the “efficiency review of the local authorities” which the Society of Chartered Surveyors supports, saying that “streamlining the number and operation of local authorities will facilitate efficiencies in management structure”. It believes consolidating local authorities “should lead to improvements in coordination and implementation of planning and development policy”.

Local authorities face a funding crisis in the coming years from a lack of levies from property development and it’s unlikely an “efficiency review” will change that. The return of the pothole is nigh.

13 Dec 2009 

A complete ban or long delays on repossessions is going to be difficult for the banks who use their mortgages as collateral for their own borrowing, reports Jon Ihle

Last Wednesday, just in time for the budget, Moody’s issued a press release highlighting further deterioration in the quality of securities backed by Irish residential mortgages.

Delinquent loans – those overdue by three months or more – reached 2.9% of total loans in October, the agency said, double the amount from the year before. Borrowers more than a year behind on payments hit 0.7%, an increase of 300% over last October.

Why does Moody’s, a bond-rating agency, care about Irish mortgages? Because the banks who issue those mortgages use them as collateral for their own borrowing, which is done by wrapping the mortgages into bonds and either selling them or lodging them with a third party, such as the European Central Bank, in exchange for cash. So mortgages are crucial not just to a bank’s profits and capital, but for access to funding.

Although Moody’s acknowledged in the statement that Irish mortgage-backed bonds had not yet reported significant losses, the analysts worried that delays in foreclosure on bad loans – very common in repossession-averse Ireland – would only lead to higher losses later on. When that happens, the banks who depend on these bonds to raise money for new lending are going to face a funding problem as counterparties refuse to provide fresh cash.

So the banks are facing another conundrum: mortgage arrears are rising, but tough collection action is impractical due to social, political and economic reasons. Yet if they don’t curb loan-delinquency, the banks won’t be able to pledge mortgages for new money to fund lending. In fact, the various measure banks are using – and the government is insisting on – to keep delinquent borrowers from defaulting and losing their homes could ultimately cut off vital credit to the economy down the line.

Less than two weeks ago, Fergus Murphy, the chief executive of EBS, and his chief risk officer Fidelma Clarke met the Oireachtas Committee on Social and Family Affairs to discuss mortgage arrears and defaults and to consider ways banks, the government and borrowers could work together to address the problem.

Murphy and Clarke aren’t the only bankers interested in this issue. It’s an industry-wide concern. And government is waking up to the growing numbers of people – 35,000 at last count – who are missing payments on their mortgages and raising fears of a second-wave crisis in the banking sector.

The banks have so far tried to deal with rising arrears through borrower-friendly mechanisms, such as the Irish Banking Federation’s (IBF) protocol with the Money Advice and Budgeting Service (Mabs), which sets out a formal debt-recovery approach that seeks to avoid a more antagonistic method, such as repossession proceedings. But bankers are concerned that the clock is ticking on the various forbearance measures they use to keep from seizing loan security.

There is a recognition in the banking industry of the value of forbearance as a short- to medium-term measure to address difficulties some borrowers are having paying their mortgages, but in the long-term bankers say something else is required. Nobody has a definitive answer yet – although there are several strategies under consideration by lenders – but there is a realisation too that whatever replaces the current ad-hoc approach must avoid disrupting the banks’ funding, which depends on using mortgages as collateral for credit lines from institutional investors.

This is what Clarke had to say to the committee on the subject: “The way the system works is that institutions use loans as collateral for lines of credit for wholesale funding purposes and liquidity. Any damage to any contract as would be seen by an international investor, could have unattended negative consequences for the Irish banking system. If all covered bonds, securitisations or liquidity facilities with the ECB were no longer deemed to be of the quality people thought they were signing up for, they could be downgraded.”

The main concern emerging in the capital markets revolves around the uncertainties caused by forbearance measures such as interest-only periods, payment holidays and moratoriums on foreclosure. Bond investors want to be sure of their coupon payments; forbearance introduces some uncertainty. For example, last month when the IBF announced its members would extend delays on repossession action for an extra six months, a number of nervous UK bond analysts contacted the organisation with questions about how this would impact the funding side of the banks.

The ratings agencies who grade mortgage-backed bonds for their quality have picked up on this, too, as Moody’s recent attention shows. The ratings and the other bond analysts reflect a sensitivity in the bond and securities markets about the safety of any investment where the prospect for regular payments is uncertain.

