Friday 31 March 2017

Q & A: Lenders may forgive part of mortgage - but at a price

Laura Noonan

Laura Noonan

DEBT forgiveness, or the writing off of debt for struggling borrowers, might sound like manna from Heaven. But anyone hoping for a no-strings-attached write-off from the banks could end up disappointed.



  • How would this debt forgiveness actually work?


The reality is we don't know, but you could be looking at something like the following scenario: you owe €300,000 on a property that's now worth just €150,000, and you're struggling to meet mortgage repayments of €1,100 a month.

The temptation in that hopeless scenario is to give up, stop paying the mortgage, and wait for the case to work its way through the long repossession process.

Under debt forgiveness, the bank would agree to "forgive" a portion of your loan, say €150,000, so that you now only owed €150,000 and your monthly repayments fell to an affordable €550.



  • Sounds great for me, but what's in it for the bank?


Instead of getting nothing from you every month, or having to go through a lengthy and costly battle to repossess your home, the bank gets €550 a month. And the "forgiven" debt could be recovered down the line.



  • You mean 'forgiven' debt isn't forgiven forever?


Probably not. A scheme is likely to include a clause that would see your mortgage increase again if things picked up. If your property was worth €250,000 in 10 years' time, your mortgage might then increase to that level.

If you got a new job and or a pay rise, your mortgage might go up too. Or if you later sell your home at a profit, you might have to share some of the money with the bank.



  • What are the pros and the cons?


The biggest pro for hard-pressed homeowners is that debt forgiveness offers a way out of a situation that could seem hopeless at the moment.

It also means that if the value of your property never recovers, and if your income never recovers, then you might never have to pay back the full value of your mortgage or another loan.

The biggest pro for the banks is that the scheme could incentivise people to make paying their mortgage their top priority. If people think they're going to lose their home anyway, there's a massive temptation to simply give up. Debt forgiveness offers them hope and a reason to keep paying.

It also makes the prospect of widespread repossessions less likely.



  • Won't everyone just claim they can't pay their mortgage and ask for it to be written down?


That's always the risk, but the banks will be determined to make sure this doesn't happen. Those applying for debt to be written off will be carefully assessed to see if they're a genuine case.



  • Are they allowed to actually do it -- use one taxpayer's money to forgive someone else's mortgage?


State-owned banks like AIB will have to get permission from the Government, and the Central Bank is likely to be consulted as well. Given the many pitfalls a scheme could face, getting a sign-off could be an uphill battle. But it is possible.



  • So is it worth the hassle?


The banks seem to think so. Around 44,500 mortgage holders, or 5.7pc of all borrowers, are already in arrears. And with the ECB hiking interest rates, that level is only going to increase.

If swathes of houses are repossessed, the impact for the economy would be catastrophic.

With stakes that high, banks and policymakers will be exploring every avenue possible to defuse the situation.

Irish Independent

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