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Ronald Quinlan: Hopes of mass write-downs of mortgage debt may be in vain

GIVEN its reputation as the world's fiscal bogeyman, it's hardly surprising that the IMF's suggestion last week, that "targeted" mortgage write-downs could help to lift countries out of the "Great Recession", was received gratefully here in Ireland.

But before anyone opts to join the ranks of the strategic defaulters, it should be noted that the IMF has form as it were, when it comes to this particular proposal.

Indeed, in a discussion document entitled Early Lessons from the Financial Crisis, published a year ago, the IMF's economists had already warned that mortgages and other household debt would need to be restructured by banks and governments across Europe and America to speed up economic recovery.

Taoiseach Enda Kenny's admission in his Ard Fheis speech two weeks ago that he was "frustrated" that the Government had not been "able to move as fast as we wanted to, to tackle the mortgage crisis" is an indication of how seriously the IMF's message has been taken by this country's political class.

And while the issue of mortgage debt would seem to have moved up the IMF's list of priorities, those pinning their hopes on its latest proposals being acted upon by Mr Kenny and his colleagues would be well advised to pay attention to its reference to "targeted" measures being taken.

With that word alone, our Washington-based economic overlords have given Finance Minister Michael Noonan ample room to steer clear of anything approaching blanket debt forgiveness.

In terms of targeting the problem, the Government could comfortably meet the requirements of the IMF through the measures it hopes to introduce as part of its Personal Insolvency Bill legislation, which already includes limited case-by-case debt forgiveness.

In framing a response to the mortgage debt crisis, however, we could still usefully pick from some options employed by Iceland and the US. In the case of the US, in 1929 for example, homeowners in distress had their repayments cut through the extension of loan terms and the reduction of loan amounts to a maximum of 80 per cent of loan to value. To avoid the risk of moral hazard, only those who were already in default were deemed eligible for the scheme.

Following its spectacular economic collapse in 2008, Iceland introduced a series of programmes up to and including mortgage write-downs to 110 per cent of loan to value for those households deemed to be "deeply underwater".

While participation in the scheme was voluntary, the banks invariably signed up to it as they recognised that the written-down value of the mortgage was still greater than the amount they could have expected to recover from a sale of a property were it to be repossessed, or if the borrower were to declare bankruptcy.

Given the extent of Ireland's mortgage indebtedness and the sheer weight of negative equity attached to properties purchased during the boom years, it is debatable whether the banks and the taxpayer could afford to fund any widescale write-down of mortgage debt. Even if the Government were to assist those who got on the property ladder in the "bubble" years between 2005 and 2008 by writing down their mortgages closer to the current market value of their homes, they would be looking at 125,358 borrowers with a combined mortgage debt of €28.248bn.

Writing down the mortgages of those in arrears would be costly too. According to the Central Bank, 70,911 or 9.2 per cent of private residential mortgages were more than three months behind in payments at the end of 2011.

Sunday Independent