Dealing with mortgage debt
By holding a conference this week on “How to fix distressed property markets”, the Central Bank has raised a question to which neither it – nor the commercial banks – have yet given a convincing answer, or offered a clear solution. The Central Bank, as governor Patrick Honohan pointed out, has ensured the banks have sufficient capital to absorb losses on their non-performing mortgage loans.
And its code of conduct on mortgage arrears has protected distressed mortgage debtors from aggressive creditors who might otherwise pursue them in an unfair manner. That should be the case in relation to family homes.
However, the banks themselves have done little so far to address a mortgage arrears problem, which with their recapitalisation by the State, they have the means to resolve. They have failed to engage fully and realistically with distressed borrowers. And they have failed to accept that what cannot be repaid – by those borrowers with unsustainable debt who are close to insolvency – will not be repaid, and therefore should be written off.
Debt forgiveness is inevitable. It is an unavoidable part of any major debt resolution process. Instead the banks, despite the urgings of the Central Bank, have mainly exercised short- term forbearance, instead of offering long-term debt solutions to distressed borrowers. Time, and the patience of both the Central Bank and Taoiseach Enda Kenny, who are dissatisfied with how the banks are handling mortgage debt, is running out. And the patience of borrowers in arrears, who are willing to negotiate debt settlement terms but who find banks unresponsive, is being tested.
The scale of the problem is immense. As Mr Honohan told the conference, household financial distress remains at unprecedented levels. Last June, Central Bank figures showed almost one in five mortgage account holders – some 167,000 – with €35 billion of outstanding debt were in arrears on their payments. In the US, which has experienced a less severe property crisis than Ireland, recovery in the housing market is under way. Home repossessions are at their lowest since the housing bubble burst.
At this week’s conference, Michael Moore, a banking expert with the International Monetary Fund, speaking in a personal capacity, said the US experience suggested faster foreclosures contributed to a more rapid resolution of housing and mortgage crises. In Ireland, by contrast, the lack of repossessions by the banks – not least in the buy-to-let sector – may well be merely ensuring a deeper and more protracted mortgage crisis that serves nobody, impedes bank lending, and chokes economic recovery. It is to be hoped that the closure of a legal loophole, which has stopped banks from repossessing the homes of defaulting borrowers on loans taken out before 2009, will make a difference.