Understanding abroad for home buyers

APART from the Great Famine, the most traumatic folk memory still hard-wired into our collective consciousness is of the notorious evictions of the mid-1800s when thousands of tenants, small farmers and indigent landholders were forced out of their homes because they could not pay their way.

Why? Landlords were ruthless.

Fast forward to Ireland 2011 where the prospect of losing your home has become a grim reality for many families who never dreamed that the good life could become such a nightmare.

Thousands of once well-heeled middle class folk now face foreclosure on mortgage loans they can never hope to repay. The inevitable result is eviction.

Why? Banks are ruthless.

Maybe not all banks, though. AIB has recognised the enormous social and human cost of foreclosing by suggesting that there might be a third way — debt ‘forgiveness’, or inter-generational home loans, or a combination of both.

Neither idea is particularly new because banks don’t like being in the property owning business. Although almost unique to Europe where the standard practice has been to hunt down mortgage defaulters, in the United States, more and more people in negative equity are simply closing the door behind them and giving the bank the keys.

Different countries treat default on mortgage debt differently and the approach taken usually depends on whether the mortgage lender has the legal power to pursue claims against the defaulted debtor. Furthermore, mortgages on second homes may be treated differently from mortgages on main residences.

* FRANCE — The legal consequences of defaulting on a mortgage are similar to Ireland. If you decide to discontinue paying the mortgage and return the keys to the lender, the latter will initiate foreclosure proceedings and the property will be sold at auction, which could result in the owner remaining liable for any shortfall.

French banks have been traditionally more cautious in lending than Irish banks, so the proportion of foreclosures is likely to be lower. For Irish people with holiday homes in France, on a French mortgage, a judgment against a defaulter by a French court will invariably be enforced by the Irish courts.

* GERMANY — The property market remained stable, with growth of only 5.9% from 2003 to 2006, as opposed to the markets in other EU countries where prices grew rapidly (Ireland 153%, Greece 148% and Spain 132%). That was one of the main reasons the German economy saved itself from the first wave of the crisis caused by the rapid fall in prices.

Likewise, mortgage lenders took a more sober view of applicants and there are few foreclosures.

* SWEDEN — Sweden went through recession in the early 1990s when house prices fell by over 30% in major cities. The number of foreclosures has been considerably lower in some parts than in others from 1993 to 2006.

At first, when recession hit in 1993, foreclosure was the norm. More than 10 years later foreclosures only represented one tenth of the 1994 figure. Since then, mediation has been the order of the day.

* UNITED STATES — Here, the term ‘strategic default’ has gained currency in recent years. A strategic default is the decision by a borrower to stop making payments (ie, to default) on a debt despite having the financial ability to pay.

This is particularly associated with residential and commercial mortgages, in which case it usually occurs after a substantial drop in the house’s value and is expected to remain so for the foreseeable future.

In the US such borrowers are called “walkaways”. A study by the credit reporting agency Experian estimated that almost one fifth of troubled mortgages involved borrowers who were strategically defaulting.

Another term in increasing use is ‘debt forgiveness’, a process being considered by AIB whereby the lender ‘forgives’ all or some of the debt. However, debt forgiveness in the US is a two-way street and even if the bank doesn’t get you, the taxman will. The forgiven debt is, in general, regarded as income and taxed accordingly. Debts that have been discharged through bankruptcy aren’t considered taxable income.

Although legislation introduced in 2007 allows a derogation from this tax liability until the end of next year, this is limited to main residences.

Nonetheless, debt forgiveness in the US has encouraged millions of mortgage holders to simply walk away.

* BRITAIN — Late last month mortgage lenders reported the first rise in default rates since the second quarter of 2009 when Britain was still in recession.

Some 11% of lenders surveyed by the Bank of England said mortgage defaults rose in the first three months of 2011, whereas they had expected the number to remain flat.

While the banks have not been slow to take mortgage defaulters to court, the growing rate of troubled mortgages has given them pause for thought.

The result is increased lender forbearance whereby banks allow borrowers to extend the repayment period of their debt, switch a repayment mortgage to an interest-only product, or even allow them a holiday on interest payments.

* ICELAND — Last weekend, Icelanders rejected a government-negotiated deal related to Icesave, the country’s collapsed internet bank.

They voted down a deal that would have repaid Britain and the Netherlands around €4 billion, including interest, in return for the two countries having compensated Icesave depositors after its operator, Landsbanki Islands collapsed in October 2008 along with the rest of Iceland’s big banks.

A group that represents households demanding debt relief says lenders should write off up to 220 billion krona (€1.35bn) in mortgage loans to help the 39% of homeowners who are technically insolvent.