Under normal market circumstances, the banks would be lending enough year-on-year to replace old loans as they matured. But because of the property crash, lending volumes are only about a quarter of what they were at the peak. That means as time goes on, more and more of the banks’ loan books are made up older loans, many of which were granted on overpriced properties during the boom. As unemployment, pay cuts and tax rises continue to wreak havoc on incomes, banks are naturally facing higher levels of arrears on these loans, leaving a smaller and smaller proportion of good loans to replace them.

According to Bloxham Stockbrokers, which was commissioned by EBS to research possible solutions to the arrears’ problem, there is a risk that concern about the potential reaction among bondholders could be used as an excuse for denying debate and evaluation. Bloxham seems to think alternative structures could be explored without spooking providers of long-term liquidity to the banking system and EBS brought several suggestions to the table, including the idea of a sector-wide refinancing plan for the hardest-hit borrowers and a more general mortgage insurance fund similar to the bank-deposit fund that traditionally has guaranteed savers’ money. Dolmen Stockbrokers analyst Oliver Gilvarry believes the government may ultimately have to set up a state mortgage bank to absorb troubled loans.

But both the banks and the government will have to tread carefully here, as the whole point of the bank-guarantee scheme and Nama is to assure funding lines into the Irish banking system so that normal credit is available to both consumers and business.

Momentum is gathering both in the financial industry and in government behind some form of mortgage rescue scheme. Since Green energy minister Eamon Ryan got the issue into the Programme for Government in October, it has become a significant issue on the political agenda. But the mechanics of any package – for borrowers or lenders – are far from being worked out. Ryan has put together an interdepartmental group made up of senior civil servants to assess option.

But capital markets and debt investors will have to be assured that any systemic solution to the mortgage arrears problem is sound, otherwise they could pull vital lines of credit from the Irish banks, which would prolong the recession and heap more misery upon cash-strapped mortgage borrowers.

Causes of rising mortgage arrears

» Unemployment: there is a direct relationship between the unemployment rate and mortgage arrears. With unemployment at 12.5% and due to climb in 2010, the outlook for arrears is getting worse. Even if the economy begins to grow towards the end of next year, bank analysts expect arrears to increase as job growth will lag GDP growth.

» Pay cuts: falling incomes mean the houses people bought at 2006 prices with 2006 wage expectations are a lot less affordable.

» Higher taxes: the crisis in the public finances has spilled over into household finances as new income and health levies have eaten into take-home pay.

» Non-mortgage debt: car loans, overdrafts, credit cards and personal loans add to the debt burden. While Central Bank figures show credit card balances, for instance, are declining, judgments on personal debt defaults are rising – and so are the amounts being sought.

» Falling house prices and negative equity: once the value of your house falls below the amount you owe on it, selling is no longer a viable option for getting out of debt trouble. The housing market is so sluggish that quick sales are all but impossible anyway, trapping even willing sellers.

Rules on repossession

Although repossession rates have been rising steadily over the two years of the recession so far, the gross numbers are still relatively low.

The reason for this is, firstly, the protocol agreed between the Irish Banking Federation and Mabs, which sets up a formal process for debt recovery designed to avoid foreclosure if possible, and delay it if not, and, secondly, the government code of conduct on mortgage-lending for banks under the guarantee scheme.

The IBF/Mabs protocol requires banks to adopt a partnership approach with Mabs when pursuing debts. It also lays out a five-step process leading to a formal payment plan for troubled borrowers which is then monitored and reviewed on a six-month basis. This approach meshes with the IBF’s own pledge to give six months’ grace on mortgage arrears on top of the statutory period.

The government’s code of conduct on mortgage lending says lenders must adopt flexible procedures for handling mortgage arrears and assist the borrower as far as possible with deferral of payments, extending term of mortgage, changing type of mortgage, or capitalising arrears and interest. They must also must wait at least six months (12 months for the two recapitalised banks, AIB and Bank of Ireland) from the time of arrears first arising before applying to the court to commence legal action for repossession.

14 Dec 2009 

Apart from extending the time period during which some borrowers can claim tax relief on their mortgage interest, Brian Lenihan’s budget contained no measures designed to stimulate the property market.

However, in the wake of the National Asset Management Agency (Nama) and the bank bailout, it would have been politically impossible for him to do anything that could have been interpreted as helpful to developers.

Aine Myler, president of the Irish Auctioneers and Valuers Institute (IAVI), summed up the reaction of the industry when she said that, overall, the budget would have ‘‘no major impact’’ on the property sector.

However, she did applaud the extension of mortgage interest relief. ‘‘We welcome this move to protect new entrants to the market, but remain concerned about those who are struggling to pay existing mortgages,” she said.

Under the changes announced in the budget, mortgage interest relief will continue to be applicable for seven years for all qualifying loans taken out before July 2011, and transitional arrangements will be put in place for loans taken out between July 2011 and the end of 2013.

