Why the Government isn’t interested in solving our mortgage debt crisis

FORMER US President Bill Clinton has identified a priority for the Irish economy that is not shared by the vast bulk of our elected politicians, or indeed many citizens of this State.

Speaking at the Global Irish Economic Forum last Saturday he said that dealing effectively with private mortgage debt was possibly the most important issue involved in the rebuilding of the Irish economy and society. This was an extraordinary statement because Irish politicians have run from the issue wherever possible over the last two years.

They have done so for three main reasons. One is the likely cost of trying to resolve the problem, because the Government would have to compensate the State-owned banks for whatever mutli-billion losses they would incur in dealing with the issue. The second is that it would be very difficult to come up with a scheme in which non-state controlled banks, foreign owned ones in other words, would take part (and half of those in arrears have their loans with such banks). The third is that any measures to bail out the highly indebted would be hated by those who did not incur high debts during the boom years. As far as they are concerned they should not be punished financially for their good sense — any scheme would have to be funded by their taxes or by a reduction in the public services they consume.

To the third issue first: the resentment is understood easily. There are plenty of examples of people who borrowed recklessly, bought houses that were clearly overpriced, that were too big for their needs, who furnished them excessively, put overly expensive new cars in the driveway, who went on two foreign holidays a year financed by borrowings and who always seemed to wear the new designer clobber. Some also borrowed to “invest” in property that they rented to others. Why should they be bailed out? If they made their own beds they can lie in them.

Well, of all those who cannot meet their mortgage repayments now — because of losing their jobs or a dramatic fall in income if still employed — few enough indulged in the behaviour described above. It is the same type of urban myth as the idea that everybody on social welfare is somehow better off financially those who work. Many of those people who are now being demonised bought modest accommodation, which they have now outgrown because of family needs. They were induced by banks and government policy, as well as the herd mentality of the time, to provide for themselves instead of depending on the State for their accommodation. They overpaid dramatically. It is estimated now that 60% of mortgage holders have a loan to repay that is larger in size than the price they would achieve for the sale of their property now.

There are people who argue that negative equity is not a real problem unless somebody has to move home, especially if the monthly repayments are being met. This is true, but only to a point: there are many people, especially with expanding families, who are going to be forced to live in wholly unsuitable accommodation, such as apartments, even if they can afford to make monthly repayments, or in locations that are unsuited to new employment. There is also the psychological impact on spending that applies to people who know they owe more than their main asset is worth.

But more importantly, what about those who can’t repay their loans? It is reckoned that about 45,000 households have not paid their mortgage for more than 90 days, with 32,000 of those not having made their full repayments for more than 180 days. But it is far worse than that. Another 56,000 households have “restructured” their mortgages. For most this means paying only the interest at present, with the principle to be repaid at a later date, or extending the life of the mortgage to reduce the current monthly repayments. The end effect is that they will end up paying more to the lender over the life of the mortgage.

Many of those who are meeting their monthly mortgage repayments are doing so because they are spending little money on anything else. This is having devastating effects on spending in the economy but it doesn’t show up in the statistics that are used to measure the problem.

So what can be done? The Government has been forced into the third review of the situation in 18 months and on Wednesday it published the so-called Keane report (named after an accountant on secondment to the Department of Finance who headed up the group of experts who examined the problem). It estimated that the amount of so-called negative equity being suffered by Irish mortgage holders is about €14bn.

The report was extremely conservative in its recommendations, seemingly conscribed as ever by the desire to offer solutions that would not cost the State much money.

Not surprisingly it ruled against so-called debt forgiveness, the straightforward writing off of a portion of the debt. (Let me declare two interests here: I highlighted the economic and social problems that were and would be caused by excessive mortgage related debt in a RTÉ programme Aftershock in May 2010. I never advocated so-called blanket write-offs without something being given in return by the borrower, such as a part share in the property being surrendered to the bank or the State). I was surprised to find that many people misrepresented my proposals subsequently as wanting to give people a free lunch. And the second thing: I am not looking for such proposals for myself.

WEDNESDAY’S report does not have ideas as to how to deal with negative equity. Instead, the report focuses on those who are struggling to make repayments. But most strikingly it does not agree with the idea of increased mortgage interest relief for those who bought at the boom, a limited measure promised by Fine Gael as it sought votes during the general election campaign. This is one to watch closely at budget time because the Government will be crucified if it fails to deliver on this, and deservedly so even if the IMF/EU/ECB excuses are being prepared already.

The Keane report comes to the correct conclusion that there are some people who will never be able to clear all of their mortgage debts, and who will not be able to meet monthly repayments at any stage from now. These people are going to have to lose ownership of their homes, but what the report suggests is that they can continue to live in those homes, as tenants of the State. There is some sense to that because if evicted people who lose their homes are still going to need somewhere to live and will probably have to turn to the State either for their rent or a council house. This solution would be preferable.

But questions remain to be answered as to what price the State would value the house on taking it over. Would it value it at the amount of the loan or at the existing market valuation? If it is the latter, then the “sale price” would only clear part of the outstanding loan. Would the tenant have to pay rent and also seek to repay the balance of the outstanding loan? How would they afford that?

The reality is that NAMA is cutting deals with the developers to allow for only partial repayment of their debts. The banks have been saved with our money. But for all the talk and three reports nobody in power is really interested in solving the issue that outsides like Bill Clinton can see are essential to economic and social recovery.

The issue of dealing with the mortgage crisis and the contrast between the State’s approach to that and how NAMA handles the debts of developers is examined in Matt Cooper’s new book How Ireland Really Went Bust, published by Penguin next Monday.