The Government is working on yet another plan to deal with mortgage arrears. The crisis has already involved three expert groups and successive policy changes. This time, expect some changes to the insolvency regime and more pressure on the banks to do deals. As usual the big question of who pays the bill for mortgage arrears will be fudged.
Whether you talk of mortgage write-offs or making the whole thing more affordable for borrowers, any “solution” involves the homeowner paying less and a cost that must fall somewhere. Politicians, who like to offer everyone a “free lunch” tend to avoid this, but as well as being a complex and tricky problem, this also makes it a politically toxic one.
Those in arrears want a break, but those who are not don’t want this to happen at their expense, whether as taxpayers or bank customers. This has delayed the move to tackle this problem. Now we have started, it is clear that it will involve a lengthy slog.
The general approach of this Government and the last one has been to try to face two directions at the same time. They have called on the banks to “get on with it”, but say the family home must be protected. The problem is that “getting on with it” – which has happened since legal and regulatory changes were made in mid-2013 – has now inevitably pushed more cases into the legal system and towards repossession.
An IMF paper comparing how the crisis was handled in Ireland, Spain, Iceland and the US puts it in perspective. Forbearance – giving the borrower temporary relief and hoping things pick up – is a typical response early in a mortgage debt crisis. US experience suggests it works in about a quarter of cases and usually within a year. Forbearance offers breathing space, but for most it is not a solution.
The US and Spain both moved quickly enough into foreclosures – or repossessions – with 15 per cent of mortgage accounts being foreclosed since 2007 in the US and more than 4 per cent in Spain. If we had foreclosures at even Spanish levels – and the crisis here was worse – some 30,000 houses would have been repossessed.
Instead the latest figures indicate fewer than 4,000 homes were repossessed by the end of last year: 1,100 via court-enforced orders and the rest via voluntary repossessions. Others will have sold under pressure from the banks.
The Irish solution to this Irish problem has been to hold out the threat of repossession, alongside the promise that it probably won’t be used. However, the numbers are now set to rise quickly, leaving Enda Kenny’s Government with a political dilemma.
Around 8,000 civil bills have now been lodged by banks seeking repossession orders. Some of these are tactics to get borrowers to the table. Some will be turned down by the courts and some will not be acted on. But whatever way you look at it, the repossession figures are due to rise sharply.
Reducing the number of repossessions means taking action, though if mortgage debt is written off or new arrangements are found to make it more affordable for the homeowner, someone pays. Perhaps we might say "the banks" should pay. But of course we own two of the biggest players – AIB and Permanent TSB – and have a 14 per cent stake in Bank of Ireland.
With stakes in Permanent TSB and AIB due to be sold in the next year or so, this will be the unspoken factor which will drive a lot of what happens in the weeks ahead.
The Government plan will promise a promotional campaign to make borrowers more aware of their options under mortgage guidelines and the new insolvency rules. It will try to address problems in the insolvency regime, including the apparent lack of expertise among many personal insolvency practitioners and problems in the financial structure of the whole thing.
The regime will be altered to give some oversight or appeal mechanism in cases where banks object as secured creditors to insolvency deals. And there may be a move to make it easier for those in mortgage arrears to deal with unsecured debt. There is talk of shortening the bankruptcy period, now three years, but this may or may not happen.
Meanwhile, the banks will be pushed to offer longer-term solutions. These will include the mortgage-to-rent schemes for those in deep trouble – meaning they lose ownership but can remain renting – and split mortgages, where part of the debt is parked for a period and may eventually be written down.
The political problem is that there is no “big bang” solution. This is outlined clearly in the IMF paper, which says that some kind of widespread programme of across-the-board debt relief is likely to be expensive and ineffective – and also to cost the banks. There seems no alternative to the “case by case” approach, it says, though the upside is that if the right loan restructure can be found, this can benefit both bank and borrower.
We now have about 115,000 people who have negotiated “solutions” and 110,000 in arrears. The only way through this is to get more people out of the arrears box and into the solutions box, to try and make sure these solutions are not just sticking plasters and to do this in as humane and reasonable a way as possible.
The reality, seven years into the crisis, is that there is a significant group who cannot pay and will never be able to and it is surely better to now get on and finally deal with this.
Twitter: CliffTaylor IT