Cantillon: Flawed mortgage strategy is no help to borrowers

The latest mortgage arrears figures are a salutary reminder – if one is really needed – that the economy is far from fixed. When almost one in 10 mortgages holders can’t pay their mortgage and have not done so for two years or more, you still have big problems.

The biggest problem is, of course, a social one. But when the mortgages in question have a book value of €8.2 billion one of your problems is also a banking problem.

The prospect of these mortgages being repaid gets less by the day but the banks still seem to show a preference for “extend and pretend” over debt write-downs. This approach flatters their balance sheets in the short term and feeds into the Irish recovery narrative, thus garnering tacit Government support.

It is a flawed strategy and predicated on an eventual recovery in property prices allowing the banks to cover their losses. This, in turn, creates a perverse incentive for banks to allow new borrowers to over-reach themselves as they chase the market.

The borrowing curbs introduced by the Central Bank are aimed at stopping this behaviour and, if history is any guide, they are more than justified. But they have checked the march of property prices and, while this may be good for economic competitiveness, the consequences for those in mortgage arrears and negative equity are less benign.

The central bank’s move to rein in the banks must be accompanied by renewed pressure on them to reach sustainable solutions – meaning write-downs – with the 38,000 people who are two years or more behind in their mortgages.

Tweaking the insolvency legislation, as suggested yesterday by the Minister for Finance is not going to do the trick.