Cold comfort for mortgage holders as banks and state devour billions

THERE is a financial crisis that gets far too little attention. It is not the one at the banks or in the public finances but the one affecting the ordinary homeowners of this country, or at least those who have mortgages that must be repaid.

New figures published by the Central Bank this week showed there are almost 789,000 mortgages with banks on homes in this country. The loans involved amount to €117.4 billion.

One can only imagine what the market value of the properties secured on those loans is. This suggests an average mortgage of €149,000 which, even in the current depressed market, is less than the price of an average house.

However, averages can be misleading because many people are fortunate enough to have mortgages that are just a fraction of the new, even if revised downwards, value of their homes. It is highly likely that many people have loans to repay that are far in excess of the resale value of their home. What was not just a place to live, but was also regarded as an asset, is now an expensive liability.

Negative equity is more of an irritant than a serious issue if you have no plans or need to move. It may act as a drag on your spending or investment if you know that, effectively, you are paying more every month to the bank than you really should, but that is a psychological issue.

The problem becomes pressing if you are unable to make the monthly repayments. It becomes a crisis if you have to sell your home because you can’t meet repayments and then find that the proceeds from the sale won’t clear your outstanding debts.

The number of people having trouble with their mortgages is mounting. The number in arrears for more than 90 days is 40,472, and of those, the number who are more than 180 days in arrears is 28,049. Close to another 30,000 mortgage-holders have rescheduled their repayments, taking agreed payment holidays or extending the length of the loan over which they can make repayments.

This means that 9% of mortgage-holders – and here I’m not looking at those with second homes, investment properties or the like but just people with loans attached to the places where they live – are having problems.

That does not mean they will default or the banks will be left with automatic bad debts – allow they will incur large losses if they have to sell a glut of homes – but the upward trends from the figures provided every three months suggest others are going to get into similar difficulties.

Rising unemployment is a major issue. The Government is hopeful this is tailing off, although much of it may be down to emigration by those who do not have mortgage debt to service. But increased interest rates next year, both by the ECB and from the banks themselves, are likely to push many borrowers closer to the edge. The belief is many people have dipped into savings or redundancy money to keep up mortgage repayments, but this source is coming to an end for a sizeable number now.

This is going to become an even bigger economic and social issue. A spiral in which house and apartment prices fall even lower looms; this would affect not just personal wealth but the value of collateral that banks hold.

Add in all the other debt held in the private sector – there’s another €60 billion in loans for cars, credit cards, investments and more – and it dwarfs the problems in the exchequer finances and the banks.

I have been arguing that some form of debt resolution process for the homeowner must be implemented if we are to deal with the crisis of personal debt that threatens to derail domestic economic recovery, as well as having awful social implications.

The Government is not unaware of the problem. Earlier this year it decided on a minimalist approach to dealing with it by outsourcing assessment of the problem to a specially established body, the Mortgage Arrears and Personal Debt Review Group. This was made up of representatives of the Central Bank, government, civil servants and members of the banking fraternity.

I suspect the Government gave the expert group – or at least some of the more influential members of it – a clear, if informal, brief. They were to come up with something that would cost the taxpayer as little as possible.

On Wednesday it announced its findings. There is to be no debt forgiveness or no debt-for-equity swaps (the latter being something that I had advocated earlier this year in the RTÉ documentary, Aftershock). Instead, there is the suggestion of a scheme where distressed borrowers can defer the payment of up to one-third of the interest they owe, and new measures to make it easier for people to go bankrupt and get out of that state again.

The measures are better than nothing but they do not go anywhere near far enough.

It is easy to understand what has happened. A debt-for-equity swap, for example, if taken up by large numbers of people, whereby they might transfer, say, 25% ownership of their home to the state or its banks, would involve large losses for the banks that might put them under.

Nor does the Government want measures that would become an excuse or reason for people to seek avoiding the repayment of what they owe. There was also the fear of a public backlash. Many of those who did not get themselves into financial trouble resent the idea of helping those who did. And I can understand why people don’t want to pay for the mistakes of others, especially if they were prudent.

But we are all paying to bail out the banks and foreign lenders to the state, so why not our own citizens?

In the business sector debts are being written off or debt-for-equity swaps are taking place and will increase in number. Banks are doing deals to get whatever money it is practicable to recover and it is the only way that businesses will survive. They know that to insist on full repayment is more likely to increase the losses.

However, homeowners seemingly are expected to pay every cent back to the banks, even when they don’t have the income.

JUSTICE Minister Dermot Ahern, when asked recently about debt forgiveness, said: “I don’t accept people will never be able to pay their debts.”

But not everyone is guaranteed a massive redundancy on losing their job – as he will get – as well as a sizeable pension.

The public finances and the banks have dominated the thinking of the Government. They do not want to see the bigger picture beyond the things for which they have immediate financial responsibility. They have not wanted to make things more complicated for themselves. They have too much on their hands as it is.

But citizens are entitled to ask why the attitude of the past two years has all been about saving institutions, structures and processes, and assisting the wealthier, with the wellbeing of less influential people coming down the list of priorities.

Many of the measures implemented by the banks to date have been a temporary relief that merely manipulates the statistics in the banks’ favour and increases the pain for borrowers over a longer period of time. I doubt if the new proposals released this week are going to make a major difference, other than ensuring that the state does not have another major new initiative to finance.

The Last Word with Matt Cooper is broadcast on 100-102 Today FM, Monday to Friday, 4.30pm to 7pm.