Repossession of family home is just the beginning of the nightmare for many
Mortgage arrears, negative equity and accumulating charges are taking their toll, says Maeve Sheehan
IN the High Court last November, a young couple crushed into crowded seats in the teeming court room, waiting for their names to be called from the long list of repossession and bankruptcy cases. They glanced up and smiled as Bernard Durkan, their local Fine Gael TD from Kildare, pushed open the court room door and squeezed himself into the back of the room. The couple's names were called. They got to their feet and strained through the mass of bodies to make themselves visible to the judge.
The judge asked if they had a solicitor.
"We can't afford to pay for a solicitor," the couple replied.
At that point, Bernard Durkan intervened on their behalf. He knew the couple from his constituency, he said. They had come to him for help. They were in serious financial difficulty. The more their case was adjourned, the greater the costs to the couple. Now they just wanted the case to be settled so they could deal with their debts and get on with their lives. The couple were given two weeks to vacate their home.
But that is far from the end of their problems. Afterwards, Bernard Durkan explained how the couple -- who didn't want to be identified -- bought their home with a €340,000 mortgage from a sub-prime lender. They ran into arrears more than a year ago when Peter (not his real name), 30, lost his job in construction. For each month they fell behind, the arrears and charges mounted. The debt accumulated to €30,000 and finally overwhelmed them last November.
The bank has repossessed the house, so the necessity for mortgage repayments has stopped. But the couple, who have four children, are still shouldering massive debt. They will be liable not only for the €30,000 arrears, but for the shortfall between what the house is worth in today's market and the loan they took out to pay for it.
On Friday, the Financial Regulator ordered banks, building societies and subprime lenders to wait a year before moving to repossess a home.
The measure gives breathing space to struggling mortgage holders to get back on their financial feet. But the moratorium will do nothing to halt crippling interest charges and financial penalties that mount up month by month.
Peter said at the time: "We had no way of getting back on top of our arrears. They were just building up month by month . . . This stay might help people who are coming into a bit of money, an inheritance or something, but it won't do anything to help people trying to pay off their arrears . . . Those people will still be left with a huge debt at the end of it."
The sting in the tail is certainly in the added extras. According to Michael McGreal, who was a mortgage broker and now runs a debt-management agency, the legal costs for financial institutions who take borrowers to court average out at about €25,000. The bill is simply tagged on to borrowers' mortgage arrears.
One letter from a sub-prime lender threatening repossession outlined the list of charges to which the borrower was liable: "An arrears amount will not only include your monthly mortgage repayment but also buildings insurance premiums, legal costs, unpaid direct debit fees or other sums incurred during the mortgage and/or loan offer. We estimate the costs of such proceedings may be between €3,000 and €25,000."
It continued: "Following repossession, further additional costs may also be added relating to the management and sale of the property."
The property prices may be cyclical, but the consequences of negative equity have the potential to remain a millstone around the necks of troubled borrowers for life. An estimated 26,000 people are in arrears on their mortgages, and many of those are in negative equity.
House prices have fallen 40 per cent, tipping an estimated 150,000 householders who bought during the boom into negative equity. The Economic and Social Research Institute estimates that if property values fall another 10 per cent, one in four will be in negative equity.
The Free Legal Advice Centre calls it the looming crisis of residual debt. The problem is only going to get worse, according to Paul Joyce of the centre, which is agitating for changes in debt law.
While there is no evidence yet that financial institutions are taking dispossessed home owners back to court to stump up the fees and shortfall due after repossession, there is nothing to indicate that it won't happen.
The statistics suggest that quite a few householders are voluntarily surrendering their homes to rid themselves of the debt. Of the 331 homes that were repossessed by lenders in the first nine months of last year, 79 were either abandoned by their owners or voluntarily handed back to the banks.
Barry O'Flynn, a credit union manager who co-founded an action group in Sligo, said that solved nothing.
"A number of people have been posting back the keys. That won't clear the debt. That person may be pursued for the remainder of the debt. The debt doesn't go away," he said.
This Kildare couple are not alone. Thomas, a carpenter in his 50s, is struggling to prevent the repossession of his home. In October 2008, work dried up; his income disappeared and his savings went in paying what he could off his €300,000 mortgage and on surviving day to day. He is €22,000 in arrears and sinking fast, caught between the pincers of negative equity and unemployment.
His options are frighteningly limited. He cannot sell his detached home, in a rural area in the west of Ireland. Even if he could, he would possibly be in negative equity. He could plead with the judge for more time to get his finances in order.
Playing for time also ensures that his fees and interest keep mounting. Whether he sells the property or his lender does, Thomas will most likely slip into old age shouldering a huge burden of debt.