In spite of all the time that has passed and all the expert advice, we still don't have the right solution for dealing with repayment problems brought about by the economic downturn. If we didn't have to bail out the banks, the problem wouldn't be as bad. In fact, most borrowers would then expect less help.
Nobody can understand why the Government should expect the taxpayer, who has enough financial worries of his own, to pay for the mistakes of those who created the problem. The answer, we are told, is that we need a functioning banking system. We might understand it better if those who have the least were not being asked to support those who have most.
As the line goes, if you fail to make the repayments you could lose your home. This is frightening to so many people. The fact is that most people who are experiencing mortgage arrears, or payments problems, have been put in this situation through no fault of their own. The mighty have fallen too, but they may have been able to pass the problem to someone else.
Like it or not, it is necessary to communicate with your financial institution to find a solution. All the banks and financial service providers are required to have a code of practice for dealing with customers who have payment problems. In January the Central Bank published a Code of Conduct on Mortgage Arrears which is available on www.financialregulator.ie. It provides useful independent advice. Don't despair if you cannot immediately find a solution. This will change, although it is taking a very long time.
The banking system has clung on to its old ways. More concerned about its own indebtedness and even insolvency, it failed to provide solutions for those in trouble. One obvious solution, for both home and business loans, is to segregate the serviceable part of the loan from that which is not. Final decisions on what will happen next should not be taken until our own banking crisis and that in Europe have been resolved.
Repossession is a real fear for most people with arrears. It is wrong to be complacent
about the situation, no matter how minor it is, but likewise the whole banking system is in a mess and it needs to face the fact that we are in a crisis. The old policies do not work in these circumstances.
Reports suggest that nearly 45,000 mortgages have been restructured to facilitate those in trouble. In most cases, the financial institution are not giving many options. The Consumer Code on Dealing With Your Lender outlines what might be possible and what you need to do. Help is available from the Financial Regulator or www.mabs.ie (Money Advice & Budgeting Service).
Arrangements include getting a payment holiday. This is rare. It might cover a period of temporary unemployment, or where business debts are outstanding and collection is imminent. The banks are required to look at each case on its own merits. Unfortunately, they may have little to offer given their own financial problems. It would appear to be in everyone's interest to explore more workable solutions until markets recover. At the end of a brief payment holiday, it may be necessary to extend the term over which the facility will be repaid. This requires approval based on reasonable circumstances. Many people are finding the banks to be very inflexible.
Other options include repayment from a lump sum on redundancy, or due under a pension scheme. Selling an asset to reduce the outstanding capital might be required. There is no reason why the banks could not be more flexible, but that may require a lot of change and bank staff are not ready for that.
To the extent that we are bailing out the bondholders, extra flexibility should be a precondition of the bailout.
Last November an expert group on mortgage arrears published its final report. It did not recommend debt forgiveness. It may seem harsh, but if debts are written off, someone must pay. That might be senior bondholders, or depositors, or as is now more commonly the case, it might be the taxpayer.
Many of the institutional investors (bondholders) are large pension funds. If the losses were so high as to cause their insolvency, pensioners might lose their financial independence in retirement. This argument will be used more and more to humanise the hedge funds and institutions that must ultimately bear some of the burden. Meanwhile, the Government continues to turn the taxpayer on and off like a tap to take what it wants to pay for its mistakes.
The Government has intervened to delay foreclosures, but this is not enough. Many of us have benefited from mortgage relief of one form or another. However, special arrangements for first-time buyers and other property-based tax anomalies have distorted the free market process.
Recent reports suggest that as many as 300,000 borrowers may be in negative equity. Some have even encountered immediate payment difficulties on drawdown, fuelling claims that there has been misselling of mortgages.
Average mortgages in Dublin were reported to be from €200,000 to €250,000. They were lower outside the capital. Based on these figures, there might be €50bn or €60bn of impaired loans. If banking policy does not change to deal with these unusual circumstances, small problems will be made larger and unmanageable. These risks could be abated if lending policy would catch up with the times.
Repayment difficulties come in various shapes and sizes. Some could be minor and will be sorted out in the short term. Negative equity loans could be a real problem for the banks, as borrowers hand back the keys. Without buyers, valuations will collapse and bank debts will rise.
Many business loans are in limited companies that are no longer viable. As companies are liquidated, the banks could lose everything. Even where personal guarantees have been given, the guarantors may have divested themselves of all assets as has been reported in the case of Nama loans. Even if what has been done is not legal, it could take years to sort out. We have seen the high profile cases that took action to protect their interests, in the knowledge that the Government will pass the debts to the taxpayer.
The Government for its part has done little to help the general public with payment difficulties, and what it has done makes very little sense. In 2009, the remaining tax relief for homeloans was abolished except for first-time buyers. Last year, a first-time buyer, who is single, could recover tax of €2,500. The equivalent married couple could get back €5,000.
Families who changed home to accommodate their growing needs were denied any relief at all. Since tax relief at source was introduced in 2002, a tax credit is given to those who have qualifying loans notwithstanding that they pay no tax.
A person whose income is below the threshold for tax would get tax credit for the interest. So too would a person on welfare or whose income is exempt (e.g. exempt artists).
In fact, if you have paid homeloan interest and have not received your tax credits, you should get a refund if you make a claim, even though you paid no tax. You may need to take financial advice if you intend to do this.
These tax provisions must be seen as a last-ditch attempt, on the part of the Government to shore up collapsing property values. It victimises low and middle-income families who are less likely to qualify.
For decades, the system of government grants and its preferential tax treatment for first-time buyers has inflated the price of property in favour of developers instead of subsidising the cost for the buyer.
The result is numerous overvalued properties, negative equity and impending default. This alone makes a compelling argument for debt reduction. But if we have given away our crown jewels, how can we buy our way out of trouble at home?
I am not in favour of debt reduction except in the most extreme cases. But then what is the point of throwing billions of euro that we don't have into a broken banking system that is destined to collapse by reason of our neglected domestic debt crisis? We need to be more careful how we spend our money and that of future generations. Charity begins at home and for now that means Ireland.
James Fitzsimons is an independent financial adviser specialising in tax and financial planning