How to get rid of an impossible mortgage
THE BANKS ARE coming down hard on people who do not repay their loans, but some experts say many of those loans should never have been given in the first place. This means that ultimately the banks will have no choice but to forgive the debt, although they are unlikely to admit that they are doing so.
Examples of boom-time lending practices are emerging now. A quantity surveyor with a salary of €40,000 was given mortgages for five investment properties, the last of which cost six times his salary.
“There were some extraordinary things going on. Someone in this situation should never have been approved for such a level of credit,” says Eamon Curley, a former banker who specialises in helping small investors to sort out their investment problems. He works for small businesses and small-scale property investors.
“The first loan was okay and maybe the second, but the other three were ridiculous. That gives him a chance to negotiate with the bank,” says Curley.
And that is where he comes in. He takes a forensic look at the documentation and if he finds errors or proof that internal rules were not applied properly when processing loans, then he can play hardball with the banks.“Very frequently the banks messed up,” he says.
“[Now] they look at the credit reports that were prepared ahead of a loan being sanctioned and, if the money should not have been signed off on in the first place, they will quite often come to their senses ahead of instigating any costly legal proceedings.
“Banks are undoubtedly writing off debt. Some are still in denial, but most have made provision for bad debts.”
Some banks want it both ways. They write off the debts on their balance sheets but continue to pursue the borrower through the courts for the money owed. Such moves have come in for severe criticism by the judiciary in recent months, however.
Curley describes the 12-month moratorium on repossessions as a purely political devices. “What is going to change in 12 months? It is pushing everything back while the bank is still adding interest to the money owed,” he says.
In the US, there are two common approaches at the moment: returning the keys, which is popularly known as jingle mail, or making a short sale.
A short sale plays out as follows: Imagine you have a property you bought for €200,000 with a deposit of €20,000. You have had it for five years and have an outstanding debt of €170,000. Properties in your complex are now selling for €100,000 and you have a buyer who is willing to pay that much. Your lender allows you to sell and takes the €100,00. It puts a black mark against your credit rating for no more than two years and that is the end of the story.
That is not what happens in Ireland. Here the bank may allow you to sell the property for €100,000, but it can then pursue you for the other €70,000. This has effectively stopped people selling when in negative equity.
The US system can lead to a much sharper crash in prices and can make the banks much more careful about to whom they lend their money too, but recovery is faster.
“It would have to be better than the slow death we are witnessing,” Curley says.
Solicitor Anthony Joyce is the mortgage man of the moment after he managed to remove a massive millstone from around the necks of one Dublin couple. The solicitor helped his clients to negotiate a reduction in their mortgage of more than €200,000.
They secured a reduction in their mortgage debt to Stepstone Mortgages from €360,000 to €154,950 last November. They lost their home but have been able to rid themselves of the huge debt they could not repay by finding a buyer for the house.
According to Joyce, banks are proving increasingly “practical and willing to work with customers who are financially devastated”. On his advice, the couple put their house on the market for less than properties were going for in the area, and got a buyer pretty quickly.
They then went to Stepstone and suggested that it could take the money, or it could repossess the house, put it on the market and wait maybe six months to a year to get a buyer, by which time the value of the property probably would have fallen further.
Stepstone Mortgages agreed to the deal. Joyce says the couple’s credit history is in tatters. “They will probably never get a mortgage again, but it means they can begin to get on with their lives.” Joyce has between 20 and 30 clients who are in a similar position, he says.
The most unfortunate are those who “have split up and hate each other but are still living under the same roof because they are in negative equity so can’t sell their houses and can’t get on with their lives,” he says.
The Stepstone case was a positive outcome for all, he says. “The bank wins because they don’t have to wait for two or three years and pay all the legal fees. The couple wins because they get rid of the house and can get on with their lives and we win because we got our fee,” he says.
Such results can breathe life into a property market that has slipped from stagnation into rigor mortis. As the Space/Allsop auctions of distressed properties have shown, there are people who can buy once prices get to a certain level. Stephen McCarthy, the managing director of Space/Allsop, has been involved in this aspect of the industry for a couple of years now and is well placed to assess what banks are doing. “The banks are not writing off debts left by the sale of a house but they are not aggressively pursuing them either,” he says.
“There is no one answer, and the banks are taking it on a case-by-case basis but no bank is engaged in widespread debt forgiveness.
“If you sell as a co-operative seller, without a receiver being appointed, the banks are saying they will take that into account but no one is giving any guarantees. The last outcome the banks want is to get a house back. I am dealing with these banks all the time and they do not want to take the houses.”
He says that distressed property auctions have shown the banks that there is an active market at prices that might make them more inclined to deal with individual homeowners.
McCarthy says returning the keys to the lender is growing in popularity in Ireland but walking away is rarely the best option.
“If a person bought a house, then they obviously wanted it at some stage,” he says. “But now they can’t pay the full mortgage, for whatever reason, so they want to walk away. But they have to live somewhere so they would be better off paying something and staying in the property.”