We must define what we mean by affordable

Since the appearance of the banks before the Oireachtas committees last week, we have seen a lot of discussion on the mortgage issue.

Like the poor, it seems speculation about mortgages will always be with us.

A vexed element of the mortgage story is that we still know little about the extent of “won’t pay” versus “can’t pay”, a debate that has raged for months.

The very term “strategic default” is fuzzy and incoherent. It implies a degree of deliberate decision making that is absent from all studies (outside Ireland) where the evidence is that the overwhelming determination of default is an emotional, not a rational, decision.

Underlying this and running through other issues related to debt is one common denominator — we have no definition of what is and is not affordable.

Take the discussions on the insolvency regimes: Anyone who has read the guidelines for what is and is not acceptable expenditure will note a massively intrusive approach into people’s spending.

While people in mortgage default or in insolvency clearly need some assistance with their spending habits, the bottom-up approach imposes significant compliance and monitoring costs.

A much simpler approach could, if there was regulatory will, be imposed which harks back to the past. This is to determine what is an acceptable percentage of after-tax salary to spend on the servicing of debt. Typically, this was seen as being in the region of 35%. What is interesting is that in the US, the percentage of household income devoted to debt service has hovered at around 10%-15% for decades.

We are around the same rate. But in Ireland we have a situation where the household sector is fractured financially.

We have more households without a mortgage than with. While non-mortgage households will have other debts, they will have much lower percentages of disposable income taken by debt service than those that have mortgages.

Within the mortgaged households, we have those in arrears (some 18%) and those without. Again, we do not have up-to-date information on how financially stressed these elements are.

Those claiming there is massive strategic default (or fraud as they are seemingly reluctant to call it) would have one believe there is little, and that the 18% are for a large part simply keeping up a (non-housing related) lifestyle they cannot afford.

It is more likely that these are more financially stressed and that they devote a larger part of after-tax income to debt repayment than those not in default.

So what about mortgage debt? It might be simpler for the incoming regulator to state that 35%, with wiggle room of 5% either way, would represent an acceptable level of repayment for a principal private residence. The difficulty is that in doing so, we would probably cause a significant hole to appear in the banks’ balance sheets.

A large number of mortgages would be reclassified as non-repayable were we to do this. This would cause the banks to have to engage in real terms with the mortgage holders. And that would result in write-offs which would erode the capital of the banks.

But they have already been granted capital to do this. In the last round of bank capitalisation, they were required to put aside nearly €10bn for losses on mortgages alone. They have not written off this amount, and will not. The taxpayer, however, has a right to expect the funds injected to be used for the purposes stated. Thus, significant write-offs of debts as irrecoverable are inevitable.

Setting a public level of affordability would also allow us get clarity on the extent of strategic default. If someone is paying 50% of after-tax income on a mortgage and still falling into default, it is doubtful if anyone would call that a strategic default. Unaffordable yes, strategic no. On the other hand, someone who is in default paying 20% might be required to get engaged with the realities of life.

There are good economic reasons why we might want to keep opaque the details of settlements between banks and defaulters.

Banks, like all lenders, need to be able to get as much as possible from loans and thus, unpalatable as it may be to some, they need to hold the upper hand in negotiations. But there is no reason why we should keep opaque the level of any non-commercially sensitive data.

In this context, we could reasonably ask that the banks be required to return to the Central Bank and that they publish, on a monthly basis, the amount of repayments made on mortgages, broken down between interest and capital. Indeed, this could be further broken down by those in and not in arrears.

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