Monday 16 September 2019

Laura Noonan: We can learn a lot from US on mortgage crisis

WALK away from your negative equity house with $30,000 of free cash. An offer beyond even the wildest dreams of the tens of thousands of Irish homeowners trapped in negative equity.

But across the Atlantic, the offer that Irish homeowners daren't even dream is already a reality.

Last month, thousands of Bank of America customers woke to letters promising them between $5,000 (€3,975) and $30,000 if they'd agree to quit their homes without a fuss.

Other Americans deep in negative equity are being coaxed into paying their mortgages with "incentive" schemes where banks reward customers who don't default.

Anyone who's read last autumn's Keane report on the mortgage crisis knows these solutions aren't even being considered in Ireland.

Yet the evidence from the States is that they do work.

Take the idea of people being paid to quit their homes. The tiny numbers of repossessions here shows that people simply aren't leaving their homes in any meaningful numbers.

But data which the banks will give to the regulator in the coming days will show there are a significant number of mortgages that borrowers will be able to repay only if they win the Lotto.

In many of these cases, the borrower will want to remain in the home. But in some cases, people will want out.

Some banks are agreeing, on a case-by-case basis, not to hold borrowers personally responsible for the gap between what their house fetches and the amount outstanding on the mortgage. But that still leaves the borrower walking away with no cash and a damaged credit record that will make it harder for them to start afresh. It's no surprise people stay and fight.

Some Irish bankers privately admit that, while they're not there yet, they'd be open to paying off departing homeowners if it made sense.

"Doing that and getting a consensual departure is cheaper than a drawn-out forbearance solution," says Professor Susan Wachter, a real estate and finance expert with US college Wharton who has seen these offers in action Stateside.

The other big American policy play that Irish banks have failed to embrace is the idea of incentives.

"Strategic default", or people choosing not to pay their mortgages because of massive negative equity, is largely pub talk in Ireland but it's been studied in America. Researchers at the University of Chicago Booth School of Business found that in September 2010, 35pc of mortgage defaults were "strategic" -- well up on the 26pc recorded in March 2009. Other studies have reported similar findings.

Banks make exhaustive efforts to predict which borrowers will choose to default by looking at their recent borrowings, where they live, and what their credit behaviour is like.

Once banks have predicted who will default, the next stage is "outreach" -- convincing the borrower that defaulting is not actually their best option.

Some run "reward programmes", where the bank pays money into a special account for every mortgage payment the borrower makes.

Once the loan is paid off, the borrower gets that money. It is less expensive for the bank than debt forgiveness.

Other variations involve the bank knocking, say, $1,200 off a mortgage for every $1,000 the homeowner repays.

However, in Ireland, if you walk away from your home, the bank can hold you personally responsible for any outstanding debt and make you spend decades paying it back.

Irish banks firmly believe people want to pay their mortgages and so bankers here say incentives aren't a priority.

But they admit that struggling homeowners make choices about which debts they pay, and that these choices don't always favour the mortgage.

One banker bemoans the fact that his customers sometimes pay credit cards rather than mortgages, because credit cards have higher interest.

Another says that their customers pay back debts to those who shout loudest -- and the consumer protection codes mean banks can't shout loudest.

So why not make the customers want to pay their mortgages?

Irish people heartily embraced the SSIA scheme, which encouraged thousands to save. The mortgage incentive scheme is the same thing in reverse.

The other problem in Ireland is pinpointing who should be offered such deals. Irish banks gathered information on people's employment and finances when mortgages were originally granted. But that information was often poorly verified at the time, and is now out of date.

Banks do have more recent profiles of borrowers who have fallen into arrears and completed the 'Standard Financial Statement' drawn up by the Central Bank. But they say as many as half their customers in arrears have either filled out incomplete statements or haven't filled out any at all.

Incentives are something that could be looked at down the line, one banker says, but banks simply aren't in a position to do it now. And in any case, the big priority for the banks isn't incentivising people to keep paying -- it's rehabilitating those who have stopped.

Irish Independent

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