Tuesday 16 July 2019

Starvation won't cure overeating

While hand-holding is reserved for the big guns, the little guys get a lecture on moral hazard, writes Brendan O'Connor

Everyone seems to be agreed that more debt is not the answer to debt. Unless, it seems, you are Treasury Holdings and the other people whose debts have been transferred to Nama. In that case, a little bit more debt seems to be the answer. At the very least, when your debts go into Nama you are led into a hand-holding process whereby everybody bends over backwards to help you pay off a proportion, maybe half, of your reckless, maybe toxic, debts. At best Nama will facilitate you with further loans, in the form of 'working capital', to help you pay off what you owe it already. It may even join in with your crazy schemes, schemes that have seen off numerous other developers, schemes like Battersea Power Station. It seems that, for Treasury Holdings, being loaned more money by us is the best way of us getting back the billion it owes us already. This is an example of more debt apparently being the answer to existing debt. Or throwing good money after bad, as you might also call it.

But that's for the big guys. For the little people, as we all know, it's different. For the little people it seems that the solution is no more debt, and for them to be pressurised to pay off what they owe as quickly as possible. There is no hand-holding process, no gentle Nama to save us from the banks, and to sit down and help us figure out where we go from here. Any suggestion of a creative solution is frowned upon by the regulators.

And so it was with the suggestion from some banks last week that they would start rolling out products that would help people who are in negative equity to move house, retaining their negative equity but moving it to a new property. A bad idea, we were told, throwing good money after bad and getting people into worse debt. Jonathan McMahon of the Central Bank said that they would look at those products with scepticism. Now they get sceptical, sez you.

The reality is that most people who are in negative equity -- and if you believe that property has gone down by 50 per cent, then there are 350,000 of us, one in two mortgage holders, in that boat -- are paying their mortgages and will continue to pay their mortgages. As a correspondent pointed out to me during the week, Irish people would rather go hungry than not pay the mortgage. Most people in negative equity are resigned to paying their way out of it and aren't expecting bailouts from anyone. A big problem for many of them now is that they are stuck in inappropriate houses and they feel right now as if they will be stuck there forever. If job, health or family situations, life in all its forms, require that they move, they simply can't.

Negative equity mortgages would ease that awful element of being trapped. It doesn't even necessarily mean that people take on more debt. It could be as simple as someone buying a house for the same price as their own, but buying a bigger house in a less central area and moving their negative equity with them. Or there may be an increase in the debt, but again, only in situations where the bank in question deems that the mortgage holder can pay off the debt.

Also bear this in mind: if a negative equity mortgage allows someone to move to a suitable house, a house that they are happy to be stuck with for the rest of their lives, and a house that they buy with a view to staying there for the rest of their lives as against one they buy with a view to moving up the ladder, then a large part of the burden of the negative equity is taken off the shoulders of the borrower.

If you have the rest of your life to get out of negative equity and you don't have to move, then negative equity can, if you're lucky, become an academic problem. And rather than lying awake at night wondering what to do, you can merely put the head down, pay off your mortgage as you would anyway, and also hope that some day property will come back to some extent and you'll get out of negative equity.

A negative equity mortgage buys you time, which is precisely what Nama is giving to all the developers who owe it money. In fact, the reality is that someone who gets a negative equity mortgage will most likely pay it off in full. Most of the guys involved in Nama will not pay off their loans in full. But somehow, it is wrong to hold hands with the little people. Hand-holding is reserved for the big guns.

The term 'reckless' is bandied around a lot these days. People who are in negative equity are sometimes accused of reckless borrowing. In fact, most of these people weren't reckless people. They were just people looking to buy a house and they paid the going rate at the time.

