Follow the Great Depression lead and cut the face value of every mortgage by 50%

HERE is an idea as to what the Government could do differently, and better, with €60 billion of taxpayers’ money.

The total value of all Irish residential mortgages is about €120bn. For €60bn, the Government could reduce the face value of every residential mortgage in Ireland by 50%. Can you imagine the boost it would give to the economy if people’s mortgage payments were cut in half overnight?

There would be a sudden increase in consumption and we would see an immediate slowing of the unemployment rate.

Who would get the €60bn? The banks because they were the originators of the mortgage loans. But it would be a much more transparent way of refinancing them and, most importantly, every householder in Ireland would benefit and not just a cabal of bankers and property speculators.

Irish households currently have too much debt while their assets (house values) are rapidly declining, leading to a sharp fall in their net worth.

The lack of debt relief to these distressed households is the reason why this financial crisis is becoming more severe and the recession – with a sharp fall in real consumer spending – is worsening. During the Great Depression in the US, the Home Owners Loan Corporation was created to buy mortgages from banks at a discount and refinance distressed homeowners into new mortgages with a lower face value and lower fixed-rate mortgages.

This massive social programme allowed countless families to avoid losing their homes and ending up in foreclosure. The Home Owners Loan Corporation bought mortgages for two years and managed these assets for 18 years at a relatively low cost to the government (as the assets were bought at a discount and reducing the face value of the mortgages allowed home-owners to avoid defaulting on the refinanced loans).

NAMA could be made to work like the Home Owners’ Loan Corporation and would be a much fairer version of the “bad bank” proposal. The bad assets of financial institutions are taken off their balance sheets and restructured/reduced.

That’s a much fairer deal for Irish taxpayers and would benefit everybody – not just a wealthy elite. It would also be completely transparent and would lead to a swift recovery of our economy.

Cearbhall O’Dalaigh

Ardbrack Heights

Kinsale

Co Cork