Negative equity solution proposed

BANKS may be forced to write off millions of euro to help homeowners stuck in negative equity.

Plunging house prices have pushed many mortgage holders into a negative equity nightmare meaning it does not make financial sense to move home.

Director of the Irish Mortgage Corporation, Frank Conway, said there is a concept called “short-sale” which is common practice at US banks and may be of help to homeowners in Ireland.

He said if a property is valued at €200,000 and the outstanding mortgage is €240,000 then this homeowner is facing negative equity of €40,000.

Mr Conway said assuming the customer is in good standing with their bank, many banks will write off the €40,000.

He said the benefit to the bank is that it does not have to issue foreclosure proceedings, leaving the mortgage holder free to sell the property.

Mr Conway said this is a concept that should be incorporated into NAMA as it creates a more fluid market.

“We need to ensure that the ultimate driver of the economy, the consumer, is given some flexibility.

“It could generate some positive results from the consumer end of the economy and gets people over the negative equity trap,” he said.

Associate director with Financial Engineering, James Maguire, said when banks are chasing for arrears they will negotiate with their client to make some sort of effort in repaying the loan back to the best of their ability.

“They will review all possibilities before looking at the repossession options,” Mr Maguire said.

In the US, where the practice is common, a bank will often allow a short sale if they believe it will result in a smaller financial loss than foreclosing, as there are carrying costs associated with a foreclosure.

Karl Deeter of the Irish Mortgage Brokers recently wrote in a A Repossession Guide for Irish Homeowners, that one option for homeowners facing repossession is a short-sale.

Mr Deeter said: “The lender might be happy to see you sell it and keep the €20,000 left over as a loan in your own name.

“In any case it’s better for them to be on the hook for €20,000 than €200,000.”

However, he says such sales are not yet common in Ireland, although he suggests that some lenders may be starting to look more favourably on it as a way to encourage some clients to clear their loans.

A spokeswoman from Bank of Ireland said the bank is not considering the option of short-sale at the moment, adding that the number houses repossessed by the bank is “extremely low”. The bank repossessed four houses last year and two this year.

She said if a homeowner is facing repossession they are told to come and talk to the bank as soon as possible to work through their options.

AIB also said it is not something it is considering at the moment.

More in this section

Lunchtime
News Wrap

A lunchtime summary of content highlights on the Irish Examiner website. Delivered at 1pm each day.

Sign up
Revoiced
Newsletter

Our Covid-free newsletter brings together some of the best bits from irishexaminer.com, as chosen by our editor, direct to your inbox every Monday.

Sign up