Mortgage support plan - Banks must share pain of loan scheme

Tuesday, February 02, 2010

FOR the banks it’s just business; it’s everyday, cold, monotonous even.

But for someone who has fallen behind with mortgage repayments it can become an unbearable emotional and psychological burden.

There are very few of us tough enough to pretend that even the prospect of losing our family home would not be frightening. Few events involving property could be more stressful, especially for a person – or a family – who has always met their obligations but, because of unemployment, a failed business or collapsed investments, are no longer in a position to do so.

In a culture so committed to home ownership it can devastate a person’s notion of self worth and achievement too. On a more brutal level it can also render them destitute.

That is why the belated announcement from Government, that it is drawing up a plan to protect homeowners in danger of losing their homes because of mortgage difficulties, deserves a welcome. However, this welcome must be tempered if the package is no more than that outlined over recent days.

Among the measures under consideration are reduced rates, later maturity dates, rolling-up of outstanding interest, the bank taking equity in the house or the bank taking ownership and leasing back the property to the borrower with rent payments coming off the loan.

These proposals give priority to the banks’ needs. They give the lenders the whip hand but take no cognisance of the fact that the banks may have contributed to the situation by lending more than was appropriate or by lending sums many multiples of the borrower’s income or by not properly stress testing all arrangements. This seems neither fair to the stressed borrower or the taxpayers sustaining the banks.

There seems, as yet, no clause that might force the banks to accept that they made a lousy business decisions and that they should, like everyone else, face up to the consequences.

This revolutionary idea has been recognised by the International Monetary Fund, which, in its analysis of the National Asset Management Agency, argued that it could be a dumping group for non-performing residential mortgages as well as insolvent developers’ loans.

Nevertheless, this scheme has the capacity to stand between very many families and a fate none of them ever contemplated and because of that it must be supported – but it must also make the banks face the consequences of their more reckless decisions.

There is an urgency about all of this as mortgage interest rates are going up in an environment where households are among the world’s most indebted after a decade-long credit spree. Household debt as a percentage of disposable income hit 175% in 2008, compared to 48% in 1995.

Adding grist to the mill the ESRI tells us there are about 196,000 homes in negative equity, which accounts for 30% of mortgaged homes.

All of this adds up to a situation that needs urgent and effective attention but it would be a good opportunity to show the banks that their actions can have costly consequences for themselves as well as for everyone else.

This story appeared in the printed version of the Irish Examiner Tuesday, February 02, 2010