They did not, for example, have lavish 21st birthdays for each of their children costing hundreds of thousands of euro, with 300 guests drinking Montrachet at

€150 a bottle at one of the parties. That was Johnny Ronan of Treasury Holdings. Johnny's lavish bashes, where Tony Fenton might DJ or a large house might be proferred as a gift, were presumably paid for with money made from that company. When there was money being made from that company, the money, or the Cristal, was not being shared with you or me. But now that that company is losing money, you and I are being asked to bail them out. So don't accuse us of being reckless. And don't lecture to us that more debt is not the answer to our problems.

More reckless lending is not the answer. However, the answer to a binge of debt is not to cease debt completely. Starving yourself is not the answer to overeating. Life, as we have constructed it, needs a certain amount of credit running through the system. This truism appears to be recognised when it comes to the truly reckless -- the Nama-ed ones. But not when it comes to the rest of us.

They are looking at other ways of cutting off credit to the common man too. The proposed new strict supervision on banking looks all very well and good. The idea seems to be that it will prevent a repeat of the crazy lending that has landed this country in such a mess. But, oddly, there seemed to be a major focus on making it more difficult for people to get mortgages. You would have to agree that the banks were happy to help people overstate their income in order to get the kind of giant mortgages people needed back in the day, and it was ill-judged. However, mortgage defaults are not the big issue that is beggaring the country right now. Anglo Irish Bank wasn't even in the mortgage business and, let's face it, it's the major problem we have right now.

Add to that the fact that most people are finding it impossible to get mortgages right now anyway, and that if they do, the banks try to knock down the agreed value of properties even more before handing over mortgages, and you would have to conclude that introducing legislation to further curtail mortgage lending is not really the major priority now. There is little danger of a reckless debt-fuelled residential property bubble now.

So we have banks whose sole reason for existing right now seems to be to rebuild their balance sheets, and effectively banking regulators are going to give them cover for doing that, by making borrowing for ordinary people, which is already nigh on impossible, even more difficult. We are paying for their debt binge by being cut off.

You will also notice that Nama is generally playing the ball and not the man. When Nama takes a guy's hand, it takes ownership not of him but of his property. While many of these guys offered personal guarantees in order to get yet more money when they already had as much as they could get using mere collateral, it seems now that most of these PGs were not worth the paper they were written on, if indeed they were written down at all. In the main, the Nama-ed ones seem to be liable only to lose the properties they had taken loans against. Despite promises to chase them to the ends of the earth, most of them seem to be managing to keep themselves in the style to which they are accustomed, swanning around the continent and passing their giant houses on to their wives.

But for the little guy, you default and there's no hand-holding and no just losing the property and walking away. The little guy remains liable for every penny he borrowed. He is ruined for life. He does not move on to pursue other projects. He does not go abroad and bounce back. He is screwed. If the regulator really wants to make the banks loan responsibly, then why not introduce non-recourse borrowing for the rest of us too? That would solve the moral hazard question for the banks -- which must have real moral hazard issues, given the size of the bail-outs they've got. Make them feel the consequences of their reckless lending. It's the norm in every other kind of property transaction, except, again, for the little people.

The IMF said on Friday that the banks here should do something to help people who are having severe trouble paying their mortgages. It was careful to say it should be focused and targeted at real hardship cases.

And yet again we have had to listen to the Moore McDowells of the world lecture us on moral hazard. But rejigging someone's payment plans, giving them a repayment holiday, or putting them on interest-only for a while is nothing that hasn't been done for the big guys. Many of the big guys, we recall, weren't even paying their interest anymore towards the end. They would arrive into the bank each month to be told the interest had now been added on to the principal, now go away and tell no one.

They can't keep treating us like fools. They figured out how to help the developers very quickly when they needed to. How long can it be taking for Elderfield and Co to figure out how to help people in real hardship?

We are now being embarrassed internationally by the IMF in Washington, DC. But it seems that when it comes to the most vulnerable on the ladder, we are further to the right than the guys in DC when it suits us. While we are pursuing socialism for Treasury Holdings and the other big guns, we are willing to let the little guys stand or fall by the market.

Sunday Independent

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