ANALYSIS: Mortgage arrears will limit Irish recovery unless it is addressed 

Way back in the mists of time, while studying business at second level, one of the most basic questions set forth in a textbook was: ‘What is the role of a bank?’

It was a formulaic question followed by a very formulaic answer. And back in the late 1980s/early 1990s, it was a very straightforward answer.

Banks were conservative institutions that took in deposits and then recycled these deposits though prudent lending practices. Then along came the Celtic tiger and the rulebook was ripped up.

Traditional high-street banks became part-hedge fund, part-high-risk investment banks. Short-term money markets were used extensively and recklessly to ramp up medium- to long-term lending, mainly to highly speculative development projects.

The music stopped in 2008. The taxpayer had to fork out €64bn to backstop losses in the domestic banking system.

Seven years ago, there were six domestic banks: AIB, Bank of Ireland, Irish Life & Permanent, EBS, Irish Nationwide, and Anglo Irish Bank.

Now there are three: AIB, which subsumed EBS, Bank of Ireland, and Permanent TSB.

Whereas seven years ago there were a raft of foreign invaders, now there is only Ulster Bank. AIB and PTSB are State-owned and the Government has a 14% stake in Bank of Ireland.

What the role of a bank is has now become highly politicised. Again, back in more ‘normal’ times, if a person did not meet his or her mortgage repayments, then the bank took legal action and repossessed the house. Maybe because it was so rare, there was no public backlash.

It was also widely accepted that banks acted honourably during the entire resolution process. The implicit trust that once existed between banks and the public no longer exists.

Banks may be returning to more normalised trading conditions but their relationship with customers has not recovered that trust. There are 117,000 in mortgage arrears, and some 84,000 in arrears over 90 days.

There are two ways of resolving this crisis: Massive debt write-offs or large-scale repossessions.

The banks have initiated legal proceedings against more than 40,000 arrears customers. There were about 500 repossessions last year. Whether this turns into a deluge over the next few years is unclear. If it does, then the State is facing an even bigger homeless crisis.

The banks say they will only opt for a repossession when all alternatives have been exhausted. Then again, the prospects of large-scale debt writedowns also look remote.

Bank of Ireland has a blanket ban on any form of debt forgiveness. AIB and PTSB are considering it on a case-by-case basis.

The Central Bank has imposed strict targets on the banks to agree restructuring solutions. Informed sources say there is considerable pushback by the banks to these targets, in the belief that an improving economy and rising property prices could deliver more benefits than widespread restructurings.

The Irish economy is among the fastest growing in the EU, but it has high levels of public and private sector debt; consequently, it is vulnerable to either internal or external shocks.

Current variable mortgage rates are among the highest in the EU. However, this reflects relatively higher funding costs; elevated levels of arrears; and a high proportion of tracker mortgages. Banks claim any threat to the status of mortgage lending as secured lending will also result in higher mortgage costs.

There has to be a sustainable and comprehensive approach to solving the mortgage crisis. A recovering economy will help improve the arrears figures. But the level of economic upside will be limited by the level of arrears. The acute shortage of housing also limits the potential outcomes.

The economy is moving in the right direction, but there are still huge challenges looming with potentially catastrophic social consequences if not handled correctly.

The mortgage arrears crisis will feature prominently in pre-election salvos between the parties. Expect the debate to be high on rhetoric but short on detail.

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