Banks will no longer be in control

Justice Minister Frances Fitzgerald, Finance Minister Michael Noonan, and Environment Minister Alan Kelly outline extra measures to deal with the mortgage crisis which have were approved at a special cabinet meeting.

There are some solid ideas on dealing with the crisis in mortgage arrears but more work is needed, writes Ross Maguire.

WHILE the Government announcement raises more questions than it answers, the fundamental change proposed is simple — the banks are no longer to be in control.

This could mark a watershed in the country’s response to the mortgage crisis. For years we have grappled with the fact of people being simply unable to meet all their debts but we have unable or willing to come up with real solutions.

The reason for this is that all policy was designed with banks in mind. We have finally learnt that lenders will never look to the general interest but the new procedures mean this no longer matters. The problem is about to be fixed without the banks’ agreement.

There are three types of mortgage arrears cases:

  • First there are those who, without any much help from the banks, have fixed, or are about to fix, their financial affairs. The rising economy, increased employment, and the passage of time have seen to this and those people are well on their way. Simple restructures such as extending the term of the mortgage or capitalising arrears will generally be enough.
  • The second group needs real help. The Personal Insolvency System is there for this group but it now has a much better chance of working. The idea behind personal insolvency is that a person’s debts are restructured, including write-offs, so as to bring the person back to solvency and at the same time to ensure, wherever possible, that they retain ownership of their home and of the tools of their trade. The problem to date has been that banks have just refused to recognise the obvious and agree to the writedowns on home loans needed to ensure the family can stay in their house and at the same time have a basic standard of living.

Now, under the new rules, where an offer in personal insolvency is rejected by the bank, the court has power to force the deal. This is a very powerful change — one that will inevitably rebalance the relationship between banks and borrowers. It is a game-changer precisely because it takes power away from the banks.

  • The third category of mortgage arrears are those people who, for whatever reason, often illness, long- term unemployment, divorce, or old age cannot afford even a restructured mortgage. For them the new mortgage to rent programme offers some hope but we do not have anything like enough detail here.

The idea of mortgage to rent is that a borrower can surrender their home to a local authority or approved housing body and then be guaranteed security of tenure in the home with the possibility of repurchasing the property. Up to now the scheme has failed to gain traction in part at least as the value of the house had to be less than €220,000 in Dublin and less elsewhere. Those bands are to be raised.

The real problem here is neither the local authorities nor the approved housing bodies have anything like the resources needed to acquire the up to 20,000 homes needed from the banks.

The issue here is there is a huge group that are really broke. This is where innovative thinking is necessary to combine the real housing needs of people with the requirement of capital for long-term stable returns.

We expect to see Minister for the Environment Alan Kelly moving on this over the coming weeks.

Expanding the bands for mortgage to rent and hoping all will be well gets you a happy press conference but will not solve the problem in any meaningful way.

But again, the essence of mortgage to rent is that the banks are out of the equation and are no longer involved and that is why it can work.

We are told that MABS is to be given an additional role to act as friend to those in mortgage distress.

This sounds well but is largely entirely meaningless.

Finally, there are those who face repossession today. No court could possibly make an order for repossession in this calendar year while this new system comes into place. People should take advice — but at least this time there may be some good news to be had.

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