Mortgage crisis resolution must balance competing interests
BORROWERS strategically default when they pay nothing but could pay something or when they choose to pay less than they can reasonably afford.
No figures exist to measure the scale of such default on mortgage loans, but it is widespread.
Whatever one’s view of strategic default, the system has contrived to make strategic default a rational option to choose. It may not be “fair” or “moral” but, in the world of finance, these concepts always give way to what is expedient.
People make decisions based on their own economic welfare and economists call this rational behaviour. In a properly operating system, such decisions are consistent with the common good. But, in a broken system, such as the housing market in Ireland, there is a divergence, and a tension is set up between the collective and the individual. In the end, everybody loses.
So why do people strategically default?
There are borrowers who could make some payments but common sense tells them, and the lenders remind them, that what they can pay will never be enough to satisfy the debt or the bank.
Such borrowers are often mired in negative equity and rents are expensive. Given the speed of the repossession process in Ireland, it is rational for them to remain in situ paying nothing. It is just a perfectly sensible refusal to throw good money after bad.
The downside is that the borrower lives in constant fear of the bank or the bailiff and life is on hold.
But the alternative option, which may involve homelessness, is worse. When borrowers come before a court they can make some payments and buy time — often lots of time.
Since 2008, the deals on offer from banks have got better and everybody believes that they will get better again. If a defaulting borrower had “behaved” and surrendered their house in 2009, the shortfall on sale would have been substantially more than had they held out to 2015. In the meantime, they would have been paying excessive rent with no security of tenure.
Whatever way you look at it, the system punishes those that comply while rewarding those that don’t.
The recent and much-trumpeted announcement by Government of a response to mortgage arrears, in reality an announcement of an announcement, has had the desired effect of postponing a resolution of the arrears crisis and ensures that there will be no repossessions this side of an election. No judge will make an order if the borrower pays something, however small, and the cavalry are said to be coming over the hill.
So Government, by its stated and even laudable policy of “wanting to keep people in their homes”, combined with the inconsistent practice of doing nothing, is actively encouraging strategic default.
Finally, there are some who need to sacrifice too much in order to pay their full mortgage. In real life, there needs to be a correlation between the amount paid on housing and the amount left to live on.
Living on the breadline while paying a huge mortgage is an impossible ask of most.
As time goes, by the consequences of not addressing the problem get more pronounced. Living under this cloud of uncertainty has a very negative effect on people’s quality of life.
While there has been some improvement lately, mainly as a result of banks extending terms and capitalising arrears, a very large and growing number remain stuck in unsustainable debt.
There are ways to deal with this.
The first is the Irish solution to an Irish problem, meaning doing as little as possible. In that scenario, strategic default will continue, the courts will be packed with families living in a twilight zone and perhaps, over many years, the grass will grow long enough to cover up the wreckage.
A second is mass eviction, which is not going to happen.
A third way is to fix the problem without mass evictions. This requires state involvement by supporting industrial-scale solutions involving both carrots and sticks.
The resolution will need to balance competing interests and it needs to be fast and peremptory. Those who cannot afford a restructured mortgage should be provided with a solution that offers security in the home, while at the same time recognising that being unable to pay must involve loss of ownership.
Those who will not pay should have their properties repossessed quickly and without fuss.
In a period of 24 months, the broken system can be fixed, in which case we will be spared the real and present danger of a gaping wound at the heart of our economy and of our society and borrowers, present and future, will be spared excessive interest rates now running at twice the European average.
Only then can it be said that we have recovered from the crash.
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