In addition, anyone whose mortgage interest relief was due to expire next year or in subsequent years will now continue to get relief up to the end of 2017. Lenihan said he intended to abolish the relief entirely by 2017.

There were no changes to stamp duty rate for residential or commercial property - some industry watchers had speculated that the rate for commercial property might be lowered in an effort to attract investment from large overseas investors and property funds.

As expected, Lenihan did make reference to the future introduction of a property tax - based on site value - that would replace the stamp duty regime on residential properties.

He said the government had accepted the recommendations of the Commission on Taxation on the need for a property tax.

However, it could be a number of years before such a tax is implemented, depending on how the government decides to go about valuing residential property. Even when that task is completed, the government will then face the tricky task of deciding how to levy the tax.

Last week, the joint Oireachtas Public Accounts Committee was told that the State Valuation Office had ‘‘early stage’’ talks with the Commission on Taxation about its ability to value residential properties. At present, the Valuation Office only values commercial properties, and charges businesses a flat fee of €250 to do so.

Aidan Murray, the commissioner of valuation, told the committee that the office could possibly play a supervisory or audit role if residential properties were to be individually valued.

He said that while the office does not have the resources to value the residential sector, this could be addressed by hiring property professionals to carry out valuations.

Just who would pay for these valuations remains unclear, but sources suggested last week that making homeowners pay for their own valuations had not been ruled out.

17 Dec 2009

The Federal Reserve repeated its pledge to keep interest rates “exceptionally low” for “an extended period” and said the economy is strengthening. “Household spending appears to be expanding at a moderate rate, though it remains constrained by a weak labour market, modest income growth, lower housing wealth, and tight credit,” it said.

02 Dec 2009

European Central Bank governors meeting tomorrow are expected to leave their main interest rate unchanged at a record low of 1% while preparing banks for a gradual end to massive supplies of central bank cash.

ECB president Jean-Claude Trichet will carefully avoid suggesting that interest rates might start to climb before economic recovery is well underway, however. The debt crisis in Dubai will also hang over the meeting in light of possible repercussions in euro zone countries.

But analysts say that this week’s ECB meeting should bring the first steps towards a gentle backdoor exit from unorthodox monetary policies aimed at boosting economic activity.

AdvertisementThe 16-nation euro zone has emerged from recession with unemployment at 9.8%, its highest level since December 1998, and Trichet warns often that the economic climate remains uncertain.

ECB staff projections for growth are nonetheless expected to be revised upwards from the last estimation of a 4.1% contraction this year and 0.2% expansion in 2010.

Meanwhile, inflation is back in positive territory for the first time in seven months but likely to remain below the ECB target of just under 2%.

The ECB has held its main rate at 1% since May, above the US Federal Reserve’s rate of around zero and the Bank of England’s main rate of 0.5%.

The ECB has sought to boost bank lending by providing unlimited amounts of central bank cash at that rate, including record one-year loans of €442 billion in June.

03 Dec 2009

BUYING ABROAD: . . . but there is still momentum in the market, driven by long-term planning for retirement Investing via your pension, writes DIARMAID CONDON

THE COMMON consensus these days would appear to be that the overseas property market has collapsed entirely. Quite apart from the usual “recessionary economic conditions”, the overseas industry has suffered a plethora of catastrophic events.

Most of those companies that have not been sued for one reason or another at this stage appear to have filed for bankruptcy. No one would really be surprised if the overseas market was fatally wounded.

The new wariness in foreign property is prompted by a long list of sound reasons including: the sometimes high-profile collapse of so many Irish-based companies selling investment properties in countries ranging from Dubai to Bulagaria, Cape Verde to Spain; the current economic environment; people struggling with properties overseas they now don’t want or can’t afford and the continuing lack of regulation of the property market.

However, this would appear not to be the case – there is still some life in the market.

It seems there are a number of factors making certain types of overseas investment still look attractive, principally: a loss of confidence in the pension market, the Government’s approach to the Irish property market, an inability to raise finance at home and the current strength of the euro.

There is still interest in overseas property, but only to a limited extent. The infatuation with holiday homes in obscure locations for investment purposes has, apparently, come to an end – at least for the time being.

What little momentum there is in the market appears to be driven primarily by long-term planning for retirement, whether through pensions or via direct investment.

Despite there being a significant appetite for UK property at reasonable values, the difficulties with, and expense of, organising finance, particularly for Irish buy-to-let investors, is currently proving a significant barrier.

