Homeowners put credit-card debt before mortgage arrears
HOMEOWNERS are choosing to deal with credit-card debt instead of tackling arrears on their mortgage, the EU Commission has warned.
There is mounting evidence that thousands of homeowners have deliberately stopped paying their mortgages, with some hoping to get debt written off.
Credit rating agencies Moody's and Fitch, and finance professor Gregory Connor of NUI Maynooth are among those who have claimed that mortgage holders are "strategically defaulting".
And US magazine 'Atlantic' published a long article this week entitled "Welcome to Ireland, where mortgage payments are apparently optional".
The EU Commission, in an internal staff report prepared on the country's bailout progress, has complained that the way the mortgage market operates may be discouraging homeowners from paying off their mortgage.
It is suggested that homeowners are paying off debts such as credit card bills ahead of their mortgages.
"While this may be an attempt on the part of indebted borrowers to keep access to some source of credit by repaying the smaller debts first, it may also reflect the moral hazard generated by legal uncertainty about the banks' ability to recover the collateral."
Prof Connor said it was rational for homeowners to stop paying their home loan and funnel limited cash elsewhere.
He said the arrears levels in this country (shown in the graph above) were "wildly out of line" with those in other countries, such as Spain, Portugal, Greece and Britain.
"There is no immediate penalty for not paying your mortgage. No cost to it. So, why would people not engage in strategic defaulting," he asked.
It is estimated that up to one-third of both residential and buy-to-let arrears were due to people strategically defaulting.
Fitch complained in a recent report that Irish mortgage holders were "on strike". And Moody's noted arrears shot up last year when there was talk of large-scale debt forgiveness.