Stephen Donnelly: We need a strategic review of mortgage crisis
AIB's move to write down a debt by €150k highlights the need for a systematic approach
On Wednesday we got some good news. On the front page of the Irish Independent, Charlie Weston told us about a Dublin family with two kids whose AIB mortgage had been written down by €150k. Sorting out unsustainable household debt may be the single most important ingredient of Ireland's social and economic recovery. Which is why we gave the banks billions of euro of public money specifically for this purpose. That was three years ago. But rather than grasping the nettle in 2011, the banks have been sitting atop these hordes of cash, like punch-drunk dragons.
Finally, in 2014, things are starting to move – three to five years late, but better late than never. It can also reveal the ongoing problems with, and potential solutions to, the mortgage crisis.
The AIB deal has been broadly welcomed. The family can stay in their home, and have a chance of financial recovery, and contribute to Ireland's economic recovery. Had their home been seized by AIB and sold, the bank would still have taken the financial hit, the State might have had to step in to house the family, and the economic productivity of the couple would likely have diminished. So – family saved, potential public spending averted, future tax take increased. Good news so far, so what's to improve?
First, the deal didn't do anything with the unsecured debt. The family have an agreement with AIB, but not with their other lenders, who will continue to pursue them – lending institutions don't have agreed protocols for dealing with borrowers who have multiple lenders. What, for example, should the credit union do if the bank writes down the mortgage? Because nothing has been agreed, the borrowers are left trying to negotiate simultaneously with different institutions. The result: many potentially healthy restructures are missed.
Second, failing voluntary co-operation between lenders, the new insolvency legislation wasn't used. Personal Insolvency Arrangements (PIAs) are one of the three new insolvency frameworks brought in last year. To date, only three PIAs have been agreed. In fact, only 46 protective certificates have been issued by the Insolvency Service of Ireland (ISI) since it began accepting applications six months ago. In the context of nearly 180,000 mortgages in arrears, this means that the insolvency legislation might as well not exist.
Third, the family were lucky enough to have borrowed from AIB. Had they been with Bank of Ireland, for example, it's hard to see how such a deal would have been done: it told the Oireachtas Finance Committee that it wouldn't be writing down any debts in this fashion.
The Government has set the banks targets for restructuring unsustainable mortgages, but has left it to each bank to apply their own solutions. The guidelines leave it up to each bank to decide what constitutes a long-term sustainable solution. So the 180,000 families are in a banking lottery, with the type of restructuring offer made heavily dependent on the bank they are dealing with.
There are other opportunities to improve the system of mortgage resolution. Lenders highlight the high administrative burden placed on them by the Code of Conduct on Mortgage Arrears (CCMA). Some say that so much time is taken up with compliance that they don't have time to meet borrowers to find solutions.
There is also a lack of transparency in what types of offers
are being made, by whom, and for what reasons. The lack of consistency between banks, coupled with such limited information on the restructures being offered, is leading to questions of fairness. This reaction is not unique to Ireland. About three years ago the IMF looked back at mortgage crises all over the world for the past 100 years. One of its conclusions was that the case-by-case and lender-by-lender approach being used in Ireland doesn't tend to work, in large part because of public opposition to the inconsistency and perceived lack of fairness.
The latest Central Bank figures show that between September and December last year, the number of mortgages in arrears fell from 182,000 to 176,000. At this rate, the problem will be resolved in March 2021, rather than the Government's target of nine months from now. The longer this goes on, the longer it'll drag on Ireland's social and economic recovery.
So what's to be done?
We need a quick review of the whole system. Different people are looking at different parts of the problem, but nobody's joining up the dots. What solutions is each lender offering? How many of these are getting agreed? Which of the solutions are working, and which are not? How many so-called restructures are really just letters threatening legal proceedings? Can compliance with the CCMA be made easier for banks, without losing necessary oversight? How many borrowers are refusing to engage with their banks, and why? How many families are not protected by the CCMA, because their mortgages have been bought by unregulated entities?
Once we know this, a common set of restructuring offers should be agreed. The quality, as well as the quantity, of offers made and accepted could then be monitored. The banking lottery would end and consistency and transparency would increase.
The banks should be brought together to agree protocols for working with borrowers with multiple lenders. Ideally, a solution should be mandated if it can't be agreed with all lenders. The insolvency processes should be redesigned to rapidly reduce the administrative burden on borrowers and lenders alike. (This is already being looked at, but in isolation.)
Genuine efforts have been made to get on top of the mortgage crisis. But they have been piecemeal. To date, there has been no system-wide, strategic approach. The result is that Ireland has several times more mortgages in arrears per capita than any country on earth. Or putting it another way, no other country has managed to so spectacularly fail to deal with their property bubbles as we have. It's time to join the dots.
Stephen Donnelly is the Independent TD for Wicklow and East Carlow