The moral hazard of mortgage defaulters

Why should I continue to pay my mortgage if the State is to bail out those who aren’t paying theirs? That was the obvious question to the proposed bill from Fianna Fáil’s John McGuinness which has been drafted by the master of the High Court Edmund Honohan, writes Daniel McConnell.

Essentially, the bill seeks to allow those people who are struggling to pay their mortgage, or are in arrears, to benefit from a debt write-down and remain in their homes.

The people in mind are those who for whatever reason have stopped paying their mortgage in part or in full.

Solidarity TDs Mick Barry (red jacket) & Paul Murphy & activists take their opposition to the vulture funds sale to Permanent TSB, Dublin.

The bill provides for the broadening of the mortgage-to-rent solution to ethically- funded, not-for-profit housing providers outside the public sector and public finances, or “friendly

vulture funds” as Mr Honohan said yesterday.

It would lead to the establishment of an industrial and provident society to be called The National Housing Co-Operative Society with the mandate and powers to acquire, manage, rent or sell distressed mortgages so that the occupants of houses can move from the status of distressed mortgagor by means of mortgage to “rent and mortgage”.

The idea is that this not-for-profit agency would get the loans at the same discount rate being applied to the foreign vulture funds but instead of seeking to eke a profit, the struggling or sub-prime borrower would be given time to work out their debt and remain in their homes.

What about the so-called moral hazard?

Both Mr McGuinness and Mr Honohan, speaking yesterday, said this bill would only apply to those people who have sought to find a solution.

“There is nothing for those who are not playing by the rules at all,” Mr McGuinness said. “Moral hazard does not apply here,” he said.

Moral hazard is defined as the risk that an individual or group will act recklessly if protected or exempt from the consequences of an action.

Last week, Permanent TSB confirmed that it would prepare for the sale of certain non-performing loans to third parties, a process referred to as Project Glas.

It said loans linked to about 18,000 properties are included in Project Glas; about 14,000 of which are private dwelling homes.

The value of all loans included is about €3.7bn, with around €1bn of thisaccounted for by properties bought specifically as investment properties (buy-to-let).

Of the remaining €2.7bn in loans, just under €2bn is accounted for by loans linked to private homes which are typically owned by customers who have not engaged with the bank, whose mortgages are unsustainable or who have been unable to meet the terms of varioustreatments put in place.

Mr McGuinness has argued that his bill will act as a filter to sort out those who have co-operated and those who haven’t. He said as things stands those who are making the effort will be lumped in with those who aren’t and exposed to the whims of the unregulated for-profit vulture funds.

Initial reaction to it around Leinster House was mixed. It is fair to say if it is to succeed, then people will have to be convinced that the State will not be left exposed to those who will seek to avoid paying their mortgage on strategic grounds.

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