The financial crisis has hit Irish consumers hard, none more so than homeowners.
But it's impacting different families in different ways. The steep decline in house prices affects a lot of people: 40pc of owner-occupier homeowners are in negative equity. Negative equity -- where the mortgage owed is more than the current value of the house -- can make people feel trapped, unable to move to take a new job or start a family. The Central Bank has just written to the banks to give the go-ahead on negative equity mortgages -- provided they can be afforded -- to help those who need to move and hopefully to get some transactions going in the housing market.
Affordability is a key concept. Homeowners may be in negative equity but can still afford payments on their mortgage -- or maybe even a new, bigger one. Being in negative equity is not the same as being in arrears on a mortgage: in fact 93pc of negative equity borrowers are not in arrears. In tough times they are working hard to keep up payments.
But mortgage arrears is a big and growing problem, with 9.2pc of all mortgages more than 90 days past due, and it is likely to get worse before it gets better. What can be done for this group of people?
Well, it's not really a single group. On the one hand, there are those homeowners who are in genuine difficulty and need a little temporary breathing space to get back on track with their payments. The banks have been using a range of techniques -- such as switching to interest-only payments or extending the mortgage -- to help out for a while, with the full mortgage still due in the end. The Central Bank's Code of Conduct on Mortgage Arrears helps protect customers in how the bank must treat you when making these arrangements.
On the other hand, there is a smaller group who are borderline insolvent, with incomes severely reduced, perhaps through loss of employment, and with limited prospects of improvement. Even after cutting expenditure right to the bone -- ditching the Sky Sports, cutting back on holidays and the like -- they still can't afford their payments. The Central Bank is telling the banks that it is in the interests of both the homeowner and the bank to face up to reality and try to find a solution now, rather than driving cases into insolvency.
We have set the banks' deadlines for identifying non-viable situations and coming up with a payments plan that is sustainable. This will have consequences for the homeowner -- sticking to tight budgets and probably being required to pay more if they get more income. But in most cases this will allow them to stay in their home (perhaps on a rental rather than ownership basis). The Government has just published plans for new insolvency procedures that will be useful where there is a complex of multiple debts, but in many cases the banks should be able to work out non-viable debt without using these.
It is important that borrowers who are struggling engage early with their lender. Many people may still be worried or afraid to take that first step but it is critically important that they make early contact. This will make it easier to find a solution. The Central Bank's Code provides important protections to you when dealing with your lender -- provided you make a full and honest disclosure of your financial situation.
There is also another group: those who can pay -- albeit with a constrained living standard -- but won't. With the costs of wilful non-payment falling largely on the taxpayer (because most of the banking system is now owned by the taxpayer), the consequences are inevitably a higher tax burden or further cuts in public services. The taxpayer has put a lot of money into the banks to deal with the genuine cases of people in trouble, but there isn't enough for people who just don't want to pay their debts. Neither the capital injected into the banks nor the new insolvency legislation is designed to let borrowers off the hook if they can but won't pay. They need to face up to their responsibilities.
The Central Bank is determined to press the banks to help consumers who are in genuine difficulty on their mortgages and to make the banks face up to their problems. The Code of Conduct on Mortgage Arrears provides important protections so that you can engage with your bank if you are struggling with your mortgage. But the mortgage problem is a big one. It will take years to resolve. And it's important that everyone plays their part.
Matthew Elderfield is the Financial Regulator