Mortgage Debt: can't pay, won't pay


Reaction at every stage of the financial crisis in this country to date has been marked by a single, overwhelming characteristic – denial. This is particularly been the case at governmental level on the part of the previous administration. It is too early to tell whether the current regime will slip into this mode but it is likely they will not be allowed to do so.

Denial of the gravity of the banking mess has been extraordinarily damaging to the country’s credibility in the eyes of our European partners. Admissions of lending losses have had to be extracted from banks only by the application of extreme duress and even then the veracity of their pronouncements have been questionable.

To date, analysis of the scale of the problem has been largely confined to the corporate lending sector. Now, attention switches to the ugly reality that is apparent to all of our citizens: we have a gut-wrenching problem with levels of personal debt and particularly in the residential mortgage sector. Where commercial default was largely about disembodied corporate entities, all of us know real people in distress. In many cases we are those people. As far as the crisis goes, this is where it gets personal. Literally.

What was once heresay is now backed up by official numbers. Last month the Central Bank confirmed that some 44,508 mortgages of the State’s total of 786,164 – some 5.7 percent – was in arrears as at the end of December 2010 (arrears being defined as 90 days past due). No-one doubts that these numbers are set to swell considerably over the next couple of years.

We will likely have some idea of the scale of this problem for the banking system in monetary terms with the imminent publication of the stress test results. But since the virtual nationalisation of the entire banking sector, the problems of the banks are now the problems of the taxpayer. One thing is sure, there is a second enormous wave of write-offs on the way and, in the likely absence of support from abroad, the Irish taxpayer will be picking up the tab.

This leads to some disturbing conclusions. There is at present a growing irritation in this country at the German public’s reluctance to finance the Irish bailout on the grounds that as things stand currently the Irish taxpayer is effectively bailing out the German banks that lent recklessly to Irish banks. But what about distressed mortgage holders who borrowed recklessly to fund their large houses and in many cases excessive lifestyles? How far should the State go in terms of restructuring or forgiveness when it will effectively be at the expense of those who were prudent before and during the boom and who indeed are presently making enormous sacrifices to meet their repayment obligations?

It is clear that as the mortgage crisis grows the Government will be under enormous political pressure to alleviate the burden faced by thousands of home owners, particularly younger home owners who are presently shackled to crushing levels of debt backed by properties whose values have diminished hugely.

While Financial Regulator, Matthew Elderfield, has moved to rule out debt forgiveness, a number of measures have been put in place to provide some comfort for beleaguered mortgage holders.

Lenders are now subject to a new Code of Conduct that protects the family home. Lenders can no longer impose arrears charges or surcharge interest on borrowers who are in arrears and who are co-operating with the new Mortgage Arrears Resolution Process (MARP) that came into effect at the start of the year.

Lenders must now wait at least 12 months before they can commence legal action against mortgage holders in arrears. That 12 month period excludes any time period during which a borrower is complying with the terms of an alternative repayment arrangement.

Lenders cannot initiate more than three unsolicited communications with a borrower, by whatever means, in a calendar month. Finally, a lender must not require a borrower to change from an existing tracker mortgage to another mortgage type, as part of an alternative arrangement offered to the borrower in arrears or pre-arrears.
This latter provision is a direct response to efforts made by banks to move mortgage holders off loss-making “tracker” mortgages that were recklessly written throughout the boom years. With rates are as low as 1 percent over ECB rate, tracker mortgages are now dramatically below bank cost of funds; this means that that large parts of Irish banks’ mortgage books are loss-making in perpetuity even before the prospect of increasing default is taken into account.

These measures to protect homeowners are symptomatic of the times and point to a regime of increasing lenience on debtors. As the economist Morgan Kelly put it: "If one family defaults on its mortgage, they are pariahs: if 200,000 default they are a powerful political constituency. There is no shame in admitting that you too were mauled by the Celtic Tiger after being conned into taking out an unaffordable mortgage, when everyone around you is admitting the same."

Against this background, all the indications are that there is a rising “culture of default”. As one mortgage broker puts it: “In the mortgage market right now there are two groups – people who can’t pay and people who won’t pay. There is now a serious negative equity situation and with every month that passes there is less and less disposable income so more and more people are looking to hide behind a ‘can’t pay’ approach.”

The irony of all this is that the hard-pressed, mortgage paying Irish taxpayer now begins to take on the same attitude the average German has to the Irish state. If the defaulters represent one “powerful political constituency” then there is another equally powerful constituency: this is represented by the ordinary, decent mortgage payer who suspects that his neighbour who moved into the big house down the road, built the extension and traded up to the overpowered 4x4, may not be paying his mortgage since his company collapsed and that he, in turn, will ultimately be made to pay for his neighbour’s lifestyle.

At the same time it seems clear that there is simply not the political will to adopt the ultimate sanction: repossession. Of course, given the state of the housing market, he practical value of adopting a repossession policy seems extremely limited. And, in fairness to the politicians there is some awareness of the problem of leniency.

Take the Fine Gael manifesto which says the following about debt responsibility: “A Fine Gael Government will expect every family and every business to do everything possible to service their debts, and will not ask others to pay the debts of the reckless and dishonest. A mass Government-imposed mortgage debt forgiveness scheme would close down new lending for First Time Buyers and further raise interest rates for families on variable rate mortgages.”

Very true.  And further on in that manifesto Fine Gael spells out their proposed approach: “We will require banks in receipt of State support to give homeowners every chance to renegotiate the terms of their mortgage to avoid repossession during difficult times. For example, as recommended by the Mortgage Arrears and Personal Debt Group (November 2010), we will require all mortgage lenders to offer distressed home-owners a Deferred Interest Scheme (DIS) that enables borrowers who can pay at least 66% of their mortgage interest (but less than the full interest) to defer payment of the unpaid interest for up to five years.”

On balance, a reasonable approach. And while it is unnecessary and uncharitable to adopt the kind punitive measures the Germans and others are adopting as they attempt to teach the Irish a lesson, if history is not to repeat itself, it is important that the Irish government and regulators continue to recognise in practical terms that non-repayment of debt has consequences all the way down the line.

In other words, now more than ever it is critical that we can recognise the difference between the “can’t pays” and the “won’t pays” and discourage the latter – otherwise we’ll all pay.

Top Judgments Registered

21.05.2020

BRIAN EGAN
Address: Lissybroder, Dunmore, Co Galway
Amount: €85,334.23

21.05.2020

CLAIRE EGAN
Address: Lissybroder, Dunmore, Co Galway
Amount: €85,334.23

21.05.2020

RYTIS SADAUSKAS
Address: 32 Latlorcan Glen, Monaghan
Amount: €10,118.71

21.05.2020

HOME EXTENSIONS IRELAND LIMITED
Address: R/o 2nd Floor Unit 5 Block 2, Quayside Business Park, Mill Street, Dundalk
Amount: €8,491.91

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