| 8.4°C Dublin

Scourge of the banks

Edmund Honohan, the Master of the High Court, laid into the banks this week as he accused some lenders of driving hard-pressed hard borrowers to commit suicide.

Over the past week the Honohan brothers have formed a unique double act dominating the headlines with their pronouncements on the financial crisis. On Sunday, Central Bank governor Patrick gave a 40-minute interview to RTE radio's 'This Week', where he disputed Morgan Kelly's call that Ireland walk away from the EU/IMF bailout.

On Wednesday it was his younger brother Edmund's turn to appear centre stage when he lambasted the banks.

Even for those of us who have been critical of the banks, it was pretty heavy stuff.

He accused the banks of pursuing debtors to "the bitter end" as part of an "accountancy exercise" so that they could write off bad debts for tax purposes. This was, he said, causing social disquiet and leading some people committing suicide.

According to Mr Honohan, the banks were "cheer leaders for the Celtic Tiger" and now that the bubble had burst had "reverted to type" -- coming to court assuming that the bank always wins. That, he warned, was "not how the law sees it".

He then went on to call for a measure of debt forgiveness for hard-pressed borrowers who are unable to repay their debts in full.

Not surprisingly Mr Honohan's comments elicited howls of ritual outrage from the banking sector. Irish Banking Federation chief executive Pat Farrell described his comments as being "inflammatory" and "emotive". Mr Farrell also pointed out that Mr Honohan had predicted an "avalanche" of repossessions more than two years ago and that this had failed to materialise.

"That event has not happened and the reason it has not happened is because my members, the mainstream banks, have engaged in extraordinary measures and forbearance across mortgage debt and personal debt to ensure that every effort is made to enable people manage measures and forbearance across their debts," said Mr Farrell.

The position of Master of the High Court is an unusual one. Despite the title, the Master is not the head of the High Court, a role which is filled by the President of the High Court. The Master has no competence in criminal cases and can't grant injunctions or bail.

The Master is basically an administrative judge, most of whose time is spent on procedural issues. As such he hears many of the initial applications from plaintiffs, usually banks, seeking the repayment of unpaid debts. This means that Mr Honohan is in the front line of Ireland's mounting debt crisis.

While his comments may have been unusually colourful for a senior court official, it's not hard to see why Mr Honohan would have been tempted to utter them. Almost four years after Ireland's credit-fuelled bubble burst there has still been no reform of our hopelessly antiquated personal debt legislation.

Almost uniquely in the developed world debtors can still be jailed in Ireland if they fail to repay the money which they owe, while anyone unlucky enough to be declared bankrupt faces severe restrictions for 12 years compared to just 12 months in the UK.

There is also no statutory scheme that allows debtors to agree to repay part of what they owe their creditors over a number of years.

This is despite the fact that the Law Reform Commission published a detailed report last December, recommending sweeping changes in Ireland's personal debt laws. It called for a reduction in the period for which bankrupts are restricted to just three years and recommended that agreements between debtors and their creditors, which have already been pioneered by organisations such as the Money Advice and Budgeting Service, to be put on a statutory footing.

Mr Honohan's fiery comments ensured that the issue of personal indebtedness jumped to the top of this week's political agenda. Unfortunately, we may have to wait a while longer before we see any action.

While the Department of Justice has promised a number of reform measures in the Civil Law (Miscellaneous Provisions) Bill, which is due to be published later this year, it will be at least 2012 before the anachronistic 1988 Bankruptcy Act will be replaced by a piece of legislation more suited to the needs of the 21st rather than the 19th Century. It is not hard to detect a hint of exasperation at these seemingly endless delays in Mr Honohan's comments this week.

In the meantime, the personal debt crisis, the consequences of which Mr Honohan finds himself dealing with virtually every working day, grows steadily worse.

While IBF's Mr Farrell claims that his members have taken "extraordinary measures" to help borrowers who are experiencing difficulties with their repayments is correct, how much of this is due to altruism on their part and how much to the fact they have lacked sufficient capital to recognise all of their loan losses? In other words, were banks simply making a virtue of necessity?

Will the banks display a similar level of tolerance towards their errant borrowers once they have been fully recapitalised? It might not be a good idea to bet on it. Mr Honohan, for one, certainly doesn't seem to think so. Far more likely is that, with sufficient capital to recognise their loan losses, the banks will become more aggressive in pursuing their problem borrowers.

The numbers behind Ireland's personal debt crisis are truly frightening. The Central Bank estimates that Ireland's households owe the banks almost €123bn. Throw in the estimated €35bn of mortgages which the Irish banks have sold to investors through securitisations and the total climbs to just under €160bn. That works out at an average of over €100,000 for each one of Ireland's 1.5 million households.

With the new house price index from the CSO indicating that prices have fallen by more than 40pc since 2007 and at least a 10th of all mortgages either in arrears and/or having been restructured, the situation is indeed a grim one. And it's not going to get better any time soon. Research conducted by the ESRI indicates that almost half of all residential mortgages are now underwater with the amount being owed exceeding the value of the property on which it is secured.

All of which means that, the procession of misery passing through Mr Honohan's courtroom is set to grow even longer. Any amelioration brought about by legal reforms is likely to be swamped by the worsening underlying situation.

Mr Honohan has been Master of the High Court since 2001. The son of senior civil servant, he is a native of the northside Dublin suburb of Glasnevin, where he still lives.

He qualified as a barrister in 1975 and became a senior counsel in 1995. He was close to former Fianna Fail Finance Minister, the late George Colley, and served as an adviser to Martin O'Donoghue during his term as Minister for Economic Planning and Development between 1977 and 1979.

Since becoming Master he has not been slow to give voice to his often trenchant opinions. In 2005 he described overcharging by solicitors of clients who had taken compensation claims to the Residential Institutions Redress Board as "disgusting", while in 2009 he struck out three mortgage arrears cases because the lenders hadn't complied with the code of conduct on mortgage arrears.

With no sign of any improvement, expect to hear a lot more from Edmund Honohan in the near future.

Irish Independent