New bankruptcy law is the only lifeline for people drowning in debt

GOVERNMENT indifference to defaulting debtors is abundantly clear. The composition of the Working Group on Mortgage Arrears excluded external expertise, comprising only civil servants and bankers.

Insiders, primarily concerned with bank survival, concluded in the Keane report foremost priority was to ensure mortgagors discharged their debt obligations. Fear of non-compliance with debt repayments spreading to those who could pay dictated that debt forgiveness was unacceptable. They answered a question nobody asked. Who inserted “blanket “into the unsustainable debt debate?

Obfuscation, denial and delay are core official tactics deployed to reject meaningful assistance for those trapped in unsustainable situations. These problems will not go away. Layers of debts make this recession different to those of the 1930s, 1950s and 1980s. Ireland is more indebted cumulatively at every level, than any other state in the advanced world. Our sovereign debt represents 137% of GNP. Household debt amounts to 147% of GNP. Personal and corporate debt is greatest at 210% of GNP. Even with miraculous economic recovery and exponential growth, repayment on all these loans will suck years of cash out of 1.8m workers and 1.6m households. Combined total of debt at 494% of GNP contrasts with Greece at 273%.

Statistics, procured by Deputy Peter Matthews’ Parliamentary replies, confirm debt forgiveness cannot be the preserve of 180 Nama elite. Their loans are to be written down from €74bn to €32bn, because the “extend and pretend” fallacy of full repayment for them is simply incredible. Down the food chain, Mick Wallace TD is subject to personal insolvency proceedings, because he owes only €40m. He can’t repay ACC €19m. Beyond bankruptcy, bailiffs and humiliation-what prospects do creditors have? They face a cul-de-sac of impairments. It’s the same story for Germany and European banks with imminent Greek sovereign default.

In the conflict between mortgage lenders and borrowers, officialdom and politicians are intent on sitting on their hands. By exerting no pressure on financial institutions to expedite settlement of bad debts, they retard recovery. Patrick Honohan spelt out that existing recapitalisation provides adequate flexibility to write down toxic debts on a case-by-case basis. Non-performing mortgages have already been assessed in the Blackrock stress tests. €63bn of public subsidy has been expended. Three months ago, almost €10bn of €19bn was injected for house loans. This refinancing acknowledged declines in market values of homes and incomes. Indigenous lenders hoard the cash and hardball petrified customers.

The debate on mortgage forgiveness has spawned smugness amongst individuals who are debt free. Single people, under 30 years of age, and older residents, whose mortgages have been repaid, pour scorn and blame on the indebted as foolish, reckless and irresponsible. They chide debt delinquents as guilty of self-inflicted pain. They envisage their pockets being pilfered in any debt rescue plan. This short-sighted tunnel vision disregards questions of culpability. Lenders procured valuation reports prior to loan approvals. Their credit committees had access to macro economic analysis of loan to value assessments, as well as economic forecasts on house prices and incomes. Couples, wishing to have kids, merely wanted to own their home. Timing was their crime — 2004 to 2008 was doom-time to be a house buyer.

The Keane report offers 10,000 distressed homeowners prospects of tenancy, staying under the same roof. House ownership could move to the state. Having spent more than 20 years as a local public representative dealing with housing, I recall the points system (allocation of social housing), whereby environmental health officers assess applicants. Usually couples require two or more children and must be on waiting lists for four or more years. They are low paid or on welfare- living in rented accommodation, mobile home or overcrowded circumstances with extended families. When successful in attaining rehousing, their rent is means tested under the National Differential Rents scheme.

The mortgage to rent proposal is conceptual, not a practical workable scheme. It excludes those at work, who won’t meet income criteria for public housing. Taxpayers and local authorities cannot afford or operate house maintenance schemes, as apply to council estates. Even more unviable, is the notion that the unpaid portion of the mortgage remains a personal recourse debt. The government committee advocate full repayment of all debt — without any write off. Householders who trade down or become tenants have no incentive to do so if they obtain no relief on liabilities. Why participate when there is no upside? They lose any equity, invested in the house in terms of renovations or initial savings. The 9% stamp duty, which governments pocketed gleefully, is down the drain.

Traditional lifelong career bankers will tell you that debt write-offs have existed individually and on a cyclical basis since lending began. Bad debt is a constant risk feature of banking. Maximising salvage values on impaired loans is predicated on providing an incentive to lenders and borrowers. There is increasing evidence that many in mortgage arrears beyond 60 days have rationalised their situation. They concluded they will lose their home. It may take two years for the repossession process to be completed through the courts. In circumstances of forfeiture, monthly non-payment means free rent before eviction. Their mindset is they may as well be hung for a sheep as a lamb. Sticking plaster solutions of deferral buys them up to two years of free accommodation. Some 50% of €125bn mortgages are with non-indigenous institutions (such as BOSI, Ulster Bank and ACC). These are not subject to any state shareholding, Nama relief or direct government diktat. Codes of practice tend to be advisory rather than obligatory.

Courts readily and routinely implement judgement mortgages and summonses for creditors, without analysis of original credit risks undertaken by lenders. The pillars of state, Parliament and judiciary, have stood foursquare behind creditors in relentless enforcement of contract law — without any regard for the collapsing housing market and decimation of incomes and jobs. How can this imbalance be rectified?

All agree that Irish bankruptcy law is antediluvian, outdated, penal — as it treats debt default as a crime- punishable by 12 years of penury and serfdom. Any income beyond €260 per week has to be paid over to the court trustee for the benefit of creditors. Disqualification from being an active economic participant in society is enforced. The terror of imposing this regime is frightening on individuals. Entrepreneurs, with access to top international professional advice, have ameliorated and evaded Irish insolvency by invoking rights as European citizens and moving to another jurisdiction. Regular householders don’t contemplate similar mobility.

One remedy that would uproot the cosy consensus of tyranny between courts, state and banks would be radical reform of the period of bankruptcy. If the discharge period was reduced to six months, not three years, it would transform debtor’s escape opportunities. Even for a limited period of three years, government could provide a safety valve for the debt epidemic. If financial institutions knew trapped mortgagors could return keys, lose their house and walk away relatively quickly, there would be a stampede to reach accommodation on debt restructuring. Eureka for the oppressed, without state bureaucracy.

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Wednesday, June 16, 2021

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