Brendan O'Connor: The debt that unites us is also tearing us apart
In refusing to realise property losses, the banks are not allowing people in crisis to move on.
The reluctance of lower paid people within the public sector to take more pay cuts comes as no surprise to anyone, least of all to their counterparts in the private sector who have themselves taken substantial pay cuts and have additionally experienced a huge erosion of the security enjoyed by generations past.
But it's not just the lower paid who have been reluctant to take cuts. Many bankers, judges, lawyers, politicians, executives in state enterprises, and, dare I say it, even TV presenters, have fought very hard not to take cuts on their high salaries. How many people on seemingly high salaries did we hear saying things like that they couldn't afford to take pay cuts, that it just wasn't possible? Which seemed odd. Until you thought about debt. Debt is the great common denominator. And the more you were earning, the more debt you were given; the more debt you were given, the more assets you were able to buy; the more assets you bought, the more assets you had collapsing in value.
People needed to keep their legacy earnings to service their legacy debts. Amazingly, many higher paid people see themselves as being just as desperate and close to the wire as lower paid people. For example, while most lawyers don't ring Liveline to talk to Joe Duffy, because they know they'll get very little sympathy, barristers will all tell you privately about the immense property pain being felt in the law library. But, of course, the situation is far worse for the lower paid.
We are a nation united by debt. But while debt is what unites us, it is also what is tearing us apart. In reality, it is debt that is at the core of the potential industrial relations war threatening the country right now. If you could solve the debt problems of the public sector, and their private sector counterparts, there would be no war. Public sector workers would probably accept more readily that there is a price to be paid for lifetime job security and a guaranteed pension, if they could afford to pay that price.
For their part, private sector workers might feel less resentful and more understanding if they themselves were not drowning in debt, if they had some alternative to the desperation they are feeling. Right now, people in the private sector not only have legacy debts to be paid on new-era wages, they have also lost the very security that the traditional debt model was based on. The idea of getting a mortgage for 20, or 25 years, was that you would have a job and a steady income for that time, so you could comfortably pay off your mortgage, and indeed it would get easier over time as your wages rose and the mortgage payments stayed static in nominal terms and went down in real terms. Now mortgages get harder for many people as time goes on, and entering into any commitment for 25 years seems insane, given how horribly wrong people's careers and financial situations can go.
The Personal Insolvency legislation has not offered the alternative that those in desperation needed. There are two key factors that limit the relief that will be offered. One is that the banks, despite having been bailed out by the people and being owned, in no small part, by the Government, will be under no obligation to comply with any personal insolvency plans. The second is that property debt will follow too many people around even if they manage to sell their distressed property.
And all of this is contributing to stasis in the economy. People who have money are hoarding it, people
who haven't much money aren't spending a penny of it and some people pour every penny they have into trying to get their debt down to some kind of manageable level. Everyone has a major dose of the fear. Debt hangs over everything for them, and they worry, even if their situation is not distressed, that it could rapidly become distressed, and they worry there is no safety net if they do enter into distress.
Sean Ryan, the CEO of Aspen Grove Solutions, a company involved in the management of distressed properties – so who knows a bit about this area – has been talking about the US alternatives to our insolvency scheme. Ryan thinks the US system is a much more straightforward method of getting people out of trouble. He thinks we in Ireland should be looking to the US model.
The US model differs from the Irish situation in two critical ways. Firstly, all the banks in the US have to comply with the processes for dealing with distressed mortgages. So the banks in the US, even though, unlike ours, they were not bailed out by the public – quite the opposite, in fact – are coerced into playing ball and have no veto on personal insolvency arrangements the way our bailed-out banks do in Ireland. Also, under the US system, even if you lose your home, the remaining debt on it does not follow you around for the rest of your life.
The first tier of US debt resolution is called HAMP, the Home Affordable Modification Programme. Essentially this is a first step for troubled mortgage-holders and attempts to restructure their loans so that they can keep their houses and continue paying off their debt, but in a manageable fashion. The borrower's financial situation is assessed and if they are paying more than 31 per cent of their take-home pay on their mortgage, then the mortgage is adjusted, either by term or rate of interest, to ensure they only pay 31 per cent.
In fact, in some cases of hardship and where there is a danger of delinquency in the mortgage, (note, only a danger of delinquency – you don't even have to be delinquent already) you can even get help if you are below the 31 per cent threshold. Generally, interest rates or payment terms are altered. Principal Reduction is rarer but the government is also offering incentives to encourage more of that. The US government also encourages enabling people in negative equity to refinance their loans, possibly taking advantage of cheaper interest rates on the market.
For those who wish to give up the struggle entirely and move to "more affordable housing", the US government encourages a HAFA, or a Home Affordable Foreclosure Alternative. This essentially means that an approved person can "short sell" their home, give the lender whatever they get for it, and walk away debt free.
The Making Home Affordable (MHA) people will even give you $3,000 in relocation expenses. And within three years, your credit score will be clear. Sean Ryan points out that these fast, efficient short sales do not involve the bank ever becoming the owner of the property and thus the bank never becomes responsible for maintaining, securing and then trying to sell on the properties.
What the system, in fact, allows is the efficient flow of the property market. Sure, it's at a cost, because you have to recognise losses when the short sale occurs, but neither do you have all the expensive legislation surrounding repossession. It is a quick, clean solution. Ryan pointed out in the Irish Times recently that in the US "the property market is recovering much faster in the states that allow the foreclosure process to flow quickly. The theory is that you have to pull the band-aid off and let the process flow, which will lead to quicker recovery. In Ireland, we have firmly glued the band-aid down for the past couple of years and essentially put our collective heads in the sand".
Property debt is, in many ways, at the root of all our woes in this country. But the banks, for their own reasons, are reluctant to grasp the nettle and realise the losses, and the Government is reluctant to make them do so. In refusing to do this, the banks are refusing to let people in crisis move on and refusing to let the economy move on.
I don't need to point out yet again that the banks were given money, by us, specifically to write down distressed mortgages. The Government would not surely be interfering too much in the commercial operations of the banks if it insisted that money be used as it was supposed to be used. It is not only the humane course of action, it is the logical one.