Thursday 23 March 2017

Forgive them lender. . . for they know not what to do

Galling for some, but mortgage debt forgiveness may be one of our best chances of getting the economy back on track

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Charlie Weston

Charlie Weston

THE break-up of her relationship and pay cuts meant Jean could no longer afford to meet the mortgage payments on her own.

She had been paying it herself for two years after her former partner hit the road. But now it was getting to be too much and she was anxious to sell up, clear the mortgage and move on with her life.

She found a buyer willing to pay €236,000 for the house. But that still left a shortfall, as the outstanding amount after years of repayments was €250,000.

Surely the lender, Permanent TSB, would do a deal for a mere €14,000 when they were getting back 95pc of the outstanding balance?

After all, the alternative was that she would end up in arrears and any attempt to forcibly repossess the house could be protracted and expensive for the lender.

But Permanent TSB is not budging on the outstanding balance issue, according to Michael Dowling of the Independent Mortgage Advisers' Federation, who is trying to help Jean.

Instead, the bank wants to convert this "shortfall" on the mortgage into a personal loan over five years. And, at an interest of three times the standard mortgage rate.

Jean's former partner has disappeared and is not interested in contributing anything. She is prepared to pay half of the outstanding balance -- €7,000 -- but feels it is unfair of Permanent TSB to demand the full €14,000 of her.

Jean (not her real name) understands that as she took out a joint mortgage, she is jointly and severally liable for the full amount. However, given the times we live in she feels it would not be unreasonable of taxpayer-supported Permanent TSB to cut her some slack.

Mr Dowling says: "If you ask for debt forgiveness it is just not available. The principle is just not there among Irish banks yet."

But are we rapidly heading to the point where debt forgiveness will be available?

Attitudes are changing -- just roll back one year.

Speaking at a conference in May, 2010, head of financial regulation in the Central Bank Matthew Elderfield was adamant there would be no forgiveness for debt-swamped mortgage holders.

He warned of "perverse incentives" being created which would tempt people to default on their mortgage in a bid to get their lender to give them a financial break.

"In seeking to assist households in difficulty, we need to recognise that the cost of any support will be borne by those neighbours who avoided excessive borrowing themselves or are gritting their teeth and meeting their obligations," he explained.

However, Mr Elderfield radically changed his tune when he spoke in Sligo this week.

On Monday at the MacGill Summer School, Mr Elderfield left his audience in no doubt that debt forgiveness was now on the table but it would come at a price. And that price will be the bank taking a stake in your home.

"Now that the banks are being conservatively capitalised they will have more capacity to restructure the debts of their mortgage or small business customers," he said.

So is debt forgiveness a good idea? Or will state-owned and bailed-out banks just end up using taxpayers' money to subsidise people who borrowed recklessly during the boom?

The answer to these questions largely depends where you are sitting.

Tracker mortgage

If you have a good value tracker mortgage, have managed to keep your job and have mercilessly cut back on household spending you may find it galling that your neighbour is getting a digout.

That will particularly be the case if that neighbour spent big during the boom, with a trophy house, shopping trips to New York and multiple holidays.

Our careful tracker mortgage holder has repeatedly raged about taxpayers having to pour millions, nay billions, of euros into the banks. He is now expected to pay a household charge, along with propping up the neighbour who is in deep trouble with their mortgage. No wonder he is going nuts.

But for the homeowner who borrowed big during the boom -- when all was well with their finances but is now in trouble -- the argument about debt forgiveness is very different.

Their income has been destroyed, they have no hope of meeting the repayments, and emigration or handing back the keys are constant thoughts.

It is not that this householder won't pay, but that they can't pay. Are we to punish these people for ever because they made bad calls during the boom, or help them get their lives back on track?

Economists argue that with one in eight householders in trouble the economy needs the fillip that even a limited debt forgiveness scheme would give to consumers. After all, they argue, consumers are responsible for six out of 10 euros spent in the economy.

The argument goes that debt forgiveness would be a means of stimulating the economy and lessening social misery.

Those championing this argument include economist Constantin Gurdgiev, academics Brian Lucey and Stephen Kinsella, and broker Karl Deeter.

They jointly proposed last November that the banks "must allow private home borrowers to revert to pre-crisis debt burdens".

They cited the vicious circle of an economy where debt-swamped householders hoard cash and stressed the inappropriateness of Ireland's outdated laws on bankruptcy.

In other countries substantially less onerous personal-insolvency regimes already involve an element of debt write-offs, if creditors agree, they argue.

It now seems as if the powers that be, and a growing number of ordinary householders, are coming round to the view that a solution to the problem of thousands being financially choked by monster mortgages must be found. The alternative is too awful, and anyway it makes commercial sense.

So, the prayers of those in mortgage misery may be about to be answered, if not immediately, but possibly by the end of the year. But crucially it won't be a free for all -- any schemes put in place will be limited with strict criteria and will come at a price.

The fact that the Government has set up a new group to look at coming up with further help for cash-strapped mortgage holders suggests the issue has moved centre stage.

And AIB and other domestic banks have submitted plans to the Central Bank seeking approval for schemes to allow them to write off some of the debt of overburdened mortgage holders.

Proposals put to regulators by AIB are understood to involve the bank taking an ownership share in a troubled mortgage holder's home in return for writing off some of the debt.

It is also understood to be looking at agreeing to deals with people forced to sell their homes, but who still owe money on the mortgage.

Dublin solicitor Anthony Joyce says mainstream banks are already verbally telling people who owe a shortfall that they will not pursue them, but are reluctant to commit that to paper.

It now emerges that AIB is looking at a scheme where it would formally agree to write off some of this debt rather than converting it into a personal loan. How much debt would be written off would depend on the finances of the homeowner.

Any debt write-down schemes, if they are given the go ahead by the Central Bank and the Department of Finance, would be difficult for homeowners to get approved for.

Bankers fear a widely available debt relief process would lead to abuse, with some homeowners deliberately going into arrears to benefit from a write-down of their debt.

AIB is also reluctant to be the first out of the blocks. Chairman David Hodgkinson said on Monday: "We would be using the capital that has been provided by the Government in this process. Clearly, it needs to be an industry-wide, government-supported approach."

Mr Hodgkinson has pointed out in the past that the bank is set to be so well capitalised after receiving €13.2bn from the State that it will have the firepower to help distressed homeowners.

The stress tests commissioned by the Central Bank earlier this year allowed for the possibility of vast mortgage losses at the domestic banks. Bad debts could run as high as €9.5bn between now and 2013.

However, the domestic lenders now have the capital to allow for this.

This is why the Department of Finance is prepared to look anew at the issue and has set up a group to look at what can be done for over-indebted households.

Second review

Finance Minister Michael Noonan has asked his officials to report to him by September on new policies "to help homeowners who are facing difficulty with their mortgage repayments".

Around 100,000 homeowners are either in arrears or have had to have the terms of their mortgage modified, typically by opting to pay the interest only on the loan.

Of these, some 13,000 have not paid their mortgage for a year or more. Many of these will find themselves before the courts once the one-year moratorium on repossessions runs out.

That said, considering there are 750,000 homeowners in the country, this is a relatively small number.

They may choose to walk away from the mortgage and hope that their lender will do a deal on the balanced owed. Others will take up offers that will see the banks ending up owning most, if not all of the house. What else can you do when you are desperate?

However, there will be no mass debt forgiveness. Debt relief schemes will be limited, with customers dealt with on a case-by-case basis.

For people like Jean there is now hope that a debt settlement deal could be on the way.

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