We must set emotion aside in seeking fair and workable personal debt solution

Fri, Mar 23, 2012, 00:00

OPINION:WE KNOW the level of personal debt in Ireland has spiralled to unprecedented levels, leaving some households in real difficulty. The number of outstanding home mortgages at the end of December 2011 was 768,917, with some 359,000 of these (excluding top-ups) taken out during the years 2005-2008.

Many of these were approved at a time of very high property prices and incomes. Yet many households’ ability to service their debt has been affected by the downturn, with unemployment at 14.2 per cent and with real declines in income due to reduced work, pay cuts, higher tax, austerity and interest changes.

In recent years the banking sector has been in reactive mode, dealing with many more clients experiencing difficulty in paying mortgages. Sometimes the difficulties are short-term, and so the solutions we have put in place up to now are focused on short-term forbearance.

How Ireland deals with its high personal debt, including mortgage debt, is currently the focus of the Government’s proposed personal insolvency legislation. The purpose is to resolve unmanageable personal debt and unsustainable mortgage debt. But just who will benefit, who will pay and, critically, how do we reach a solution that is fair and sustainable?

Other countries have brought in debt settlement mechanisms to deal with high consumer debt, but these mainly relate to unsecured debt, thereby excluding mortgage debt.

There is a strong case for arguing mortgage debt should be excluded from any settlement framework because it is untested, and the impact for Irish society is unknown. This is the position of the banking sector.

This debate tends to be very emotive, given taxpayers have already supported domestic banks, while trust in banks is low. Some people perceive the banks are not dealing fairly with customers in arrears, and this perception is their reality.

We need to be careful that a decision is not made on emotive grounds alone. Any solution should only be targeted at mortgage customers who, on any objective basis, cannot now nor ever will be able to repay their debt. The reason is simple: somebody ultimately has to pay for any debt not repaid.

So who will pay? The most recent National Household Survey shows 1,805,500 people are employed in Ireland. These are the country’s income taxpayers. Most of these don’t even have a mortgage. Based on the Central Bank figures, some 768,917 home mortgages have been issued. Most of these can meet repayments as originally calculated or with some restructuring. What is often forgotten is that banks have so far restructured 74,379 or almost 10 per cent of mortgages.

It is clear there are mortgage customers in real distress. The Department of Social Protection says 19,000 mortgage customers are in receipt of Mortgage Interest Supplement. This is 0.4 per cent of the total population, 1.1 per cent of taxpayers and 2.5 per cent of all mortgage accounts.

These customers need support and in some cases their mortgage may not be sustainable. Banks will need to determine whether the loans are recoverable. In some cases they won’t be, and the personal insolvency legislation will provide a framework for this.

But who foots the bill, and how do we make sure the system is fair? Based on these numbers, 1,805,500 taxpayers will support perhaps 19,000 distressed mortgage holders. Those same taxpayers have already paid a high price for this by injecting capital into the domestic banks.

The legislation needs to be targeted at those who cannot cope with their debt, not those who don’t want to pay. We need to differentiate between those who “can’t pay” and “won’t pay”. We need to support the “can’t pay” group, and this will cost the taxpayer and the banking sector. We cannot afford to support those who “won’t pay”.

Ultimately someone pays. We need the economy to recover, a mortgage market that functions and funding to return to Ireland. We need to put the mortgage arrears issue behind us through a personal insolvency framework which is fair and sustainable.

Pat Farrell is chief executive of the Irish Banking Federation