Light at end of the tunnel for struggling homeowners
What might a workable mortgage rescue scheme look like? Roisin Burke looks at the good, the bad and the ugly out there
Published 26/09/2010 | 05:00
'VULTURE capitalist' Wilbur Ross really put the wind up mortgage lenders by suggesting that if his consortium buys EBS it may write off some homeowners' mortgage debt in certain circumstances.
Sources at EBS rapidly pooh-poohed Ross's statements, saying there was no way the building society would do this for any of its almost 6,700 customers who are in arrears. Under the radar, however, it is likely that banks are at least mulling over mortgage debt write-off scenarios.
"I would be surprised if banks here aren't looking at this," said economist Ronan Lyons. "My sense is that they're going to do it quietly. They're not going to launch a scheme and write down mortgages by 20 per cent, it will come down to one-to-one deals. The precedent for it has already been set in the banking world."
A government mortgage rescue scheme bankrolled by taxpayers is highly unlikely, says Dublin Institute of Technology's Tom Dunne, head of the school of real estate and construction economics. "It's a question of moral hazard -- why should the prudent pay for the profligate, the argument goes."
That's fair enough, but meanwhile the 'moral hazard' of bailing out the big mortgage lenders, including EBS, is glossed over because of the pressing need for national fiscal stability. That's a bitter pill for tens of thousands of struggling homeowners.
With jobless numbers hitting 460,000, and mortgage lenders on solo runs -- and raising interest rates despite the ECB keeping its rate low -- homeowners falling into default is a problem that will only grow.
"Somewhere between €6bn and €7bn is the extent of the arrears on residential mortgages," Irish Mortgage Advisers Federation's Michael Dowling estimates.
"Without a bailout those in arrears will become an increasing drain on the taxpayer," he argues, "as they turn to the social welfare system for support."
Next month the Expert Group on Mortgage Arrears and Personal Debt will deliver the final part of its report on measures to help those with mortgage arrears. Few property experts think it will propose government-led debt forgiveness measures.
But are there other bailout possibilities? We consulted some expert views on what a rescue might look like.
let Vulture Capitalists bail out mortgage holders
Could we privatise a big mortgage bailout? Has Ross hit on a workable Big Idea for a mortgage rescue scheme funded by the private sector?
A state mortgage bailout is probably not on the cards, but a private sector one might be.
Private equity outfits like Ross's could buy up Irish banks' mortgage loan books. They pay a discount price that reflects the risk they are taking on defaulting loans. Then they cut a deal with distressed mortgage holders to write off some of their debt.
"Banks could bundle up distressed mortgage loans and sell them to the market place," says Dunne. "It's difficult for the State to do a bailout scheme, but private enterprise could do it -- have the market solve this problem."
"Government regulation could back up the private scheme," says Dowling. "You'd have to have some fairly strong legislation there, of course, to protect peoples' family homes against private equity players coming in, taking the best of the assets and getting out in two or three years."
If, years down the line, the house sells for a profit, the Wilburs get a cut.
It privatises the mortgage debt like a kind of private-sector Nama, and it doesn't cost the taxpayer money.
"We've already committed our tax money to these organisations, but a private scheme might reduce our future commitments," says Dowling.
This might be a possible escape hatch for someone who wants to move and has an underwater house value.
"The banks are haemorrhaging money on tracker mortgages," says Simply Mortgage's Peter Bastable. "They are actually paying twice the amount for Euribor [the rate at which European banks borrow cash from each other] money than the tracker mortgage repayments are yielding.
"There's a great expression: he who holds the gold makes the rules. If you have a tracker, you're in a terrific position to bargain if you want to sell up but are in negative equity."
It can't be stressed enough, of course, that the golden rule in most cases is: if you have a tracker, hold on to it for dear life. But in certain situations -- and we stress we are not advising people to ditch their trackers -- it might be possible to use your tracker as a bargaining tool with your lender to reduce your mortgage.
"If you have a mortgage of, say, €350,000 on a house that is now worth just €300,000, you could cut a deal with your lender where you relinquish your tracker in return for say, a 20 per cent discount off your mortgage. That could put about €75,000 in your pocket. It frees up equity for people to move home."
Bastable suspects that banks may soon seek to do some sort of 'tracker buyback' deals with customers.
In the right set of circumstances they might -- we stress might -- be worth considering. Do your sums first.
interest-free mortgage loans (Obama'S solution)
The US administration is offering $1bn (€745m) in zero-interest loans to help homeowners avoid foreclosure. Individual loans of as much as $50,000 (€37,000) can be made to help a borrower make mortgage payments for up to two years.
Rumours are rumbling that Barack Obama's government is also about to order state controlled lenders Fannie Mae and Freddie Mac to forgive a portion of the mortgage debt of millions of Americans whose property values have sunk.
It's telling that even the most capitalist country in the world is helping homeowners in this way.
Cap mortgage repayment
"In the US when you get into difficulty the banks can cap your mortgage repayment at 31 per cent of the gross monthly income coming into the house," says Dowling.
The scheme, introduced in an attempt to halt further damage to the housing market, allows hard-hit US homeowners to avail of the relief directly through their mortgage provider up until 2012.
Refinancing options have also been allowed.
Some version of this could be applied here for a period, Dowling proposes. "I'm not saying it has to be as high as 31 per cent. It's not a write-off, but a breathing space for recovery," he says.
The bank takes an equity share of the property in return for a write-off. "The bank says 'we'll take ownership of 50 per cent in return for writing off some of the debt'," Dowling explains. There's a possibility the bank will gain in a 10- to 15-year period as the housing market recovers."
Introduce personal bankruptcy
In the now notorious CNBC interview, Ross also commented on the lack of a consumer friendly bankruptcy code in Ireland. Where Britain and the US allow forms of personal bankruptcy that might protect the family home, unsecured debt like personal loans and credit card bills can lead to judgements against your home in Ireland.
"The elephant in the room is the lack of this option in Ireland," says Frank Conway of the Irish Mortgage Corporation. "Unsecured debt on personal or credit card or car loans can be redeemed against the house, not just mortgage debt. The Law Reform Commission has been pushing to put something more consumer-friendly in place, but it's on a slow path."
The bank repossesses the house but rents back to the defaulted mortgage holder. When economic recovery kicks in, the mortgagee has first refusal on taking up the mortgage again.
"Banks at the end of the day are businesses like any other," says economist Ronan Lyons. "If they can get 80 per cent of their money instead of 40 per cent or none, they'll take it.
"Rent back would prevent a flood of properties on to the market that would bring down property prices."
Another US solution, this is a way of at least freeing those who can't pay their mortgages anymore and have to give up their homes from having to carry the shackles of negative equity for years afterwards.
The bank allows the sale of the home for less than it's worth, and agrees to take the hit on the remainder of the mortgage. You lose your home but you are free of the shackles of the mortgage debt and the bank is saved to expense and hassle of a forced foreclosure.
"In the US, the lenders' attitude is to take it on the chin and re-sell quickly," explains property expert and author of Ireland's House Party Derek Brawn. "Sometimes there can be just 15 days between repossession and sell-off."
He can't see it happening widely here, however, "unless you've got the money to pay off the difference, say through a loan from the credit union. Anything like that at the moment is subject to individual discretion by the bank."
As detailed in a previous piece, there is evidence that mortgage lenders have allowed some (in severely limited situations like marriage break-up) vendors to sell their negative equity property and pay back their remaining loan at their former mortgage rate.
As for debt write-offs, Brawn can't see it happening here on a grand scale. "People aren't going to be given debt forgiveness, so they're just going to have to struggle on."