It’s time to write off mortgage arrears - Schoenmaker

Leading Dutch economist Dirk Schoenmaker says banks should write off some residential debt as he says 20 per cent deposits are needed to avoid property boom

Irish banks need to begin writing-off some of their residential mortgage arrears to free consumers from unsustainable debt, a leading Dutch economist told a conference organised by the IMF in Dublin on Monday.

Dirk Schoenmaker, dean of the Duisenberg School of Finance in the Netherlands, also said Ireland needs to introduce a loan-to-value (LTV) ratio of 80 per cent for residential mortgages if we are to avoid another property boom and bust.

Such a move was proposed by the Central Bank of Ireland late last year.

On personal debt, Mr Schoenmaker noted 7.2 per cent of Irish households are in “big arrears”.

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In addition, about 75 per cent of the value of all owner-occupier mortgage arrears relates to arrears of two years or more. “You really have to start to think of a write-off [of some of this debt] freeing up households and freeing up the banks.”

He said similar write-offs are also needed for SMEs to help begin investing again in their businesses.

On a new LTV rule, Mr Schoenmaker said: “You need to have less debt financing and more equity finance,” he said, adding that equity can absorb losses.

“You need to have lower LTVs.”

However, Mr Schoenmaker said a new LTV rule needs to be phased in as it continues to be difficult for house buyers to get credit at present.

“Start today with 85 per cent and then in a few years time [move to 80 per cent].”

He said that if Ireland doesn’t lower the LTV ratio, “you will get back to this problem of [house prices] going up and down”.

In response to Mr Schoenmaker's comment on debt write-off, Ann Nolan, second secretary general at the department of finance, said: "When you're looking at what to do with bad loans, you have to look at individual cases, you can't have a general rule. You can't have a target for write-offs."

She said Irish banks have written off about € 6 billion already across the system in recent years.

Ms Nolan said the Government expects to get back the € 29.4 billion that has been invested in AIB, Bank of Ireland and Permanent TSB over time. "I do believe we will get that money back," she said.

Ms Nolan said the State has already received €10.4 billion back from the banks - €5.4 billion in guarantee fees and €5 billion from Bank of Ireland transactions- while our remaining holdings in AIB, Bank of Ireland and Permanent TSB are currently valued at €15 billion.

However, she said the €35 billion put into Irish Bank Resolution Corporation (formerly Anglo Irish) "is not coming back" although this is in a "manageable space" given Ireland's long-term deal on repaying the Anglo Irish Bank promissory notes.

Ciarán Hancock

Ciarán Hancock

Ciarán Hancock is Business Editor of The Irish Times