Rebuilding the housing market

Despite pre-election promises to tackle the mortgage crisis, nothing concrete has been done. But Nama’s latest offering may offer hope to some of those struggling, writes Claire O’Sullivan

OVER the past 15 months, various schemes have been unleashed to tackle the problem of arrears and ignite the housing market.

The brainchildren of everyone from the banks, the Government and Nama, they’re trumpeted as solutions to the ongoing crisis in the housing market: People’s fear of buying a first home in case prices further tumble, people’s inability to trade up due to negative equity, and then the ongoing nightmare of mortgage arrears.

But the adoption of a systemic approach to the housing market crisis is something the Government seems to be avoiding. Pre-election promises were made, but to date, nothing concrete has been done. The publication of the long-awaited insolvency bill has now been deferred until next autumn.

It’s estimated there are 2m family homes in Ireland and 860,000 of these are mortgaged. Out of the 860,000, it’s believed 300,000 are in negative equity. Official Central Bank figures show however, there are 109,000 mortgage holders in arrears — a figure which has risen, on average, by 9% each quarter.

The latest offer aimed at rebooting the housing market comes from Nama.

THE 80:20 DEAL

Under the 80:20 deal, buyers pay interest on just 80% of the sum they borrow from their bank. The remaining 20% is paid back in five years’ time with Nama carrying the 20% cost for these initial five years.

Under the deal, all homeowners must pay a 10% deposit and only 115 houses are available under the scheme — 62 in Cork and 53 in Dublin.

The advantages to the buyer are by saving on the interest repayments on the deferred 20%, they can get ahead on mortgage repayments. When they reach year five, a house price review takes place. Then, even if the price of the house has increased, the mortgage would remain the same.

However, if the price has fallen by anything up to 20%, the repayments would reflect that. AIB, via its EBS subsidiary, Bank of Ireland, and Permanent TSB will provide the loans for this scheme. It’s a great product for new entrants to the housing market as it takes away some of the risk of buying at present but already, homeowners who are trying to flog houses in some of the chosen Cork and Dublin estates are complaining it will severely undermine their house sales.

SPLITTING MORTGAGES

There’s a realisation amongst many in the banks that a lot of those in financial trouble will get back on their feet in time. And so they have devised the split mortgage. Those struggling to pay mortgages will be able to delay paying part of what they owe.

Agreement would be reached with the bank whereby a section of the mortgage would be repaid later — possibly 10-20 years down the line.

To work out the amount to be frozen, the banks would look at net income in the home. For instance, you have a mortgage of €200,000 and can’t meet the full payments due to reduced income: €100,000 of the mortgage could be split from your repayments and repaid 10 years on.

However, questions remain as to whether all, part of, or any of the interest would be put on ice. This plan could be attractive to those with good long-term employment prospects. But the devil is in the detail and whether the interest would be shelved or not. It could also be repaid if the houseowner comes into money, retires, or downsizes.

NEGATIVE EQUITY MORTGAGES

While negative equity is not a problem for somebody who doesn’t want to move in the short term, for those who bought with the intention of trading up within two or three years, it’s a serious issue as up to recently, you couldn’t sell up if you were in negative equity.

Take for example somebody who may have bought an apartment for €300,000 in 2007. They have a mortgage for €280,000 and their apartment is now only worth €150,000. Negative equity mortgages will allow them to move on and take the remaining €130,000 with them, where they can add it to their new mortgage.

However, experts believe these deals will be difficult to organise as the vendor will have to estimate the sale price of the original apartment, drive a deal with their original bank, sell the house, and buy another while co-ordinating with various financial institutions all at the same time.

MORTGAGE TO RENT SCHEME

This pilot project is being run by the Department of the Environment, the housing association Cluid, and New Beginnings.

Under the scheme, people who can’t pay their mortgages, and who are unlikely ever to do so, are allowed to remain in their homes.

However, ownership of the house will transfer to the housing agency, Cluid.

There are multiple criteria however for this scheme, including that participants are eligible for the housing list, earn less than €35,0000 and that the house is worth less than €220,000 in current market value.

It is widely believed this pilot scheme is fantastic for people who meet the criteria as it will give them the peace of mind of knowing they can remain in their current home.

None of their neighbours will know either that they don’t own their home anymore.

Offering an option whereby the homeowner can buy back the property later, if so desired, is also being discussed but has not been decided upon yet.

However, for people in more expensive homes who are in arrears but who don’t want to trade down, it offers no relief.

AMORTISATION

This is a solution that New Beginnings has also suggested.

Under the scheme, current mortgage repayment levels would be decreased with agreement with the bank for a particular period of, say, 5-10 years. For instance, a current monthly repayment of €1,000 would drop to €500 per month.

However, each year from here on, another 3% or 4% would be added to that repayment sum and so in 2020, you could be paying more than now.

According to New Beginnings, it would provide the much needed breathing space struggling homeowners are looking for. Again, it’s for people who are seen to have a bright future despite being in the doldrums now. For those staring long-term unemployment in the face, it offers no get-out clause.

Many of these products and deals are not on the market yet and some are still pilot projects.

The split mortgage scheme has just been sent to the Central Bank for its consideration by Bank of Ireland and its subsidiary, ICS.

Advocacy groups in the housing sector are increasingly frustrated with the Government’s failure to tackle the mortgage and housing market crisis in a structured way. Instead, we are being left with a hotpotch of solutions.

But it’s the fact that more than nine-tenths of homeowners are managing to pay mortgages that poses a political problem for the Government. Tackling the mortgage crisis means addressing the thorny issue of debt writedown. If the Government is seen to endorse debt writedown in any significant way, they could be pilloried by the 90% of homeowning voters who will see it as a bailout for big spenders who bought homes they couldn’t afford.

However, as David Hall points out, up to €10bn has already been put into the banks to cover expected losses in the residential market. He’s arguing that the money is there: The banks and the Government just have to find transparent, fair solutions so those that can pay will pay and those who can’t are allowed to move on from the fear of losing their homes. Sorting the crisis will also offer a shot in the arm to the wider economy.


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