David McWilliams: Squeezed middle class families need banks to shoulder bad debt blame
Published 31/10/2012 | 17:00
A MORTGAGE debt deal is the single biggest issue facing the country at the moment. Hundreds of thousands of our fellow citizens -- brothers, sisters, sons, daughters, husbands and wives, friends and people across the room at work -- are caught in a twilight world of too much mortgage debt and too little income.
There are 128,000 mortgages in arrears. This is 16pc of all mortgages. There are 710,000 mortgages in the country. In terms of those needing help, most of these mortgages belong to couples with children, so there are close to 200,000 people affected.
Not all need help right now but many certainly do. History suggests that when an economy is caught in a debt brace, things hold together for a while as people scrimp and save and then they unravel very quickly when something happens, such as the birth of another child, and the bills just don't add up.
The heroine of my new book, 'The Good Room', is a 32-year-old pregnant woman and she is typical of dozens of people I have spoken to over the course of the past two years of research. She is a teacher, but as a young teacher she has no job security, is paid much less than her senior staff-room colleagues and, unlike the older teachers, she is carrying a large mortgage taken out in 2006 and now deeply in negative equity. This is the story of a generation.
Significantly, now that the housing market has tanked, these people are being described as reckless and the insinuation is that they were in some way cavalier with money.
However, when you think about it, many of the people who took out huge mortgages did so not because they were being reckless but because they were doing what they thought was the responsible thing at the time. They were bombarded by incessant financial propaganda by banks and estate agents, while at a more subtle, familial level, they were exposed to parental pressure urging them to buy because that is what "responsible young parents" do.
Now their financial hole is getting bigger because even if they are servicing all their loans -- and many tens of thousands are -- there is no money at the end of the month, so as one of the contributors told me on last week's 'Late Late', he isn't "a functioning member of the economy" because he has no money left after he pays his mortgage.
If he isn't spending, then someone else isn't earning and if that someone else isn't earning, he in turn isn't spending and you can see how the entire economy can grind to a halt because we are paying off too much bad debt. This is a recipe for economic stagnation.
Thus, in addition to giving people hope, we must appreciate that keeping thousands of people in a debtor's prison benefits nobody. So it is in your interest that we lighten the immediate debt burden on our neighbours.
So how could it be done in such a way as not to bankrupt the nation again? This is where the principle of "co-responsibility" comes in, meaning that the bank and the borrower both shoulder the bad debt burden. Both parties are responsible. So how can this be done?
The bank can preside over a debt for equity swap. This means if you owe, for example, €300,000 on a mortgage but can't pay it, the bank risks you walking away and losing everything while you lose your house. This is hardly the best way forward.
In the US in the 1930s they introduced a scheme whereby the bank and the individual did a deal. The person's mortgage was reduced and the bank was compensated by being offered half of the potential equity in the house, so that when the house is eventually sold in 10 or 15 years, the bank get first call on half the value of the house.
Now the bank must be able to turn into money the potential equity, which it is now holding until the house is sold. So the bank will have to get someone to lend it money against the collateral, which is the future equity in the house. Who might that be?
This is where the ECB comes in. The central bank has to lend to the Irish banks against the collateral, which is the future wealth in the Irish housing market. This can be achieved by negotiation and this is where the 'Good Room' mentality described in my new book has to change. We have to front up and tell the ECB that large parts of the Irish middle-class are bust and if the ECB and the Germans want a success in Ireland, the bankruptcy of the middle-class has to be addressed with an imaginative and workable debt bargain.
We therefore have to define the world in Ireland to the foreigners as it is, not as we would like it to be or they would like to hear. To do this we have to get out of the 'Good Room' -- a place where pretence triumphs over reality.
This is the most important challenge facing the country. Let's roll up our sleeves and start talking straight.
David McWilliams hosts the world's only economic and comedy festival this weekend in Kilkenny -- www.kilkenomics.com. His new book, 'The Good Room', is out now