Lawyers clean up on back of mortgage arrears fiasco
The banks must find ways to solve the mortgage crisis other than taking homeowners to court, says James Fitzsimons
The main lenders are under pressure from the Central Bank to sort out the mortgage arrears by the end of the year. Eighty-five per cent of cases should be offered long- term solutions, but the banks have a long way to go and at the pace they are moving, it can't be done. Many new cases have been stopped from falling into arrears, but the older ones are still there.
They are making progress, and the number of permanent solutions is rising, but there is no certainty that they are sustainable. About 55pc of restructured cases are meeting their full restructured repayments, but 11pc haven't made any payments at all. Average families lost tax relief on mortgage interest of nearly €2,000 a year. That would go a long way to sorting out the arrears - not that tax relief is the best way to fix bad loans, but in a crisis every little helps.
The banks have had an avalanche of new cases seeking easier terms on their mortgages and that makes up most of the number of restructured mortgages. If the same options were available when the crisis began, most of the older arrears cases would have been sorted out long ago; instead, they are treated as uncooperative borrowers and repossession is what they face now. But they can use the ISI (Insolvency Service of Ireland) to get around that.
The ESRI has said that house prices are still 27pc below what they are worth. It's not the same everywhere, but it's better than it was and improving all the time. Bank of Ireland claims it will sell about 1,500 properties on its books and use the proceeds for new lending. It's a pity it wouldn't use the funds to sort out the old arrears.
KBC Bank will cut the rate of interest for new customers and switchers. Things are going back to where they used to be as the banks fight for market share. The only difference is that there is no Anglo to compete with this time. There is no profit in sorting out the arrears, unless you are a lawyer, and the banks have no incentive to sort it out.
As negative equity disappears, it's the perfect opportunity for mortgage-providers to embrace split mortgages and warehouse the part that can't be serviced until prices rise, and the ESRI predicts they will. If the borrower cannot service the debt by then, sell the property, but after prices have recovered to wipe out the losses and maybe even leave a profit.
Mortgages that are not viable today will be soon; if not, the decision to approve them was probably not sound and we need time to evaluate how the banks should be held accountable.
Bankrupt and insolvent customers can rely on the ISI to help them start over again. Now that the economy and the property market are showing signs of improvement, it makes sense to avoid unnecessary repossessions.
Last year, the Central Bank left it to the banks to sort out the problem, but they took the easy way out and the problem is still here. Customers who couldn't cut a deal were forced down the legal route, which in most cases was unnecessary, and most have been abandoned. Once Alan Shatter removed the impediments to repossession, tens of thousands of cases were listed for court. It cost the banks nothing, as the charges are added to customers' unmanageable debts, a dumb approach if ever there was one, but they got away with it.
The EU, the Central Bank and the Department of Finance were all in favour of more repossessions, but we don't need them.
The Oireachtas Committee on Finance castigated lenders for being too quick to seek legal remedies when real, sustainable solutions are available. It all stems from the fact that Ireland's rate of repossession is behind the rest of Europe. But that's no reason to put people out of their homes when better solutions are available, if they would only use them.
The banks were not ready for the crisis - they made a mess of handling it; they dumped the problem on someone else and now their customers get the bill. Legal fees, created by lenders who mishandled the situation, can be €2,000 or €3,000 in the smallest cases, and much more for bigger ones.
For lawyers, it's money for old rope; for customers it's compounding the arrears problem they are struggling to cope with. If legal fees add €3,000 to a mortgage, the real cost could be twice that when interest is added for, say, 20 years. It's nothing to be complacent about and based on the Oireachtas Finance Committee findings, banks that instigated unnecessary proceedings should pick up the tab.
But first, borrowers who have been hit with the legal fees should claim it back from their lenders. If that doesn't work, they should complain to the regulatory authorities, who should not have let it happen. Many don't even realise it's been added on. They probably paid less when they bought their homes. Home-owners have been hit hard by taxes and, in most cases, tax relief for mortgage interest was taken away too. All they have is the ISI and that isn't working yet, either.
With the exception of loans taken out since 2004, mortgage interest relief was taken away from home-owners in 2009, making things even more difficult than they were when the mortgage crisis took hold. In 1999/2000 a family could get back nearly €3,000 a year in tax for the mortgage interest they paid.
Tax relief was given at source from 2002 and it was limited to the standard rate (20pc), relief fell to €1,600 for a typical family. But those who bought their first home between 2004 and 2008 could still get up to €6,000 under certain conditions. Tax relief wasn't given based on need, it was used to influence behaviour and it contributed heavily to the property bubble. It's highly discriminatory and it rarely helped those in need.
The banks won't resolve the mortgage crisis by the end of the year - not unless they repossess everything that's left, creating huge losses in the process. Split mortgages and debt forgiveness are the viable solutions that could sort out the rest. Term extensions and capitalisation of arrears are already working well.
Tax relief was always arbitrary and creates more victims than it does beneficiaries, but it's difficult to see how those in arrears and on reduced income can meet the terms of their mortgages without some tax relief to plug the holes. It's not the right way to sort out the problem, but it might be the only way - and the banks can sort out the rest.
James Fitzsimons is an independent financial adviser specialising in tax and financial planning