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Bankruptcy threat is your best hope for mortgage help

THIS week the Irish Mortgage Holders Organisation (IMHO) revealed that AIB had written-off €150,000 of one family's €400,000 mortgage.

This is significant.

The bank's decision marks a new realism in dealing with unsustainable loans by at least some banks

AIB has been working with the IMHO to restructure some of its distressed mortgages and would have known the write-down would quickly become public knowledge.

So why did AIB choose to write-down mortgage debt in such a public manner?

Because it had to. AIB is 99.8pc state-owned and the Government has been leaning very heavily on all of the banks to tackle the problem of unsustainable mortgage debt.

With previous "solutions" such as interest-only repayments and extending the term of the loan clearly not working, the banks are being dragged kicking and screaming to the point of having to concede write-downs.

The Government's new personal insolvency legislation has also upped the pressure on the banks to write-down at least some of their problem mortgages.

The bankruptcy period has been cut from the previous 12 years to three. This has given distressed borrowers far more leverage.

If the banks refuse to be reasonable, the borrower can threaten to declare personal bankruptcy, which wipes out all of his or her loans, secure in the knowledge that they can start again in three years time.

EVIDENCE

While it is still early days, there is at least some anecdotal evidence that borrowers and their advisers are using the threat of personal bankruptcy, which in most cases would result in even greater losses for the bank, to force lenders to adopt a more realistic attitude.

Under the terms of the deal revealed this week, AIB is writing down a €400,000 mortgage by €150,000 or 37.5pc.

However, it is also "parking" another €40,000 of the loan with no interest being paid on this portion of the mortgage.

It means that the real write-down is at least 40pc and possibly even higher.

If write-downs of this magnitude were to become the norm, the implications for the Irish banks could be very serious.

According to the latest Central Bank figures, mortgages with an original value of €46bn are either in arrears and/or have been restructured.

While the Central Bank doesn't break down arrears by individual bank, it is generally reckoned that about €30bn to €32bn of these distressed mortgages are on the books of the Irish-owned banks.

A 40pc write-down would crystallise losses of €12bn to €13bn for the Irish-owned banks.

While they might be just about able to absorb mortgage losses of this magnitude in isolation, throw in distressed SME and other problem loans and it could be the straw that breaks the camel's back.

The fear is that further major loan write-downs, on top of the almost €45bn which the surviving Irish-owned banks have already written off since 2008, could force the State to put even more taxpayers' money into the banks.

BORROWERS

That's the potential bad news. The good news for distressed mortgage borrowers is that this week's write-down at least provides a ray of hope.

If you're a borrower with an unsustainable mortgage, you should use either an organisation such as IMHO or instruct an accountant or solicitor to contact the bank on your behalf and demand a similar treatment.

And if you don't get such treatment?

Then threaten bankruptcy.


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