Tuesday 23 May 2017

Keane report shows delay is deadliest form of denial

The Government and Regulator must act fast to tackle the problem of mortgage arrears, writes Stephen Kinsella

HISTORIAN Joe Lee said recently that "delay is the deadliest form of denial" in Irish politics. When it comes to the mortgage market, the recently published Keane report is just more denial, more delay, and more time wasted in the search for a solution to the problem of overindebted households and mortgage holders.

The Keane report puts huge store in the implementation of a personal insolvency bill in early 2012. This is welcome, but the time lag involved in the creation of complex and important legislation, and its passage through the Oireachtas, means that no meaningful action will take place to reduce the debts of citizens until this time next year. And that's moving at top speed.

Time delays mean more uncertainty, more individual stress, more time spent between banks and borrowers -- delaying, praying, waiting for a less onerous solution to the problem that some borrowers will never repay their loans.

The problems will continue to pile up while waiting for personal insolvency legislation to get started, and these problems are worsening. The number of mortgage accounts in arrears over 180 days has gone from 17,767 in the third quarter of 2009 to 40,040 in the second quarter of 2011.

Despite a series of very costly recapitalisations, uncertainty still exists around Ireland's banks' balance sheets because they have not dealt adequately with the potential fallout from large-scale defaults within the mortgage market. So our banks may not be able to address their funding problems from the international markets because of this delay.

The result may be that our banks need additional capital from the State to absorb additional losses.

That's the macro picture.

The Keane report recommended allowing households who are unable to make their mortgage repayments to sell their house to the local authority, which will lease it back to them. This creates several implementation problems.

First, what is the appropriate rent -- what the household can afford, or the market rent?

Second, with the house now owned by the local authority or another approved housing body (essentially the State), when the house deteriorates, the expense of maintenance is now borne either by the State or the banks, in a most inefficient manner.

Third, what happens if the State (or the bank) wants to sell the home? What happens if the former owners want to leave? What if there is a shortfall between the mortgage previously owed and the amount the bank, or the State, values the home at? Who pays the difference? What about the 24,138 households on the social housing list that have been waiting more than four years for a house -- will they now be leap-frogged in the queue?

Details of the implementation of the leasing and mortgage to let scheme are not given in the report. This is, to say the least, frustrating.

So what should the report have said?

The report should have detailed exactly which mortgages are in difficulty, using the new Central Bank datasets on individual mortgages.

The report should have come up with a series of sustainability tests applied loan by loan, where a mortgage-holder in difficulty is subjected to these tests of their income, including details of their other loans, assets, pensions, businesses, and other family homes.

This is the grey area in the mortgage arrears resolution process currently running. If the loan is not sustainable, then either the borrower must apply for bankruptcy, give up the home, or lease their former property from the State.

One way to speed up this process instead of waiting for personal insolvency legislation would be to mandate a sale of the property following these tests, with the borrower taking a proportion of the equity shortfall with them, given their incomes, and other loans, and the bank taking a hit for the rest. In this case both parties walk away without entering bankruptcy at all.

Those mortgages that can be saved by a combination of interest rate reduction, putting some of the loan on a shelf of sorts for, say, five years to allow the principal of some of the mortgage to be written down, and old-fashioned forbearance should be allowed to continue.

The Keane report notes in several places that banks not covered by the Government's blanket guarantee hold 50 per cent of the mortgages in difficulty. The subtext is that the Government will have less leverage in implementing possible debt restructuring proposals.

This may be true, but not if the proposals are mandated by the Central Bank as the regulator of the credit institutions in the State. Institutions are required to comply with any regulations imposed upon them by the authorities.

To claim that non-covered banks are exempt is to deny any agency by the Government in a solution to the mortgage problem. The State cannot interfere in individual contracts between banks and borrowers -- but it can mandate courses of action with respect to the conduct of banks in certain situations.

The Government and the Regulator can and should act swiftly to limit the damage mortgage arrears are having within individual households and the wider economy. Delay is just more denial.

Sunday Indo Business

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