The UK market is, of course, still suffering from the glut of apartment properties brought to market by so-called “buy-to-let investment clubs” during the peak of the boom, which has made UK banks very wary of the buy-to-let sector as a whole.

In the US, however, it is still possible to raise finance at reasonable rates as long as a valid set of figures can be produced. Clear Sky Capital, which promotes yield-driven property investment in the north-east of the country, raised over 200 enquiries at recent seminars and is confident that it will engage in more than 20 viewings in the US at the end of the month. This certainly puts paid to the view that the overseas market is totally dormant.

The UK and US are traditional havens in turbulent times at home, but what about other countries that could be monitored with a view to longer term investment? In the current environment investors want to stick with countries with a long tradition of freehold property ownership and, preferably, also a tradition of long-term rental.

Apart from the US, distance also seems to faze investors at the moment. The two standout candidates on that basis would have to be Germany and Sweden. Both are stalwart members of the EU (although Sweden does not use the euro, which is actually somewhat of an advantage for purchasers at the moment) and both look to be gradually bringing their economies back to some semblance of normality.

Sam Roch-Perks of Swirish, a Swedish/Irish investment company based in Waterford, says that following a considerable lull period, there are signs of some traction in the market again, particularly for long-term and retirement planning, whether through pensions or otherwise.

“Sweden is ideal for this,” he says, “as yields are reliable and there is no unrealistic expectation of huge capital appreciation.” It has also been relatively unaffected by the past year’s global real estate collapse, particularly in the smaller cities and their satellite towns.

He says yields of 6–7 per cent net of all costs are quite common in Sweden and borrowing is attractive as the Swedish base rate of 0.25 per cent is a full 0.75 per cent below the euro rate. Loan-to-values (LTV) of up to 80 per cent are, he says, also freely available depending on the product. The euro has been strong against the Swedish krona of late, giving investors some extra buying power. The krona has typically ranged around 9-9.5 krona/€1, but is currently just under 10.5, having reached just under 11.2 in March 2009.

Germany, the largest economy in the EU, has also proven attractive for longer term, yield-driven investors. During the boom years across Europe, Germany bore the cost of integrating the old GDR, consequently its property prices remained quite sane, often under the cost of construction.

Finbarr Flahive, MD at Youngfields OCP, a Dublin-based firm with offices in Cork and Stuttgart, says his company has recently seen a significant increase in demand for commercial property investments through pension funds.

“People are unhappy with the current investment strategy of their pension providers, such as over-exposure to volatility in stock markets and managed funds,” he says.

Flahive believes that post-Nama, current attractive Irish bank deposit rates will drop significantly leaving risk-averse investors with no option but to consider investments outside the country.

Germany is the world’s largest exporter and its third largest economy and has, according to Des Quigley of Louth-based Off-Plan Investments “proven its resilience to the downward price pressures being experienced in other markets”. He says that investors who were sold the promise of high potential capital gains have run into problems as they do not have the backup of a solid, mature rental market, which is where Germany wins out over many other countries.

“Prices are realistically valued on actual and historical rental income and German banks remain confident in financing overseas investors on a non-recourse basis, with a loan-to-value (LTV) of around 70 per cent for well-located residential properties which can return up to 8.5 per cent gross,” Quigley maintains.

Current lending rates are around 4.25 per cent for five-year fixed and 4.88 per cent for 10-year fixed – fixed rates are the preferred option with German banks.

He concludes that Irish investors are also steering away from “trophy” type properties because of lower yields; everything is returns-driven these days.

Why overseas investments can still be attractive

THERE is a perception in the marketplace that traditional pension funds simply aren’t performing as they should. These funds thrived in the good times – but it is widely felt they didn’t exhibit the foresight for which fund managers are paid. Now people want to know in what, exactly, they are investing, and many aren’t prepared to pay large fees to allow someone else to plan their investment strategy.

The second factor is a lack of confidence in the Irish property market, particularly from investors. Not alone do they feel that there is not sufficient upside in the investment market here, the new second home property tax has been taken as a snub to the property investment community. Despite the fact that nearly every country has a property tax of some description, the potential for dramatic increases in the Irish tax is the obvious concern. There is certainly a feeling among investors that there are other countries with better prospects for short-term economic recovery than Ireland, where investment in property is still welcome.

The third factor is an inability to raise finance in Ireland. Although banks claim to be “open for business” it is apparent to anyone who has had any dealings with one recently that this is patently not the case.

In any case, property has rapidly moved from the most desirable asset class to a virtual pariah – hence Nama.

The last thing Irish banks want on their books at the moment is more property.

