Write-offs and negative-equity loans already on offer -- just don't tell everyone
The debate about debt forgiveness has raged across the nation, polarising public opinion. Laura Noonan investigates what banks are really doing to help struggling homeowners
Published 01/09/2011 | 05:00
It might surprise people to know that some banks have been embarking on forms of mortgage write-offs for quite some time.
And that's not all that's been going on -- some of the other new-fangled "solutions" expected to be recommended by the Government's latest mortgage expert group, like negative-equity mortgages, are already in action, too.
The reason the public don't know about these developments is simple -- the banks don't want the masses to know.
Because as soon as you admit things like this are happening, you run the risk that everyone will want a piece of the action.
The action so far has largely been limited to borrowers who've actually left their home by way of "voluntary surrenders".
One senior banking source revealed how the system works. "We say to them, we'll handle the sale, it's more efficient that way anyway because we know the market better, and we'll get a better price.
"When the home is sold, there's a shortfall between what we get and what the mortgage is worth. So we have to work out a way of dealing with that shortfall."
The first option is for borrowers to pay off the remaining amount over an extended period of time, typically at the same rate as their original mortgage. But that's not always a runner.
"Sometimes people won't pay, then you go and get a judgment," says one banking source. "But there's no point enforcing that -- you can't get blood from a stone and it just adds legal costs -- so the judgment just sits there."
From the banks' point of view, the key consideration is that people don't want to have judgments against them.
While a number of banks are either already writing off debts and taking judgments, or preparing to do it in the future, it's not something that banks are united on.
But banks are more united on their position around so-called "negative-equity mortgages". These allow homeowners to carry negative equity they've already built up to new properties.
The Irish Independent understands that Permanent TSB has already facilitated a small numbers of borrowers, as have AIB and Bank of Ireland, while Ulster Bank has dealt with a small number of enquiries.
KBC and National Irish Bank haven't experienced any demand yet but are open to the idea, as are EBS, who don't currently facilitate such arrangements. The thing most bankers are keen to stress is that negative-equity mortgages aren't a "product", they're a "service" offered to customers in particular circumstances.
"Sometimes you could have someone come into you who has a €500,000 mortgage and a house worth €400,000," said one source.
"They've just got a big promotion and they want to buy an €800,000 house.
"If they're in a position where they can handle the repayments on that €800,000 mortgage, that's something we could probably work with.
"If they can pay, and if the loan to value isn't worse, then it can work."
The limited demand that's been seen so far has largely been from Dublin, reflecting the traditional pattern of buying a small city centre apartment and moving out to something larger in the suburbs once couples start families.
The Central Bank has banned any advertising -- banks can respond to customer enquiries, but they can't actively make customers aware that the service is out there.
They're also restricted to dealing with their existing customers -- those in the negative-equity market can't shop around for the best deal.
Bankers also point out that negative-equity mortgages are available only in a limited number of situations and won't be given to everyone who's in an unsuitable house.
Aside from this, there's the arena where debt forgiveness and negative-equity mortgages collide.
Borrowers might agree to trade down, take an element of their negative equity with them, and an element can be written off.
There's no evidence that that's already going on, but it's something many banks seem open to in theory.
"There's a serious issue of debt overhanging the economy," says one banker. "We've got to find some solutions."
The other likely solution is a kind of "shared-equity" situation, where banks take a stake in the home and repayments are cut, or where banks write down the debt and share the upside if the property ends up selling for a decent price.
Bankers and other well-placed sources are united in their belief that the Government's next mortgage strategy is likely to revolve around these kinds of solutions rather than anything new.
But hopefully it will at least encourage the bailed-out banks to embrace the full range of solutions and engage energetically with customers.
Solutions would be equally available to everyone -- not just those who haggle with their banks or ask for something that's not officially on offer.
Comment: Martina Devlin Page21
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