Monday 20 January 2020

Mortgage debt and economic recovery

It's not difficult to decipher the message being transmitted by the IMF to the Irish Government and the banks -- get a move on with debt reduction and forgiveness. The IMF argues in its most recent World Economic Outlook, which was published yesterday, that targeted household debt reduction policies, including mortgage write-downs, can deliver significant economic benefits.

The IMF pointed out that the overhang of high levels of household debt, which have been accumulated during an economic bubble, can act as a brake on economic recovery after the bubble bursts. This is exactly what is happening in this country, with GNP -- basically the domestic economy -- set to shrink for the fifth successive year in 2012.

So why have our banks been so slow to write down mortgages? After all, it's not as if there isn't a need to do so with over a fifth of all mortgages either in arrears and/or having been restructured while at least 60pc of mortgages are "underwater" with the amount owed exceeding the value of the property against which the loan is secured, sometimes by a considerable amount.

As part of last year's bank recapitalisation, which cost the taxpayer a further €24bn, the banks were supposed to provide between €5.8bn and €9.2bn to cover losses on mortgage loans. A year later and the banks have only set aside a fraction of that amount against their mortgage losses.

Further complicating matters is the Government's proposed "reform" of personal solvency legislation, which is ridiculously skewed in favour of the banks, giving them an effective veto in cases of secured debt, ie mortgages.

What has effectively happened is that the banks have taken the capital which they were given by the taxpayer last year, including the money that they were supposed to provide against mortgage losses, and hoarded it on their balance sheets instead. In the meantime the property market and the domestic economy upon which it is so dependent continues to shrivel.

This has left us with the situation of having extremely well-capitalised "zombie" banks which will neither write down their existing loans nor advance new loans. The good news is that, even if the Irish Government hasn't noticed this, the IMF most certainly has. In case the Irish Government doesn't get the hint the IMF helpfully points to the example of Iceland where up to a fifth of all homeloans are in the process of being written down. The IMF would seem to suggest that the sooner we follow the Icelandic example the sooner the domestic economy will begin to recover.

Irish Independent

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