Strategic arrears - bank-made myth or harsh economic reality?


Controversy erupted last week when one of the country’s most prominent mortgage brokers suggested that as many as 20,000 mortgage holders were deliberately delaying payments in order to win concessions from lenders

ARE STRATEGIC ARREARS a genuine phenomenon in modern Ireland? Or is talk of people with money to spare choosing to fall behind on their mortgages, in the hope of getting some class of writedown from their bank, dangerous and divisive rubbish which serves the best interests of the banking lobby – which has has been doing all it can to avoid cutting any slack to borrowers with mortgages they can’t manage?

Two years ago, the very idea of someone strategically not paying their mortgage in order to force their bank to cut a deal would have been unthinkable but, last week, the phrase entered our vocabulary. And with it came outcry.

Karl Deeter, one of the country’s most prominent mortgage brokers, did some digging and reported that as many as one quarter of mortgage holders whose payments are in arrears – or around 20,000 people – could be deliberately delaying payments in an effort to win concessions from lenders.

Deeter had been brought on to Newstalk’s lunchtime news programme to discuss the latest dismal figures from an Irish financial institution – on this occasion, Permanent TSB – and in the middle of a conversation about the mortgage-arrears crisis – which has seen more than 100,000 homeowners struggle to pay their mortgages – he brought up a topic he hadn’t really planned to talk about just yet.

“A lot of the banks have said that, lately, they’re seeing an advancement in the level of arrears, and it’s being caused by people thinking that they might get some kind of debt deal that is being caused by changes that the Financial Regulator made and how often you can contact people. And I’ll be honest, those figures are going to come out,” he said.

He said that, while banks were not doing deals, “people think that they might get one . . . those figures are going to come out soon because banks haven’t been measuring them, but they’re starting to be asked for them. When people see the amount of mortgages that are in arrears that don’t need to be, I think it’ll be a couple of days’ headlines in that alone.”

Deeter said his numbers were based on conversations with clients, bank debt-collection teams and senior executives in some of the State’s largest financial institutions. He said people were coming to him for mortgage consultations, and he was struggling to understand the root of their financial problems. “And they say, ‘well, you know, I don’t want to have to give up X’. And what they’re doing is, effectively, strategically making the decision that they wanted to bet on their own case rather than for the banks.”

No sooner had Deeter’s microphone gone dead there was uproar. His research was dismissed as speculative nonsense which would only hamper the chances of beleaguered homeowners hoping to free themselves of their debts and help the banks bully the Government into altering its stance on any class of debt relief for people with unsustainable mortgages.

First out of the traps was Noeline Blackwell, director of the Free Legal Advice Centres (Flac). She said that while some people were “undoubtedly abusing the system”, it was impossible to establish the true number. She said banks “may well have suspicion about their own customers, but ultimately that is just speculation. We do not get anyone in to us telling us they are planning to strategically default on their mortgage debt, and I very much doubt they are telling the banks that either.”

David Hall of the New Beginning group which helps people in arrears in court cases, was even more sceptical.

“You can never legislate for a small number of rogues – and there are certainly rogues out there who are manipulating the system – but to suggest that it is anything like 25 per cent or even 12 per cent is pure rubbish. The vast majority of people who are in difficulty are not there voluntarily.”

He described Deeter’s survey as “very dangerous” and said it did “borrowers a great disservice. There are two million homes, 800,000 mortgage holders and 100,000 in arrears. Reports like this can turn people against each other, and if the information contained within the survey is inaccurate, than that is really dangerous.”

Hall also asked how people could “milk the system when the banks have all the cards. There will always be a few fellas who are pulling a few strokes, but no one is going to gamble their family home when the banks have all the power. It needs to be remembered that if you lie on the Standard Financial Statement and declare that you have no choice but to fall into arrears when that might not be the case, the bank can use that lie to start the repossession process.”

Hall suggested that perhaps one in 20 mortgages “may be strategically in arrears which is roughly the same percentage of people who try and pull strokes when it comes to the welfare system. I can tell you for certain that anyone who has contacted us is not contacting us with a view to pulling a stoke. “

Suggestions that mortgage holders here are deliberately defaulting on their repayments for 90 days or more on the hope that it may result in a writedown of a percentage of the outstanding debt is misleading and not based on any material evidence, said financial advisor and director of moneycoach.ieFrank Conway.

