The mortgage crisis is now so large that it risks financially destroying an entire generation and keeping our economy on the rocks for a decade. Wednesday's announcement of new targets for restructuring mortgages looked like it might help. Predictably, the detail betrayed another sorry tale of Ireland putting institutions ahead of citizens. The plan could be made to work, if only this Government could find the bottle to lead.
We love our institutions. In the Fifties, we institutionalised more citizens than any country in the developed world. Already in this Dail we've had the Cloyne report, the industrial schools and the Magdalene Laundries. You'd think, with all of this, we might reflect on the lesson history is screaming in our face: prioritising the integrity of institutions over the integrity of citizens is an astoundingly bad idea.
When the banks came knocking, we gave them €64bn of citizens' money. No bank could fail, no bond could go unpaid, we would not "have the name 'defaulter' written across our forehead". But no such tough talk in defence of citizens. For them, it's strategic default, moral hazard and "nobody forced them to borrow the money".
Protect the institutions. To hell with the citizens.
We examine the sins of our recent history and wring our hands in shame at what we allowed, and helped, institutions to do to citizens. We abhor the imprisonment of women in the Magdalene Laundries while at the same time consigning many of today's children, and their parents, to debtors' prisons for the rest of their lives.
You see, the mortgage crisis isn't something that happened to us. We did it to ourselves. Or rather, two successive Irish governments did it to people who bought properties between 2000 and 2009.
In September 2009, just three per cent of residential mortgages were in arrears of more than 90 days. It's now 13 per cent. Including arrears under 90 days and mortgages restructured to interest-only, it's 25 per cent. That figure is not rising because of strategic default, or that awful bunch out there who apparently "won't pay". It's rising because the Government keeps reducing people's incomes while refusing to help them reduce the costs of servicing their debts. Non-performing residential mortgages have risen 50 per cent since Fine Gael/Labour came to office.
For buy-to-lets, more than one in three is not performing, and also rising. Here the Government carries even more blame. Fianna Fail changed the rules so landlords couldn't subtract total costs from total revenue to determine taxable income. Then it charged them for having the properties. And in Budget 2013, Fine Gael/Labour decided to charge PRSI on rental income. Astoundingly, when you tax businesses on revenues rather than profits, those businesses fail.
This is not how it works in other countries. Two-thirds of private debt deleveraging in the US is from default, much on mortgages. They walk away, they start again, and they are way ahead of us on getting private debt back to sustainable levels. In Iceland, they wrote down mortgages to 110 per cent of market value. Their recovery started two years ago, and they have one-third our rate of unemployment. Norway did something similar after its banking crisis in the Nineties. In the UK you can be in and out of bankruptcy in one year, and you and your family can start again .
So having helped create the mortgage crisis, how does the Government's new plan stack up? It has set ambitious targets for all mortgages in arrears to be restructured – half by the end of this year, and the rest by the end of next year.
The banks have to offer "sustainable solutions". Sounds good. Only here's the thing. The banks get to decide what "sustainable" means. And neither the Government nor the Central Bank will provide guidelines on the types of restructures they want used. And if borrowers refuse these offers, banks can, after 30 days, initiate legal proceedings for eviction. Protect the institution.
Evictions were talked about a lot on Wednesday.
So were "non-co-operating borrowers". The Code of Conduct on Mortgage Arrears is being revised to "facilitate effective resolution of borrowers' arrears", according to the Government. Here's some of what it's actually proposing to do:
• Allow banks to classify borrowers as "not co-operating" if they don't respond within timelines ... set by banks.
• Remove the 12-month moratorium on eviction for "non-co-operating borrowers".
• Remove the three-per-month limit on contact by banks.
• Allow banks to move borrowers off trackers as part of new restructuring offers.
So what's likely to happen? Banks will offer restructures which are as close to interest-only or term extensions as possible. They will, at all costs, avoid restructures which reduce the total amount of debt (Central Bank figures show of the 80,000 mortgages restructured to date, 99.86 per cent have avoided this). If really pushed, banks will offer split mortgages. Here, a portion of the mortgage is shelved for, say, six months, while interest and capital is paid on the rest. But Ulster Bank, PTSB and Bank of Ireland have indicated they will charge interest on the shelved portion – essentially making it an interest-only product. Banks will move to evict, and use the threat of eviction to scare borrowers into accepting whatever they're offered.
With these new powers, banks will comfortably ignore the one thing which might have facilitated writedowns, the personal insolvency legislation (in which they have veto powers anyway).
Mortgage arrears will fall. But the level of mortgage debt won't. Japan, in 1991, locked in mortgage debt – as this will do. Its economy stagnated for 15 years.
Analysis of financial crises by McKinsey Global Institute suggests that economic recovery begins when private debt falls to sustainable levels. This plan, as is, guarantees that won't happen for many years. Even when GDP grows, it will come from multinational exports. While welcome, this is not job-rich. That comes from the domestic SME sector – and that only begins to invest and grow after private debt levels fall.
The plan could work if the Government made a small number of important changes.
First, it could set targets for reductions in total mortgage debt. Forcing this through would greatly accelerate Ireland's economic recovery and job creation.
Second, it could specify the solutions it wants banks to use. The most promising is probably a debt-for-equity product. This gets around the Government's obsession with nobody gaining from the plan, and keeps the banks' balance sheets intact.
Third, additional funding could be provided to organisations like Mabs, Flac, New Beginning and the Irish Mortgage Holders Organisation. A government commitment to employ 100 people to support borrowers should be activated. With additional funding and staff, these organisations could create a one-stop-shop for borrowers for the next two years – to provide crucially important expert advice, representation and policy input.
If these actions are not taken, over half a million men, women and children could be consigned to debtors' prisons, with future improvements in their finances snatched by the same banks they bailed out. An entire generation will work until 60 just to get back to zero. Economic growth will remain unnecessarily low and unemployment unnecessarily high for years to come. But if we stop putting the interests of the institutions ahead of those of the citizen, and make some radical decisions, we can avoid much of that.
The question is: has our own history taught us a damn thing?