THE APPARENTLY unilateral commitment by banks to try to reach an accommodation with customers who fall into difficulties with the mortgages on their homes is welcome. It goes a step further than the obligation imposed on these institutions by the statutory code of conduct on mortgage arrears, which puts a six-month moratorium on legal action – extended to 12 months in the case of AIB and Bank of Ireland. The requirement by the banks that borrowers must co-operate in trying to find an alternative solution is reasonable.
The banks, it must be said, are making something of a virtue out of necessity. The truth is that they do not want to repossess houses in this market. Not only is it a bad decision from a purely business perspective, it would be a public relations disaster. Keeping people in their homes, paying what they can is far more sensible – from the banks’ perspective – than suffering more public opprobrium whilst trying to manage and sell a large number of repossessed properties in a falling market. This realism explains the relatively low level of repossession to date, with only 70 taking place this year, according to Irish Bankers Federation (IBF) figures.
However, these statistics mask an incipient crisis in the residential mortgage market. Housing charities estimate that between 25,000 and 30,000 borrowers are in arrears and about 1,000 of them are relying on welfare assistance to meet their interest payments. This situation is likely to be compounded as the numbers in employment and house prices fall further and interest rates rise next year. The number of borrowers in negative equity will rise in tandem, with the Economic and Social Research Institute estimating that some 200,000 borrowers will have mortgages in excess of the value of their homes by the time the cycle bottoms. There is also a problem brewing in the buy-to-let market, which will be brought to a head by falling rents and rising interest rates.
The commitment from the IBF yesterday should be the first step in an imaginative response to the problems created for many mortgage holders by the property bubble, which the banks helped to create through their lending policies. The banks have not had to pay the full price for their mistakes, and have instead been rescued by the Irish taxpayer or, in the case of foreign banks, by taypayers in their home state. The case for now making mortgage borrowers pay the full price of their foolishness is difficult to sustain. Comments last week by Permanent TSB chief executive David Guinane that banks should deal “generously and imaginatively” with customers would appear to acknowledge this reality.
Several proposals are on the table, most of which involve either an element of debt forgiveness or a debt for equity swap. Some envisage a role for the National Asset Management Agency, a development flagged by the International Monetary Fund. State involvement will add to the already heavy burden being borne by the taxpayer but the longer-term consequences – in terms of blighted lives – of not addressing the issue are equally grave.