Dearbhail McDonald: Moral hazard? The strategic defaulters were right all along
It was early 2007, during the height of the property boom, when a Senior Counsel told me to throw my head into the weekly High Court repossessions list.
I didn't even know we still had a repossessions court - and I was the Irish Independent's Legal Affairs Correspondent at the time.
The existence of the repossessions court (its official name is the Chancery Summonses list) was revealed to me by the lawyer as I lamented that I had missed the property boat as I was paying down years of student loans.
I was gearing up to take the plunge with a sub-prime or 100pc mortgage when m'learned friend told me not to - and go to the repo court instead.
It was the best piece of advice I've ever received: that man was my canary in the coalmine.
Every Monday I sat quietly at the back of the court and listened to tales of how people on low incomes (including social welfare recipients) secured €400,000 mortgages, and of other borrowers - many of them who took out near- and sub-prime loans - who had defaulted, sometimes within months of a drawdown. There were truly tragic stories of job losses, separations and emigration, a harbinger of the deluge of despair to come when the global financial crisis hit with full force less than a year later.
Many of the cases, however, were reckless if not fraudulent lending. For months, I didn't write a word as I didn't want to be alarmist, and when I did try to warn of a looming flood of repossessions, no one believed me.
They were right: fears of a "tsunami" of repossessions have not materialised - we've had barely a trickle. Indeed, the number of legal proceedings issued by banks to repossess homes has halved in the past two years.
There was a 20pc fall in the past year in the number of repossession orders granted for family homes compared with the previous year. In contrast, around 33,400 residential mortgage accounts are in arrears for more than two years. Consumer advocate Brendan Burgess, of the Askaboutmoney.com website, said this meant that last year someone who was more than two years in arrears had only a one-in-20 risk of losing their home. Can you imagine renters lasting two months let alone two years if they defaulted on their rent?
At first I was the quintessential bleeding heart liberal. But over time I found my (exorbitant) rental heart hardening, especially when it emerged that some borrowers hadn't paid a mortgage or arrears payment in four or five years.
I'm not for one moment dismissing the tragic plight of thousands who fell behind on their mortgage payments on their family homes. I also have sympathy for the hordes of accidental landlords who dived into the buy-to-let roulette.
What irked me over time was the deliberate extend-and-pretend strategy deployed by lenders and the State. Banks blame the slowness of the courts process for the dearth of repossessions, but that's only part of the story.
Blame the Famine if you like, but evictions in Ireland are inherently toxic and neither the State nor the banks wanted to touch them.
Don't be fooled by talk of forbearance: the small numbers of repossession proceedings issued and the low level of evictions should not be mistaken as an act of compassion by the banks or an erudite government policy aimed at protecting our most vulnerable citizens.
It was a wait-and-see fudge.
It suited the State not to have a spate of evictions. And for a long time it suited the banks to have borrowers in their homes, literally keeping the lights on even when they weren't paying their mortgage debt. And some homeowners, sensing this refusal to grab the proverbial bulls by the horns, took a strategic decision to stop paying their mortgage or giving the rental incomes they received from their properties to the banks.
Who could blame them when no resolutions were forthcoming?
But how does that make those who did pay their way under pressure feel? And has that strategy run out of road now we're in the midst of another dysfunctional housing crisis, one that could make many borrowers potentially more vulnerable?
Toxic residential mortgage books of the Irish banks continues to pose a threat to the economy, despite a surge in house prices. More than any commission or report, repossessions - or the lack of them - has exposed successive governments' cowardice in forcing the banks whom we saved from dealing with non-performing loans.
Those loans are now being gifted to the so called vulture funds who will now do their dirty business - including repossessions - for them.
Some banks are hoping that rising house prices will persuade more people with unsustainable arrears to agree to hand over homes as higher property prices will mean a better deal can be done on the outstanding debt.
Others are clearing up their balance sheets by selling their impaired home loan portfolios to the vultures.
Despite their bad reputation, many of the vultures or non-banking funds are practical and will cut deals with debtors. Strategic defaulters, however, will be given short shrift.
Default is never easy. But functioning credit economies need systems for dealing with non-performing loans and futile debt, ones that allows banks and borrowers alike to face reality - and move on.
Dearbhail McDonald is Group Business Editor and author of Bust: How the Courts Exposed the Rotten Heart of the Irish Economy (Penguin Ireland)