Country needs action, not ideas

People in mortgage distress need more than state reports, says Trevor Grant

ANY ideas that will assist or enable those facing real financial ruin to remain in their own homes is welcomed, but this report is largely just that: A series of ideas. And while we appreciate that work is under way to implement its key elements, Ireland’s mortgage holders have been in recession for more than three years and the Government is still only at idea stage.

There is some logic behind the two mortgage-to-rent schemes but a significant level of co-operation will be required from the stakeholders. Under each scheme, households in mortgage distress who are eligible for social housing would be able to remain in their homes as social housing tenants with either the lending institution or a housing association taking ownership of the property. Based on the lack of interest expressed by the lenders in relation to the previous “interest deferment scheme”, it’s difficult to see a more complex scheme getting off the ground. And who will foot the bill?

Alan Shatter’s Personal Insolvency Bill is the key to unlocking household debt. As mortgage negotiators, it’s difficult to negotiate without a default strategy. A 12-year-plus bankruptcy option just isn’t tenable, whereas a three or even five-year option is. Most of our clients have two to five mortgages, usually accompanied with lower incomes and are in €500,000-plus of negative equity.

In real terms, it is unlikely their income will recover in the short term as it’s equally unlikely that the values of their properties will exit negative equity over the next 10 years. Therefore, on paper, they’d be better off declaring bankruptcy, suffering in the interim and being debt free after three or five years. However, banks won’t want individuals to take that road as they stand to lose too much, so will offer a more palatable option. This is the key solution as it involves equitable pain sharing and real solution over a set time period.

While the report doesn’t announce any formal debt forgiveness scheme, we are seeing evidence of short-sales, and other structured agreements, particularly in the buy-to-let market. These solutions are growing in favour as the banks become more realistic and realise that there isn’t going to be a magic economic and property recovery and that many of the current mortgage contracts are unsustainable in their current form.

The trade-down mortgages, split mortgages and sale by agreement solutions are all laudable but without the threat of the borrower opting for personal insolvency, it’s difficult to see the banks offering pain-sharing versions of these solutions.

One of the greatest areas of growth is mortgage repayment restructuring, wherein lenders appear to be recognising the fact that existing repayment structures are unsustainable. Based on the number of people falling into arrears, we believe that the number of mortgages to be restructured will need to reach 10,000 per quarter if the growth in mortgage arrears is too slow. Also bear in mind that the Central Bank’s published quarterly data is over three months out of date, so the problem is almost certainly worse now than when the numbers were recorded in June 30.

The report doesn’t deal with the far greater crisis in the buy-to-let market where arrears are considerably worse and in many cases the solution involves substantial debt write-off and/or shared property ownership between the borrower and the lender, but only where the customer deals with the issue head-on.

While the ideas are positive for those in grave danger of losing their homes, they are still only ideas. We don’t know how much they are going to cost and who is going to pick up the bill. Establishing a fair and modern personal insolvency process is the only real long-term solution for the vast majority of troubled mortgage holders. Without it, the banks won’t come to the table and the economy cannot recover. We need action, not ideas.

- Trevor Grant is managing director of Mortgage Negotiators