Dramatic solution for mortgage arrears ‘vital’

More dramatic solutions to the mortgage arrears problem, including debt write-off, will have to form part of the banks’ strategy in the future, the Secretary General of the Department of Finance, John Moran, told the Irish Banking Federation conference yesterday.

Irish banks had to develop a three-prong strategy to dealing with the debt crisis, said Mr Moran. First the sector has to come up with appropriate lending policies for viable households.

“The savings rate is 14%. The pre-crisis savings rate was 8%. If there was a 4% decrease in the savings rate, it would lead to 1% GDP growth.”

But unlocking this potential required banks to develop appropriate lending policies to viable households, which would in turn improve wider consumer sentiment and boost the economy.

Banks will have to deal with a number of strategies for non-viable households. This means separating those who can’t pay from those who won’t pay. And for households that can’t pay and where the debt burden is unsustainable, debt write-off will have to be an option. And there are situations where there will be no alternative to repossessions, he added.

Banks still have to determine what are acceptable standards of living when restructuring customer debts, added Mr Moran.

“I think people are going to have to realise that living standards will be different in the future. In the 1980s and 1990s it was common for people to buy houses and then furnish it over time. During the boom people wanted to move into fully furnished houses. I think people have to accept that this is not realistic.”

Moreover, there are a number of viable SMEs that accumulated speculative property debt during the boom years, which doesn’t form part of its core operations, but servicing this debt is dragging on the overall performance. The banks have to develop strategies to deal with this unsustainable property debt, he added.

“But it isn’t the job of banks to lend into broken balance sheets,” said Mr Moran. He said the Government was looking at developing alternative sources of equity and mezzanine finance for Irish SMEs. He cited the example of Silicon Valley Bank, which announced in June that it was establishing a $100m fund for the Irish life sciences sector.

“But overall the biggest challenge is establishing confidence. People need to believe that tomorrow is not going to be worse than today.”