Tuesday 19 November 2019

We need to get real and recognise that debt forgiveness is the only solution

MORE than half of all mortgages are now in negative equity.

This is important because Blackrock, the US company which analysed €100bn worth of mortgages for the Central Bank, believes that negative equity is the primary predictor of arrears. Unemployment plays a role but negative equity seems to play a bigger role.

Yesterday's report by Moody's seems to back this up. It says that loans with high negative equity have an estimated default rate of 21.7pc. Moody's expects default on all mortgages to peak at 20pc in early 2013.

Taking the data available, the ratings agency calculates that negative equity makes a mortgage holder 1.7 times more likely to default.

The Government's Expert Group on Mortgage Arrears and the Keane report both contain good ideas but they have been shown to be ineffective in solving the arrears problem, which continues to grow.

'Principle modification' -- which is a nicer way of saying 'debt forgiveness' -- is, according to Moody's, the only solution. This has been empirically proven by Blackrock. Thus, we have a known cure that we won't countenance and can't afford.

That forgiveness is the answer has also been argued by Harvard economist Carmen Reinhart and backed up by several economists in Ireland, including Oxford's Ronan Lyons, Trinity's Brian Lucey and UCD's Ray Kinsella.

Banks know that even mentioning this possibility is financial kryptonite to their sector. But just look at the figures. Short of mass repossessions, there really is no alternative. The message from the banks is: "Stay calm, don't worry, this is under control."

Quite frankly, our banks have been lying to us. This is about as controlled as herding butterflies.

Some lenders estimate that as much as 40pc of their arrears clients are not "truly unable to pay".

These strategic defaulters find themselves unable to sell at a loss because banks won't work out deals -- but they also can't get repossessed.

If you are in a 'no-win' situation, it is reasonable to take the only good from the situation. This is either living with less cost (default on a loan for where you live) or increased income (don't pass on rent received). The Irish Nationwide loan book of €800m is 45pc impaired and AIB investor loans are almost 40pc impaired. Are four in 10 properties not rented out? Hardly, or they wouldn't be appointing rent receivers to address this. You can't collect rent from an empty property.

The choices are stark and often unpleasant, whatever a mortgage holder decides to do. Borrowers who do begin to pay their mortgages again are often shackled by bad credit histories and reduced wealth. Playing by the rules often means that they lose in the long run anyway.

Karl Deeter is head of client advice at Advisors.ie and Irish Mortgage Brokers

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