James Fitzsimons: Banks must face reality and solve the mortgage crisis for all our sakes
Strategic lending would get things going again, but the banks haven't figured it out yet
THE Central Bank may prolong stagnation in the economy by focusing its attention on restoring our banks to profitability and treating the rest of us as second class citizens. This Government, and the last one, pinned all our hopes on saving the banks to get us back on the road to recovery. They may be the best capitalised banks in Europe, but they still can't save us. In spite of all that we have pumped into the banks, we are one of the most indebted countries in Europe. Early indications suggest that the number of home loans and business loans falling into arrears is declining, but those with long-term problems is rising. Nama saved the banks. Can it save the rest?
In a recent report from the Central Bank, household debt was estimated to be in the region of €175bn. That's as much as the entire country can generate in a year (GDP) and it is 200 per cent of disposable income. Stagnation is all we can expect while this situation prevails. The contraction in consumer spending is one of the major factors holding back domestic economic activity. Those who lost their jobs have nothing to spend. Those who can't pay their bills have nothing left to spend. And those who have something left are afraid to spend, or just want to cut their debts because the future looks bleak.
The banks will continue to be a big black hole while spending in the domestic economy is flat. It's a catch-22 situation. The ones who need help cannot afford to pay back what they owe. Even if the banks had the money to lend to them, the risks are too great. Over-lending is what created the problem. There is a place where strategic lending would get the economy going again, but the banks haven't figured it out yet.
Part of the solution is debt forgiveness, and it need only apply in a very small number of cases. But if the process is too long and painful, it is doomed to failure. That's the problem. A person can be automatically discharged from bankruptcy in Ireland after 12 years. The Personal Insolvency Act provides for discharge after three years, subject to certain conditions. But you can be discharged in 12 months if you go to the UK. Restructuring won't work here if it leaves you with nothing.
The Central Bank is encouraging those in trouble to work things out with their banks. But that is proving difficult. If the banks take their losses, they have little prospect of returning to profitability any time soon. They need more capital and they want it cheap. Even then there is no guarantee. The personal insolvency process can take up to seven years to work through. During that time, there will be no luxuries. Even necessities have been taken away. It's a meagre existence at best, but it's a chance to hold on to what you have. If you are insolvent, then bankruptcy is all you have. And you lose everything in the process.
If you can restructure your finances under the new personal insolvency regime, you
don't lose everything as you would if you become bankrupt. But you must use a personal insolvency practitioner (PIP) and that will cost more money. Nobody knows how much. If the Central Bank has its figures right, PIPs could earn €100m in fees in the first year alone. It has been suggested that it might be €5,000 to take a case, which is roughly what it costs in the UK. If you think that's bad, bankruptcy costs a whole lot more. That involves the High Court and well-paid professionals. A typical case will run to tens of thousands of euro.
When you weigh it all up, bankruptcy in the UK looks good, but only if you leave all you have here and move there until it works its way through. And you still have to pay. If you file for bankruptcy in Ireland, you might be off the hook in three years, but if you've been suffering for the last five, maybe that's too much to ask. If you work things out with the banks under the new personal insolvency regime it could take seven years, and added to what you have already gone through, you might have lost 12 years of your life. Murderers and rapists serve less time.
The last option, and it has already encountered problems, is the Central Bank's pilot scheme for impaired homeowners with multiple debts. The banks and other creditors work things out between them to come up with sustainable solutions. But the credit unions have pulled out before the process has even begun. The Central Bank was pinning its hopes on this to kick-start the process where banks would do the right thing, even if it meant writing off debts that cannot be paid back. But as the credit unions pointed out, the banks don't want to entertain this. It would be too much to bear.
In its first 18 months, Nama reviewed about 11,000 impaired loans for 800 impaired borrowers. It categorised them between hopeless, manageable and those with little prospect of survival. Now they are managing the biggest single property portfolio in the world. Maybe they are sitting on their hands since the initial appraisals were done. They need something new to rekindle the spark that that makes them useful.
Mayhem will prevail and the mortgage crisis will not abate if someone doesn't intervene to sort things out. Personal Insolvency Practitioners will run like headless chickens between customers and their creditors if the banks are not forced to take action. Economic stagnation will last for years if we don't solve the mortgage crisis and get better deals for those who need credit in the SME sector.
Nama is turning into something it wasn't set up to do. It could be a clearing house to make sure banks and PIPs don't get into an endless loop that goes nowhere, but costs a lot. Patrick Honohan, the Governor of the Central Bank, recognises that bad mortgages shouldn't keep home owners on the breadline for decades. So let's sort it out. And for that, the banks have to be forced to play ball.
James Fitzsimons is an independent financial adviser specialising in tax and financial planning