Thursday 30 October 2014

Mortgage mayhem follows Anglo deal

Published 17/02/2013 | 04:00

Patrick Honohan

POOR Patrick Honohan. He must be at the end of his tether. His colourful choice of imagery on Sean O'Rourke's Week in Politics programme last Sunday was arresting.

The Governor of the Central Bank revealed that the top brass in Dublin's Dame Street fortress were "tearing their hair out" at the lack of action from the banks.

The RTE interview should have been a lap of honour for Patrick. He had just pulled off a big deal on the Anglo promissory notes. So why in the name of God was the folically challenged Patrick "tearing his hair out"?

Patrick's outburst smelled of desperation, bang in the middle of sampling a Pyrrhic victory. Patrick was signalling a far worse problem than the Anglo promissory notes. The mortgage arrears crisis is coming to a crunch. And the banks have been simply ignoring the warnings from the Central Bank.

What is new?

Nothing at all. Once again bankers are running rings around regulators. This time the problem may be too big, even for professor Pat.

It was last October when Central Bank chief Fiona Muldoon stunned the bankers after she let them have it with both barrels about their failure to tackle mortgage debt. Fiona was the advance party in a Central Bank offensive to get the bankers off their butts.

The bankers hardly budged. Mortgage arrears have continued to soar.

One month ago Honohan publicly told the Dail's Finance committee that he was "unhappy" with the progress on mortgage debt. Everybody tut-tutted solemnly. Last Sunday he stamped his foot on Sean O'Rourke's programme. He grabbed a few headlines. The bankers sat tight, absorbing the abuse, but doing nothing.

And last Wednesday the Central Bank held a timely conference on "How to Fix Distressed Property Markets".

The host, Professor Patrick, opened the event with a broadside about the "extraordinary level of mortgage arrears in the State". Speakers from abroad were hauled in to tell us how fatal would be our laissez-faire approach to mortgage arrears.

Independent experts were damning in their verdicts. The Central Bank had organised a conference with critical speeches – heavily loaded in favour of house repossessions – as part of the solution to a mortgage crisis. A none-too- subtle message was being sent to the bankers and the Government.

What looked like a modest series of alert warnings a few months ago seems more like pure panic today.

Patrick is looking down the barrel of a gun. My guess is that there were two important dates in his calendar this year. The first was the pushover, March 31, D-Day for the Anglo notes.

The second was far more important. And far more dangerous. Originally, pencilled in for early July, the Irish banks were due to be stress- tested.

Stress tests have proved awkward hurdles for Irish banks. The last one, two years ago, has left still unanswered questions about the possibility of a flawed process, the bizarre treatment of a Central Bank whistleblower and the consequent credibility of the final outcome.

For some mysterious reason this year's stress test has been postponed. Originally scheduled for the summer, it has now been pushed back till the autumn. Even then, it leaves very little breathing space for Patrick to sort out mortgage debt. If the result of the stress test is credible this time, it will tell us that the banks are refusing to tackle a mortgage monster that is poised to expose them as insolvent.

The omens are not good. Action on the mortgage arrears front is close to a standstill. Bankers are relishing their paralysis. While repossessions stand close to zero the number of borrowers falling into arrears is rocketing. Recapitalisation looms.

Nearly one in four mortgages is in distress. Currently 135,000 homeowners fall into the arrears category.

The banks are reluctant to repossess any houses because the arrival of a flood of residences on the market will depress property values and expose the lower value of all the properties held on their books. In turn that will reveal that they have grossly underprovided for bad debts.

If they were then forced to write down the value of their security to realistic levels, they would urgently require more capital. Which they do already – but they are happy to pretend that the values are much higher.

In other words, they have been lying. Old habits die hard.

The bankers' escapism has been connived at by the Government. No politician wants to see repossessions. No Government wants to force the property market down to realistic levels. No regime wants to return to the taxpayer for more funds to prop up the banks. Better to live well in a fool's paradise than to meet your maker.

The refusal of the banks to repossess homes is far from an act of human kindness. It is a necessity to protect their web of lies. They are conveniently protected by a 2009 judgment, forbidding a lender to apply for repossession in certain circumstances .

Yet their failure to act, and the Government's reluctance to change the law, is leaving punters puzzled. Pressurised borrowers have naturally taken advantage of the lax regime exercised by bankers, albeit for unscrupulous reasons. The result is predictable. Mortgage repayments have become an optional extra.

Borrowers have learned that non-payment provokes few, if any, immediate penalties. They are discovering that their neighbours are not paying their mortgages either. Nothing happens.

The Government is colluding with the banks to allow mortgage mayhem.

And the number of punters in arrears is certain to rise in the coming months. Just wait until the Government's wretched property tax bills drop through the letter boxes. Homeowners will realise that they have no choice over whether to pay the property tax, as it will be confiscated from their wages or their social welfare by the taxman.

In order to pay their property tax, many will opt not to pay their mortgage, knowing that their seemingly benign, but deeply cynical banker is frightened of taking any action against them in case the entire edifice of lies collapses .

Mortgage anarchy is in prospect.

The banks have given the two fingers to the Central Bank. They are squatting on phantom balance sheets living in a fantasy world of padded house valuations. The day of reckoning is at hand.

The Government responded to the crisis with a feeble Personal Insolvency Bill, a piece of legislation that left power over mortgage arrears in the hands of the bankers.

Honohan has threatened to give the bankers "direction". They are hardly quivering with fear. God knows why he did not take this course years ago. He will need to kick ass, to tell them to recognise realistic values in their balance sheets, to make adequate provisions and then to come clean on their real capital needs. Alongside the mortgage arrears timebomb the Anglo promissory note was a walk in the park.

Patrick has seen into the abyss. That is why he is tearing his hair out.

Irish Independent

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