He said various and successive European Union and Council of Europe reports point to falls in income as being among the primary drivers in the loss of a person’s ability to service debts. “Ireland nationally is estimated to have seen average income levels fall by about 14 per cent. Other factors such as marriage breakdown and illness also play major roles. In other words, the majority of people will strive to service their debts but don’t only when they can’t.”

He said the vast majority of Irish families he encounters in difficulty with debts are in that position because they have no money. “The Irish people that I know pay their bills and they especially pay their mortgages even if it means sacrificing other things, like health insurance, heating and holidays. What else explains the disparity between why one in seven are in arrears with their mortgages but such a higher percentage are estimated to be in arrears with their utility bills?

He says mortgage arrears have risen sharply “for a variety of reasons, including rising costs for various other services and even depletion of personal savings and falling incomes. However, I do not believe that this US-style strategic defaulter culture has come to Ireland.”

Conway worked in the US banking sector for 14 years and he told Pricewatch that he knew the nature of both US and Irish borrowers extremely well. “Americans strive to pay their bills but the laws there facilitate those that cannot, and so some may choose to use the protections of the law to begin a new life.

“Irish consumers do not have the luxury of such legal protections when it comes to debt.

“And, while the new personal debt laws are on their way, evidence of a seismic shift in Irish attitudes to debt are not. I expect that most people will still strive to pay their bills even after new personal debt legislation is enacted,” he continued.

He dismissed Deeter’s report as supported by “mere conversations with collection department managers, many of whom are probably wishing they had an easier job to do”.

The Independent Mortgage Advisers Federation also rejected the report. Its spokesman Michael Dowling said there would “always be a small number of opportunists that seek to avoid their responsibilities in all areas of life, but the banks have been using this misleading tale as a red herring in a desperate attempt to have the personal insolvency provisions watered down to ensure that the banks retain their dominant position and keep distressed mortgage holders under continuing pressure”.

He said suggesting that the increase in arrears was due to the expectation of debt write-off was “extremely disingenuous, unhelpful and currently without foundation”. He said people had “exhausted all available resources and made a great deal of personal sacrifices while dealing with the impact of the various austerity measures.

“Many mortgages are clearly and simply unsustainable based on the reduction in borrowers’ income since originally approved or the increased interest rate currently being applied,” he continued.

In the face of all the flak, Deeter stood his ground and he absolutely rejected any suggestion that he was acting in the best interests of the banks. “The banks do not want us to know this is happening,” he said. “They want the Central Bank to know because they want the rules on contacts with those in arrears to be changed, but they do not want Joe Public to know and think they can do it too.”

He asked why, if his figures were out of whack with reality, arrears have increased dramatically over the last 12 months while unemployment has barely moved from the 14 per cent it was at the start of 2011. Unemployment is high but stagnant while the number of Permanent TSB accounts more than 90 days in arrears has gone from 12,000 to 20,000 in a year while AIB’s arrears cases have quadrupled.

Of course Deeter has not been the only person talking strategic default in recent days. Speaking to the Leinster Society of Chartered Accountants at the end of last month, the president of the Irish Banker’s Federation John Reynolds, President, Irish Banking Federation echoed the assessment.

In remarks which went largely unreported at the time, he said banks had reported an increase in strategic defaults last year.

“There were signs during mid-2011 that strategic default became more manifest in the payment patterns or more accurately the non-payment patterns among customers in mortgage arrears,” he said.

He claimed that while the banking sector was prepared to work with those “customers who genuinely cannot pay, those who won’t pay should not be encouraged by legislation”. Insolvency legislation is to include both secured and unsecured debt much to the annoyance of the banking sector which has been fighting tooth and nail to have mortgage debt excluded from the process.

Reynolds said the consequences of strategic defaults would be “very negative . . . not just on the banking system but on broader national interests – including the cost to the State and taxpayers, pricing for current and future mortgage borrowers and future mortgage market funding and therefore lending.

He said that in circumstances where there were “financial incentives to categorise oneself as somebody who cannot pay, it will be difficult to determine the difference between someone who can’t pay and someone who won’t pay”.

Deeter suggested that Flac and New Beginnings “have an ideological view of the world. I don’t.

“Maybe that makes me soulless but I believe my research is good. They can dismiss my research and rubbish it but what have they done? What research have they put together. They have done nothing. I am certainly not going to back down just because people disagree with me.”