Thursday 14 December 2017

Threats to repossess should be welcomed

Threats to repossess buy-to-let residential investment properties (RIPs) should be welcomed, not alone by home buyers in search of homes, but also by many existing home owners.

But such a welcome need not be confined to repossession of RIPs. It could also be extended to repossessions of homes whose owners are unwilling to share the costs of protecting their neighbourhoods.

Some commentators are insinuating that the delays by banks to repossess and sell off houses may be part of a strategy to reflate the housing market; if it is then this plan may backfire.

In fact, delaying repossessions can lead not only to a deterioration of the property itself, but also of adjoining properties, and thus bring down property values across whole neighbourhoods, and especially gated communities.

For instance, take the case of apartments, or indeed houses, in developments which are controlled by management companies. Many of these management companies are reporting high levels of bad debts, as an increasing portion of owners are not paying their service charges.

Such bad debt levels by themselves can deter prospective buyers from purchasing homes in those complexes, as buyers will first check whether a management company is solvent, and second what service charges they are likely to encounter.

Even those who are solvent may have low cash flows and lack sufficient funds to undertake major works to buildings, lifts or grounds.

These will also deter buyers who are willing to pay reasonable service charges where their some neighbours are not share equally the maintenance costs.

Consequently, those complexes where owners are unable or unwilling to pay their share will deteriorate, and the longer the delays are in dealing with such non-paying owners, the more the value of those properties will fall.

Recent surveys suggest that at least 35pc of those who are in mortgage arrears may be unwilling, rather than unable, to pay. This figure is based on statistical studies of strategic default in the United States, where re-possession is easier for the lender.

Despite the greater severity of the housing downturn in Ireland, there have been far fewer dwellings re-possessed, relative to the volume of arrears, than in the USA or the United Kingdom.

According to economist Colm McCarthy, some bankers suggest that some people are meeting other types of payments, such as electricity, gas, and credit card bills, but are falling behind on their mortgage repayments. Some buy-to-let investors are also collecting the rents but defaulting on the lender.

He points out that it "is tempting to regard strategic default as a victimless activity, an opportunity for the populace to take revenge on the despised bankers," and argues strongly that "strategic default is not victimless at all. The banks are (mostly) owned by the State, so the cost, if the strategic defaulters get away with it, falls on the taxpayers at large."

But it is not just the taxpayers that are bearing these costs; it falls more heavily on their neighbours. Not only are they paying more than their share of local maintenance, but they also have to pay extra on their mortgages because one of the reasons banks have increased mortgage rates is to compensate for the revenue losses arising through non-payment of mortgages.

As Dr McCarthy says, banks have shown excessive indulgence to the strategic defaulters and have been far too slow in undertaking repossessions.

Furthermore, he raises serious questions as to how badly off those in mortgage arrears are really.

While acknowledging that many households are genuinely unable to service their loans, and will have to be offered write-downs, including re- possessions and a new start with an affordable mortgage in a smaller dwelling, he also says that the capacity of the banks to help genuinely distressed borrowers is at risk of erosion, through people who can pay pretending that they are unable to do so.

Everyone who wishes to own a property needs to take on the financial responsibilities that go with it. They have a choice and if they don't wish to take on those responsibilities then they can opt instead for a rental home.

Irish Independent

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