Friday 9 December 2016

Banks have to pursue all mortgage defaulters

Those seeking lenient treatment of mortgage holders who can pay, risk a fresh banking disaster, writes Colm McCarthy

Published 08/09/2013 | 05:00

INTERROGATED: Jeremy Masding, CEO of Permanent TSB, left, and Shane O'Sullivan, head of PTSB's Asset Management Unit, arriving to appear before the Oireachtas Finance Committee
INTERROGATED: Jeremy Masding, CEO of Permanent TSB, left, and Shane O'Sullivan, head of PTSB's Asset Management Unit, arriving to appear before the Oireachtas Finance Committee

The discussion about the mortgage arrears crisis is beginning to lose touch with reality. The solvency of the remaining Irish banks depends on their success in collecting on their loan assets. If they are not successful in pursuing all of those who can repay borrowings there will be another banking collapse and it will play out very differently from the last one.

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The portfolio of loans accumulated by the banks during the bubble can be divided into developer and construction loans, residential mortgages and the rest, mostly business and consumer loans. The developer and construction loans have been bought at a large discount by Nama and are no longer the banks' problem. Crystallising the losses on these loans revealed the initial insolvency of the system, remedied through injections of taxpayer cash. But the residential mortgages and the business/consumer loans are still on the books of the banks, and it remains an open question as to whether they have enough capital to write off the unavoidable losses in these areas. They have been playing extend-and-pretend these last few years, have written off very little and the Central Bank has lost patience. Thankfully, there is a belated push to face the music over defaulting mortgage holders, the biggest threat to the viability of the surviving Irish banks.

If the banks are unable to collect enough from mortgage and other borrowers they could go bust again. The two banks wholly owned by the State, AIB and Irish Permanent, have very large mortgage books but so does Bank of Ireland (the Irish State owns 15 per cent) and Ulster Bank, majority owned by the UK taxpayers. Before considering the proceedings at the Oireachtas Finance Committee during the week, when the chief executives of all four of these banks were quizzed by Dail deputies and senators, it is important to be clear about the consequences of a second failure of the Irish banking system.

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