WHILE undoubtedly very important, it may not be quite correct to say that “mortgage arrears is the single biggest issue currently facing Irish people”, as Taoiseach Enda Kenny said last Tuesday in the Dáil.
The euro crisis, clearly, is bigger, and even if it wasn’t there are many people who think the home loans crisis has nothing to do with them.
After all, one third of all homeowners in Ireland have no mortgage at all. Many more have very small mortgages or, even if large, that are still less than the price that would be achieved in the emergency sale of their home. Many others rent. To them this is a crisis to other people.
However, everyone is affected (and in a decent society consideration should be given to those who, largely through no fault of their own other than mistaken ambition, are now laden with excessive debt). Over 75,000 homeowners, or 10.5% of the total with loans with banks, have been unable to pay their mortgage for more than 90 days. They are at risk of losing their homes. If they do then the State will have to help provide alternative housing. Others are making their payments but are sacrificing other spending to do so, or are using their savings.
The knock-on effects for spending in the economy are enormous and have exacerbated the domestic recession. This affects everybody, especially as it costs jobs even among those who have no mortgages or who have seen their pension income reduced. If you doubt the seriousness of this then consider that in recession-hit Britain such mortgage arrears are running at just 2.5%.
This is just the issue with home owners of course. The arrears rate for investment properties, so called “buy-to-let mortgages” is much worse than the situation in residential mortgages.
Kenny said that his Government is working on a personal insolvency bill to encourage banks to give borrowers a chance to work their way out of debt problems. But the word is that the IMF/ECB/EU troika clamped down on some of the greater ambitions initially sought by the Government, especially when it came to debt write-offs that would cost the banks.
And then what of the banks? “I would like to think that the banks themselves would show greater urgency in sitting down with the borrowers,” Kenny said. But to do what exactly? To agree write-offs of unpayable debt? The Central Bank said this week that it was “not comfortable” with the level of mortgage arrears and wants the banks — AIB (including EBS), Bank of Ireland and Permanent TSB — to do more to tackle the worsening mortgage crisis. This includes identifying borrowers who are unlikely to be able to repay mortgages and to push for “assisted” or “agreed” sales of properties and the repayment of any shortfall, something that presumably will bankrupt many. Others are to have their loans “modified”, although financial regulator Matthew Elderfield has suggested that putting borrowers on “interest only repayment” schedules is not working. At the end of December 24,811 mortgages — or about a third of all the Ireland’s restructured mortgages — were on ‘interest only’. Another 11,097 were making reduced payment of less than interest only. The Central Bank also wants banks to move more quickly on struggling buy-to-let investors with large investment portfolios by appointing receivers to collect the rents.
Elderfield said that the banks will have to show “distinct” strategies for how they’re going to deal with both categories of borrower. Given that they haven’t been doing much lending for the last three years why hasn’t this been done already? Yet apparently the Central Bank has spent “months” trying to force lenders to come up with better ideas to deal with troubled mortgages, and has written to them numerous times requesting action plans.
“I don’t know what the motives are [for not facing up to it],” Elderfield last week. The scale of the problem has overwhelmed the banks and they weren’t well prepared for it. The big problem commercial loans were moved to Nama. So what were the new bosses doing for all this time? Elderfield said the lenders needed more staff and better expertise and systems to deal with problem mortgages. Hold on. Aren’t they laying off thousands of people at present, at great expense? Will they be replaced then with others, rather than being retrained? This was all so predictable. In May 2010 I made part of a documentary for RTE called Aftershock which showed the extent of the mortgage problem and how it would grow unless dramatic action was taken immediately.
At the time I suggested a form of debt-equity swap for hard pressed homeowners. This would have involved banks taking part ownership of the homes of people in negative equity (where the loan is bigger than the value of the home) in return for writing off part of the outstanding debt, given people a lower debt, more realistically related to the present value of the home, to be repaid.
There wasn’t too much support for the idea. There were two main objections: the first is that people have to take responsibility for their own mistakes and do not deserve to be bailed out by those who had not made the same mistakes. The second was that the banks and Government were bust and simply couldn’t afford to finance an idea like this.
I understood and acknowledged both, but argued that there were social and economic consequences of doing nothing. I argued that the then Government and State agencies such as the financial regulator had a responsibility to help because of their failings to do their jobs properly. Those in negative equity had been persuaded by government policy that buying at inflated prices was the right thing to do, that it was okay to take out loans of enormous duration and to do so at a multiple of salary. The banks behaved recklessly in inducing customers and the regulator stood idly by.
As for the issue of personal responsibility? Who hasn’t made mistakes in their lives? Who hasn’t followed the crowd and done what everybody else said they had to? Should the punishment be as severe as that being imposed on young people and those with families approaching middle age? I didn’t argue on behalf of those with investment properties and I didn’t ask for any solution to apply to any part of the debt that was incurred in paying off car loans, or credit card debt or splurging on holidays. This is about people’s homes.
PEOPLE get cut breaks all of the time, particularly the richer they are. Many of the developers who sold the overpriced homes have been cutting deals with Nama: they won’t repay all of the money that they owe and many continue to live in some luxury. Some have even managed to park money outside of the jurisdiction, away from the taxman and creditors. They won’t be back to pay off their debts.
But in the meantime the ordinary people will suffer the repossessions. Poorer people than the developers who were persuaded to borrow excessively to buy the houses and apartments are expected to repay in full. Where’s the justice in that? What I suggested — a swap of debt for equity — is common to rescuing companies that get into difficulty, to stop them going bust. It is not pain free for the borrower, as they would lose part ownership of their home, but it would make their repayments more manageable. The banks were overcapitalised last year — total bill to date of €64bn of taxpayers’ money — and have the resources now to deal with this type of idea, unpopular as it may be to those who do not owe.
Yes, there is a cost to taxpayers in all of this, people who didn’t go mad are going to have to pay part of the bill for those who did. But that’s part of life, isn’t it? If you pay taxes it is a societal contribution and you cannot dictate where those taxes go or quantify what benefits you get from them. Paying mortgage debt is part of the same thing.
We hear all about the need to rescue the public finances, but what about the issue of excessive private debt? But we cannot dismiss people, the citizens of this State, lightly because the public finances and the banks have been allowed to take precedence or because those who have are unwilling to share the pain with those who do not. That hasn’t changed in the last two years and after a long delay something has to be done.
* The Last Word with Matt Cooper is broadcast on 100-102 Today FM, Monday to Friday, 4.30pm to 7pm. His best seller How Ireland Really Went Bust has been republished in paperback.
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