I suggested a form of debt-equity swap for hard pressed homeowners, struggling under the weight of hefty mortgages at a time of declining incomes. This would involve banks taking part ownership of the homes of people in negative equity (where the loan is bigger than the value of the home) in return for writing off part of the outstanding debt, given people a lower debt, more realistically related to the present value of the home, to be repaid.
The response has been mixed, support for the concept from some being more than matched by objections and rejections, judging by emails and texts I’ve been getting, have been emphatic: the idea has significant problems, which I acknowledge and to which I will turn later, but it is rooted in the belief that without doing something a generation of people will be left to labour under an unfair millstone and that our economy’s chances of recovery will be greatly hampered.
In May 2005 I was the presenter/reporter on an edition of Primetime Investigates, made in conjunction with producer Brian Pairceir and researcher Catherine Cleary. In that hour long documentary – called “Tax me if you can” – we focused on tax avoidance in this country.
Tax avoidance is legal, using the laws to your own advantage to minimise your tax payments, and differs from tax evasion where due tax is simply unpaid. The programme was broken into two strands. In the first we focused on tax exiles, Irish citizens who chose to limit the personal tax they pay in this country to income earned in Ireland and not what they receive to their foreign places of residence.
In the second we looked at tax breaks that were provided at the time to high income earners in Irish society. Notwithstanding the fact that capital gains tax on profits was pitched at just 20%, and that our income tax rates had fallen to the lowest in generations, our government introduced a range of “incentives” designed to persuade the rich to invest in Irish assets. Unfortunately, much of this foregone tax was invested effectively in inflating the property bubble. We focused on the mad-cap construction of hotels and also focused on what have since become known as “ghost estates”, pointing out that tax breaks were encouraging the construction of houses in inappropriate areas, which would remain empty, just because investors wanted the tax-breaks over 10 years for buying them. I bring this up now because the reaction at the time from the public to the programme was muted. It did lead to some debate in the Dáil and Brian Cowen, as finance minister, was forced into curbing and the abolishing some of the construction-based tax relief. However, viewers, and there were more than 420,000 for that particular programme, didn’t get in touch to tell me that they were outraged that they were effectively subsidising the rich in getting even richer. This week, though, I’ve heard from plenty of people who disagreed vehemently with my suggestion for a very limited debt write-off and a conversion of part of mortgage debt into equity, which would be held then by the banks.
The objections can be put perhaps into two categories: the first is that people have to take responsibility for their own mistakes and do not deserve to be bailed out by those have not made the same mistakes. The second is that the banks and government are bust and simply can’t afford to get involved in financing an idea like this.
I understand both objections, but there are social and economic consequences of doing nothing. The knowledge that you are repaying far more than your house or apartment is worth, that you will never be able to sell other than at a major loss and that you are highly vulnerable to interest rate increases or the loss of income is highly stressful to say the very least. It is likely to lead to your spending a lot less, which in turn dampens demand in the economy.
The Government and state agencies such as the regulator have a responsibility to help because of their failings to do their jobs properly. Those in negative equity were persuaded by government policy that buying at inflated prices was the right thing to do, that it was OK to take out loans of enormous duration and to do so at a multiple of salary. The banks behaved recklessly in inducing customers and the regulator stood idly by. As for the issue of personal responsibility? Who hasn’t made mistakes in their lives? Who hasn’t followed the crowd and done what everybody else said they had to? Should the punishment be as severe as that being imposed on young people and those with families approaching middle age? I’m not talking about those with second apartments and any programme should not apply to any part of the debt that was incurred in paying off car loans, or credit card debt or splurging on holidays.
But I do believe in some pragmatism. People get cut breaks all of the time, particularly the richer they are. Many of the developers who sold the overpriced homes will cut deals with NAMA – they won’t repay all of the money that they own and I doubt if they’ll lose their homes, even their oversized luxury ones. Some may even have parked money outside of the jurisdiction, away from the taxman and creditors. You’d be naive to think otherwise.
But the ordinary people will suffer the repossessions. The developers who got it wrong will be unable to repay all of the money they borrowed and will not have to do so. But the poorer people who were persuaded to borrow excessively to buy the houses and apartments – and who got the money from the banks who had lent to the developers and who wanted their money back from them – well those homebuyers are expected to repay in full. Where’s the justice in that?
WHAT I’ve suggested – a swap of debt for equity – is common to rescuing companies that get into difficulty, to stop them going bust. It is not pain free for the borrower, as they would lose part ownership of their home but it would make their repayments more manageable. It would require the injection of extra capital into the banks – which would probably have to come from the State – but if as Brian Lenihan said recently the rescue of Anglo Irish Bank is within the State’s financial capability why not this? Of course somebody has to pay for what I’m suggesting. It could cost billions, but not tens of billions, not as much for example as much as rescuing Anglo Irish Bank is costing, because many people will not want to avail of it because it would involve a bank part owning their property.
Negative equity is a major issue for a large segment of our population, especially those who bought in the last decade. It can’t be ignored and difficult as it may be, something has to be done. We hear all about the need to rescue the public finances and the banks, which we do. But we cannot dismiss people, the citizens of this state, lightly because the public finances and the banks take precedence or because those who have are unwilling to share the pain with those who do not.
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