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Stephen Kinsella: A sustainable solution that might just restore our trust in the banks


Taoiseach Enda Kenny: 'The Davos Champion'

Taoiseach Enda Kenny: 'The Davos Champion'


Taoiseach Enda Kenny: 'The Davos Champion'

The world is being love-bombed with positive news from little old Ireland. At Davos, the annual knees-up for the global elite, Ireland featured prominently and positively. Taoiseach Enda Kenny was described approvingly as "The Davos Champion". Goodwill abounds internationally for Ireland.

The situation on the ground doesn't quite match the rhetoric spouted at altitude by the global elite, especially when it comes to mortgage arrears.

Let's not rehash the statistics. You know the numbers of people in mortgage arrears has risen, and risen, and risen as the economic crisis has deepened, and now the total numbers in arrears have levelled off. Those in mortgage difficulties are not going away.

Not only are those households experiencing the kinds of stress normally seen in wars, as recent research has shown, their presence on the books of Ireland's banks represents a key concern that international investors have when thinking about buying bits of those banks. Combined first with a restrictive, and then with a new and untried bankruptcy regime, in policy terms the arrears situation has festered.

Trust has broken down between banks and their customers across the world. In a recent survey of US banks by Paola Sapienza and Luigi Zingales, only 37pc of respondents trusted banks at all, and only 17pc trusted large corporations.

Given Ireland's experience with its banks over the past six years, it is hard to imagine as a people that we trust our banks more than our American cousins.

When trust breaks down, it is very hard to move parties with conflicted agendas towards a resolution. The banks want to recover all of their loans, even though many were given out in a less-than-rigorous way. The customers in arrears want a deal on their debt if they can get one. Given the public ownership of many of these banks, the potential for socially damaging outcomes is very high.

Honest brokers are hard to come by, especially when the person involved devolves their power to an agent to resolve the situation. Economic life is rife with these principal-agent problems. When you go to the doctor, you as the principal/patient are giving the doctor agency to assess your health on your behalf. You trust the doctor because they have an ethical code to follow, legal structures to work within, they are making a lot of money in the transaction, and if they get it wrong when diagnosing you, they can lose their jobs, which makes them inherently conservative and risk averse when it comes to your treatment. That's why when you show up with an ingrown toenail, doctors don't biopsy your brain for the fun of it.

The most important feature of an agent is their information. They have more information, typically, about a situation than you do. When you see your orthopaedic surgeon, you take it for granted they know a lot more about hips than you do. So their opinion on what to do with your hip matters more than your opinion. There are, however, incentives at play: the surgeon gets paid per operation, so they may push marginal cases into surgery if professional ethics and the threat of legal action aren't strong enough.

The new Irish Mortgage Holders' association headed by David Hall has stepped into the breach to act as an agent for the mortgage holder and the banks. They are funded by AIB, but functionally separate. Their role is to be an honest broker, to extract workable deals from AIB and from the customer. Their first 55 days in operation show that a remarkable 123 deals have been made between borrowers and AIB.

These are the first in what I hope will be a larger movement from unsustainable arrears towards sustainable solutions. These solutions might involve split mortgages, selling off the property, or a combination of remedies, but regardless of the solution, the borrower is 'free', in a certain sense, from the crippling stress an unsolved debt problem can cause.

The other big finding released by the Irish Mortgage Holders' association is just how many borrowers needed help filling in the standard financial statements required by the banks – over 42pc. Some borrowers now classified as 'unco-operative' by the banks may simply not know what to do. This speaks to the 'information' argument I described in the case of the orthopaedic surgeon. In a highly uncertain situation, you need an agent with lots of experience in dealing with these matters, an agent who is fundamentally transparent.

A series of case studies would be welcome from the Irish Mortgage Holders' association to show the public what worked, and why.

These are just first steps. Lots of things can go wrong. The Irish Mortgage Holders' association shows an honest broker can be effective in resolving a crisis of this size to the satisfaction of all parties.

Everyone gets on with their lives, the bank's balance sheets aren't hammered by mass default, the borrowers are not crushed by unsustainable debt. Both parties work out a solution over time. That would be good news.


Irish Independent