ANALYSIS:Outright mortgage debt forgiveness was not considered in report
IRISH HOUSEHOLDS are among the most indebted in the world – more so than any of their euro zone counterparts. The vast bulk of their debt is accounted for by mortgages.
More than one in 25 mortgages, (or 32,321 in total) was in arrears of 90 days or more in the first quarter of the year, according to the Financial Regulator. And that number is rising fast, jumping by almost one-quarter in just six months. It is set to rise further, given inevitable future job losses and other negative developments.
It was against this backdrop that the Government established its Mortgages Arrears and Personal Debt Expert Group, whose interim report was published yesterday.
Although the package of proposals amounts to far less than was suggested by Ministers launching it on the steps of the Taoiseach’s department, it was as much as could have been expected given the constraints of the dire fiscal position.
Government intervention in “household debt restructuring” can take many forms, ranging from ensuring a well-functioning framework exists for borrowers and lenders to alter original loan terms, to the State taking on some of the costs of writing off loans.
This more interventionist approach can be done in a number of ways: governments can, for instance, buy loans from financial institutions and write off a portion of the debt. Such an approach may be effective in dealing quickly with the problem, but it creates perverse incentives, moral hazard and, most immediately, is hugely costly. Given the state of the public finances, this approach has never been an option in post-Celtic Tiger Ireland.
At the other end of the spectrum, governments can decide to leave well enough alone, allowing normal bankruptcy procedures to operate and leaving lenders and borrowers to come to their own agreements on a case by case basis. For political reasons, more than economic ones, this hands-off approach was ruled out.
But the recommendations in yesterday’s report are much closer to the hands-off end of the spectrum, amounting mostly to the formalisation of forbearance practices that have already become the norm. Outright debt forgiveness was not dealt with in the interim report – it is to be “considered” in the next phase of the group’s work.
The only aspect of yesterday’s package that could have a direct budgetary impact if implemented is the proposed expansion of the scope of the Mortgage Interest Supplement, a cash transfer to those struggling to service their loans. A €64 million budget line was set aside for the subsidy in 2010. An overshoot is possible even if its scope is not widened before the end of the year.
Apart from budgetary considerations, another reason that a more interventionist stance is not justified, on economic grounds at least, is that the rate of foreclosures remains very low (the total stock of repossessed homes stood at just 496 in the first quarter of 2010, according to the regulator).
In economies where financial institutions foreclose aggressively on struggling mortgage holders, the number of properties on the market swells. If this reaches a point where the additional supply is large enough to put downward pressure on prices, there is a risk of entering into a vicious cycle.
Ireland is nowhere near such a cycle. Repossessions account for only a tiny fraction of the total stock of homes currently for sale and could not possibly be having any significant effect on prices.
Another reason for the State to take an interventionist line is when the capacity of the legal system to deal with disputes between borrowers and lenders becomes overwhelmed. The figures show that this is not case at the current juncture here. In fact, the number of cases initiated by lenders against defaulting borrowers fell sharply between the third quarter of 2009 and the first quarter of 2010.
None of this is to say that the problem of excessive debt is anything but a catastrophe – for banks, for the State and, most of all, for tens of thousands of households. Bringing it to safe levels will take place only at great cost, human as well as economic.
MAIN POINTS:
- One-year moratorium on legal action should not be extended.
- Lenders must not apply penalty interest or arrears charges to borrowers in the mortgage arrears resolution process.
- Lenders should not encourage distressed borrowers to change to mortgage products that will cost them more.
- The Department of Social Protection should reform the mortgage interest supplement.
- Bankruptcy laws should be comprehensively reformed urgently and a non-judicial debt settlement process put in place.
- Lenders must communicate more regularly and in more detail with customers, especially those in trouble.