It’s time to deal with mortgage arrears
By David Murphy, Business Editor @davidmurphyRTE
For many families next year will be defined by what is perhaps one of the most frightening chapters of the crisis as Ireland grapples with mortgage arrears.
Thousands remain in limbo while the personal insolvency bill is making its way slowly through the Oireachtas. At the same time the Troika has secured agreement from the Government to plug a legal loophole which has blocked banks from repossessing properties.
The commercial property sector is beginning to work out the first of its problems and the results are showing. Receivers have been selling a steady stream of assets at steep discounts, in some cases 90%. Developers have lost control of companies, gone bust and banks have been badly burned requiring taxpayers money. The property oligarchs who populated Fianna Fáil’s tent at the Galway Races are now washed-up, pitiful characters whose boom-time ostentation now seems obscene.
But there is something healthy happening. A small number of international investors such as US group Kennedy Wilson have bought distressed commercial properties from receivers. Last week, for the first time, a high profile Irish investor was lured into the market. Beef baron Larry Goodman bought the former Bank of Ireland headquarters in Dublin’s Baggot Street for just over €40m; it was originally bought for €212m in 2006 by Derek Quinlan and three other investors.
But there is a big difference between sorting out commercial property and residential homes. Taking a shopping centre from a developer is not the same as the repossession of a family house. But thousands of families are lumbered with mortgages which will never be repaid.
The New Beginning lobby group says Ireland faces a choice: either set people free of unsustainable debt or protect the financial world. It says we cannot have both. But even after the taxpayer has poured €64 billion into the banks, they don’t have enough capital to reduce the debts of the people in arrears. If there was blanket debt forgiveness it would mean all taxpayers bailing out one cohort of society.
Families in arrears are a more worthy cause then the bondholders who have been entirely bailed out by the State under instruction from the European Central Bank following the bank guarantee. The Ballyhea bondholder bailout protest has been campaigning weekly on this issue. At a policy level, paying off all the bondholders has been a very expensive mistake for Ireland.
While the Government repays bonds, it does not solve the current problem facing families in arrears. The personal insolvency legislation has a wide variety of potential solutions. The basic strategy of the Government is to tackle each customer one-by-one and hope that the banks have sufficient capital.
It looks as if unsecured creditors such as credit card companies and credit unions could take some pain. Under the new regime, consumers can get a debt relief certificate which would see their unsecured debts up to €20,000 written off.
But there are some big challenges. At the heart of the new regime is an insolvency service which will agree non-judicial debt settlement arrangements between borrowers and banks. According to the Department of Justice, it will have an initial staff of 80 people who will be largely drawn from the public service. But there is a danger it could become swamped with thousands of cases. Another problem is whether it will have the sufficient skills to deal with the complex legal and often emotional problems that go with people in deep mortgage arrears.
The European Central Bank has reservations about those with debts as high as €3m using the personal insolvency legislation. The ECB wanted the limit to be lower at €1m. It seems the higher limit will include many of those with significant buy-to-let debts. Another issue is that the banks will be able to veto any proposed agreement leading to the fear it will be too bank-friendly.
Dealing with the problems won’t be easy but two smaller lenders, KBC and Permanent TSB, are beginning to make progress with customers. Regardless of the complexities, next year has to give families a fresh start.
The banks have been in a state of paralysis since 2008. Now it’s time for the lenders to pour resources into dealing with families sensitively. After all the banks are one of the main reasons people are in this mess in the first place.