The final factor is the current strength of the euro against a number of currencies, particularly sterling and the dollar. The US has proven particularly attractive of late as it is possible to borrow for investment grade property product with proven yields; such investment is proving far more difficult in the UK, although this is a market with which the Irish have traditionally been very comfortable.

Investing via your pension

PROPERTY in overseas jurisdictions may be included in self-administered pension schemes such as a Small Self Administered Pension Scheme (SSAS - for company directors) or a Self Invested Personal Pension (SIPP - for self employed and professionals).

There are a number of restrictions, such as the inability to purchase your principal private residence (PPR) and a necessity for the transaction to be at arm’s length from the pension recipient (for instance, the property cannot be let or sold to the intended recipient).

Essentially, a self-administered pension scheme allows the pension owner to control their pension investment decisions without the assistance of a third party insurance provider. A trust is set up and administered by the appointed trustees, one of whom is required to be a revenue approved “pensioner trustee” (see www.pensionsboard.ie).

Fund investment is entirely up to the pension recipient, as long as these comply with Revenue rules.

30 Nov 2009

We know that there is a planned scheme for distressed mortgage holders – internal Green Party memos have been shown ­– but there is no current working solution or blueprint, so what must be done?

We rapidly need answers that are fair to all participants. Currently there are three groups at the table – the lender, the borrower and the taxpayer. Taxpayers have already done more than their share and should not be called upon to remedy further issues, leaving the banks and the borrowers to find a middle ground whereby neither party is the ultimate loser.

Industry and consumer bodies must be engaged as soon as possible and the state needs to stay out of this other than as a facilitator or enforcer. If the government gets involved then the taxpayer gets involved and in principle taxpayers hold no further debt to irresponsible borrowers or lenders.

This knocks out ideas such as debt forgiveness – this oft vaunted solution is no more than a direct transfer from people who didn’t make mistakes to those who did. They tried it in Taiwan for credit card debt in 2005/06 and it was a disaster. Look at a Taiwanese bank balance sheet during this period and it is almost exclusively built up of credit-card debt. While compassion is prerequisite, bad solutions are not.

The changes long-term must come in the very footing of our debt laws, the ability to declare bankruptcy rather than have it imposed upon you is a first step. An end to the ruling whereby you can be chased for 12 years is paramount – this should be revised to five years or less.

Mortgages that are non-recourse beyond the property itself would be a great idea as banks would make more prudent choices. It would also deter rapid property price inflation as increased access to credit would have larger deposit requirements (independent of credit pricing). Currently you can get a 92% mortgage and at the same time access the cheapest rates available – this business model is flawed; higher LTVs must price risk

Short sales where a person in negative equity can sell their property for less than the mortgage and carry out an unsecured loan for the difference would be a further by-product.

If a bank’s only hope for recourse was the property it would compel them to accept alternative solutions.

Allowing a person to sell their actual mortgage would help – it’s called ‘moving paper’. A person with some arrears may have more luck in selling if the buyer can take on (for instance) their tracker mortgage with the deal and clear the arrears in the process. That way the bank get a performing loan and the buyer gets a good deal on the finance.

The banks made a mistake in forwarding credit but equally the borrower made an mistake in obtaining it. The issue is debt mixed with high unemployment and deflation so the only option may be one that allows both bank and borrower to give something up.

The best we can hope for is a long-term moratorium for those who cannot pay, but rather than piling up interest which would just create deeper unrecoverable negative equity, the banks would instead take a comparable percentage ownership in the property in question and then hold a portion of the actual asset the loan is secured upon as well as the loan.

It is better to have this solution in place than one where the bank repossess a property when the market is at a nadir, remove the tenants who want to stay put, and then both borrower and bank crystallise all losses at a low point. The actual costing of such a scheme, if the figure of 35,000 borrowers in arrears is broadly correct, would be less than €800m. The exit strategy will be tricky but it beats the alternative.

Unfortunately, residential arrears tend to lag commercial arrears so it is likely that we have not seen the worst of what the residential market has to offer.

The whole system, from Nama to mortgages or employment hinges on one factor: recovery. If we don’t get recovery it all ends in tears, if we do then the key is to get sufficient forbearance to allow all parties enough breathing room in the interim so that we can fix issues over time when conditions are more favourable.

Sadly, we didn’t opt for market solutions which would have seen much of this solved already, so in the coming months the government needs to flex with the banks, not posture, but push, and our Central Bank needs to stop barking and bite if lenders try to avoid the remedy.

We can, and will get out of the hole we nationally dug ourselves into, but we cannot let the prudent take further punishment for the profligate, and the question really comes down to what condition we hope to come out the other side in.