We're morally obliged to share burden
No one forced homeowners to borrow heavily, but the State acted irresponsibly during the property bubble, writes Stephen Donnelly
'DO not send any literature to my house and do not allow your canvassers come near my house at the next election," the constituent wrote. He was, it is fair to say, livid. He had heard me on the News at One arguing that the banks and Government must share the burden of restructuring the mortgages of people who couldn't pay them (or whose efforts to pay them meant that they couldn't maintain a decent standard of living).
He and his family had been prudent amidst the fervour of the boom. His children had not bought property during the bubble. And now here was I, apparently suggesting that his children contribute to easing the burden on those who had, by his standards, been reckless or spendthrifts. I understand his anger. But I disagree with him.
The term 'debt forgiveness' has been widely bandied about in recent weeks. It implies that there are sins to be forgiven.
And in the past three years, many sins have been forgiven by successive Irish governments.
The senior bondholders have been forgiven -- they made terrible investment decisions, but are to have their losses covered in full. The insurance companies have been forgiven -- they insured some of these senior bondholders, but as the bondholders are being forgiven, the insurance companies don't need to pay out. The senior bankers have been forgiven -- they get to keep the bonuses they took during the bubble years and the vast majority of them still have their jobs. The senior regulators, central bankers and civil servants have been forgiven -- a recent newspaper report revealed that not a single person at the Department of Finance, the Central Bank or the Financial Regulator has been fired as a consequence of the banking and economic collapse. That's a lot of forgiveness. And every cent of it will be paid for by the Irish people and Irish companies in higher taxes and lower services for decades to come.
What so for those individuals, couples and families who have lost their homes, who are in arrears, or who can only service their mortgages if they use nearly every cent they earn for the next 30 years?
There are two principles that we should use to work out if and how they should be helped.
The first is a moral one -- the principle of responsibility. Should those who are now struggling with debt be held responsible for those debts? Of course they should -- nobody forced them to take out their mortgages. But what of the banks that abandoned prudential lending practices? The Financial Regulator and Central Bank, which were asleep at the wheel? And the Government whose members ignored international warnings and encouraged people to get on the property ladder? These shared in the responsibility for those debts -- and they should share in the burden of those debts.
The second principle is a pragmatic one -- economic self-interest. Having a large swathe of the population locked in a poverty trap -- in the 21st Century of a debtor's prison -- does no one any good. If we don't insist on the principle of sharing the costs amongst the parties responsible, we will lock possibly hundreds of thousands of people out of being able to contribute to our much needed social and economic recovery. They will spend several decades giving the vast majority of their incomes to the Government and to the banks. They will not be able to invest in the future of their children. They will not be able to contribute to the real economy.
The new Government has the opportunity to turn this into a good news story. A clear policy framework is needed to outline the rules of mortgage restructuring, and of debt settlement agreements, where it proves impossible to restructure. Clearly, it must exclude those (like myself) who took out such mortgages, but are fortunate enough that they can afford to service them.
Critically, this cannot be based on the banks getting as much as they can from the mortgage holders. It must be based on the principles of shared responsibility and of ensuring that people can begin to contribute to Ireland's recovery. And the banks cannot be trusted to implement it themselves.
At the Finance Committee on Friday morning, I heard Central Bank Governor Patrick Honohan and the Financial Regulator Matthew Elderfield state they were not satisfied with the progress by the banks on distressed mortgages. They spoke of bank 'denial'. I and other members of the committee highlighted anecdotal evidence of intimidation and bully-boy tactics being employed by the banks, which enjoy a vast power imbalance when it comes to dealing with individual mortgage holders.
People who are struggling to pay their mortgages cannot afford accountants or lawyers. The banks can. Most people are not at ease with compound interest rates, bankruptcy laws and financial negotiations. The banks are.
Independent expert representation needs to be provided to mortgage holders who have to enter negotiations with their banks.
Acts of intimidation and non-compliance by the banks must be pursued by the Financial Regulator. The bankruptcy laws must be changed radically -- we have the most draconian bankruptcy laws in Europe. Bringing the discharge time period from 12 to five years, as is currently being floated, is not enough. In the UK it is one year or less. This is not about debt forgiveness. It is about a policy response based on a sound moral and economic footing.
During the property bubble, many people did what they thought was the right thing. They believed their elected leaders. They believed their banks. They believed what they read in the papers.
They worked hard, they saved up and they bought a small house or apartment. They knew they were paying far more than any generation of Irish people had ever paid before, but were assured they had no choice.
They are responsible for their actions, but they are not the only ones. They made a mistake, but it should not ruin their lives.
Besides, we need them to be fully engaged in our economy -- we will be using their wages to forgive the banks and the bondholders for decades to come.
Stephen Donnelly is an independent TD for Wicklow