BEFORE we found out what the Government had in mind to deal with the distressed mortgage timebomb that is ticking away at the heart of the Irish economy, Pat Rabbitte rubbished the idea that there would be wholesale repossessions. But of course, nobody had suggested there would be. The figure he mentioned, and dismissed, was 95,000 repossessions, which would represent the bulk of the private home loans currently in arrears of more than 90 days.
The Secretary General of the Department of Finance, John Moran, had indicated to a Dail Committee that he would like to see our repossession rate of just 0.25 per cent come more in line with what happens elsewhere – 3 to 5 per cent. Which would give us something just above 3,600 repossessions a year, compared to the present figure of around 300.
Then on Wednesday we were told of the plan.
A schedule for the banks was set out requiring them to come up with "sustainable solutions" for 20 per cent of borrowers in arrears by the end of June, 30 per cent by the end of September, and 50 per cent by the end of the year. In July, targets for finalising these solutions will be announced. Failure to achieve these targets could see the banks' capital reserve requirements increased, which would leave them short of working capital.
The problem was, we were still left wondering. The crucial question was, to what extent is the Government, through the Central Bank, telling the banks what to do – something it had always said it would not do. The State's shareholding – almost total in AIB and 15 per cent in Bank of Ireland – was not to be used to interfere with the commercial running of the banks; that had been the line consistently. The Government wouldn't do it any more than it would tell Christoph Mueller how to run an airline. So, now, had the policy been changed? Or was this another set of pious aspirations?
There are only two options for the banks in dealing with distressed mortgage-holders (apart from doing nothing, which is what they have mostly done up till now). They can do a deal, or they can repossess.
There is a grave suspicion that the bank executives and board members would really love to solve all their problems in this area through the latter approach. Fall behind in your mortgage and the bank will take your house, sell it for whatever it can get and you are still liable for the rest.
There were two problems with this "solution". The first was the Dunne judgement, a 2011 court interpretation of a particular piece of legislation that was proving a huge obstacle to bank repossessions. Basically, the banks were not repossessing homes in any great numbers because legally they couldn't.
We were told that that legal anomaly was being rectified with new legislation due before the end of this month, but on Thursday we found out that there is nothing imminent in that department. In fact, the legislation hasn't even been drafted yet.
The other problem with the repossession option is that bringing a lot of seized properties to market at the one time will depress the market even further, and leave the banks with an even poorer return on their fire sales. Of course, we have already given the banks millions of euro to deal with the mortgage problem. Would not the temptation be to use that money to cushion the banks against these losses?
It's one way of looking at it. It's a way some bank executives might look at it. But the money we gave them is not limitless, so they would be depleting their resources if they tried to over-use it as compensation for losses on repossession sales. Unless they are thinking of coming back for more.
On the other hand, they could deal with each mortgage-holder on a case-by-case-basis and try to come to some arrangement that would ease the burden on the home-owner and ensure steady repayments to the banks. That is clearly what the Government wants, and expects, from the banks. But then, if the banks are amenable to such an approach, why are they not doing it already? They have trotted out the excuse that they did not have sufficient numbers of staff trained up to negotiate with distressed homeowners. That was understandable. Bank officials who had spent most of their working lives doling out loans with both hands would be ill-equipped to handle the minutiae of such personal crises. So special training was needed. But a lot of that has been done now so that excuse has not held water for up to a year.
Why then have the banks confined themselves to a few interest-only arrangements,
when they could be engaging on a greater scale to make the kind of sustainable agreements the Government says it wants to see. Logic says the only reason they have not done so is that they don't want to. What they most definitely do not want to do is offer writedowns to anyone. And the background noise from different government ministers suggests that this is not something the Government truly expects on any large scale. A close look at what the Government called for last week suggests that, as far as the banks are concerned, it is all carrot and no stick.
There are potential penalties for the banks if they fail to engage at all, but it is framed in such a way that repossessions will constitute engagement just as much as doing a deal.
How will it work? Will repossessions – what might be seen as the easy or the lazy option – predominate or will it be 50/50, or just the can-pay-won't-pays? Will the deals be reasonable, or designed to fail? Not all bank loans given out during the boom were what they seemed to be. The same could apply to the helping hand. Certainly, it does not seem that deal-negotiation will be a continuous process. Postpone some of your loan, agree to pay what you and the bank think you can, but renege on that and don't expect to come back for a second bite.
The steps taken by the Government last week were a good move in the right direction. It was an attempt to put some pressure on the banks to get moving on the mortgage problem. There are definite penalties – though only in the eventuality that the banks actually do nothing, an unlikely scenario.
What we really don't know is what exactly the banks will do. We don't know this because while what they ought to do is suggested, it is not mandated. It is, in fact, left up to themselves. We have put our trust in the banks. Let us hope they respond to that trust in kind.