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Moneytimes - February 16, 2011

Posted by Jill Kerby on February 16 2011 @ 09:00

 

Negative Equity Promises Not Worth the Politician’s Paper They’re Written On

 

Fine Gael’s promise to rescue mortgage holders in negative equity by extending more mortgage interest relief to them should make me despair more than I do already about the future of this country.

However, since Michael Noonan’s absurd idea, which also includes mortgage interest price controls is just that – an empty promise – it isn’t worth getting too annoyed or indignant. 

Nor should anyone in serious negative equity actually pin their hopes on the likes of Noonan – or any other elected politician – to solve their mortgage woes.  The mortgage problem is past solving with more tax tweaks or twirls and now that we no longer really have a say in how the finances of this country – or its insolvent banks are run – there will be no capping of interest rates, as Noonan proposes. (The foreign owned lenders like NIB and Ulster Bank, who will also be raising rates, will quite rightly tell him to get stuffed.)

Noonan says it will cost €120 million to extend mortgage interest relief but he really hasn’t a clue. Since about 300,000 new homes were sold during that period and house prices have returned to at least 2002 levels I’d suggest nearly every house purchased with less than a 25% down payment over that period is in neg equity.  Throw in every house sold since 2008 without a substantial down payment and all those second hand homes – or second properties – bought since 2004 with tiny down payments, and this is a multi-tens-of-billion-euro problem that the government cannot solve, even with loans from ‘the Fed’, the US Federal Reserve, as Noonan also suggested in his mad banking manifesto a fortnight ago that he would seek.

So long as you keep your job, have a tracker mortgage and are happy enough to stay in the house you bought, negative equity shouldn’t be keeping you awake at night. However, you must start budgeting to take account that ECB rates may go up at some stage, probably by 0.25% or more.  Every extra 1% interest adds between €60 and €70 a month onto every €100,000 you owe (depending on the lender).  If you have a €200,000 mortgage it could go up by €180 or €2,160 a year. Work out now where you can save or earn this sum.

If you are in negative equity and are struggling to pay your mortgage (especially if you are on a variable rate) and think you may fall into arrears because of a rate rise, it’s time to act.  Read the new mortgage arrears protocol that has been agreed with the banks and the Financial Regulator. (http://www.helpinghomeowners.ie/pdfs/Mortgage_repayments_guide_Feb10.pdf

Then, with or without the assistance of MABS, for example, do a budget listing all your income and outgoings, indicate where you have reduced discretionary spending – such as switching to cheaper insurance and utililities, by cutting down on the booze, cigarettes, food (by now shopping in Aldi or Lidl).  Bring this financial statement to your lender and explain that you cannot pay the higher interest repayment and that you can’t even realistically keep paying the previous one.  Tell them how much you can realistically pay each month.

If they decline to accommodate your repayment adjustment  because you have not fallen into arrears yet (despite the protocol allowing for early intervention), contact the Financial Regulator and complain.  Or, you could go into arrears by simply missing a mortgage payment, which will certainly get the bank’s undivided attention, though this could affect your credit rating. (Which may already be compromised.)

What you most definitely do not want to do is to  get into a panic or depression about your mortgage repayment. This is no longer just your problem – this is a national problem and the last thing the banks want is mass foreclosure. Once you are shown to be cooperating with your lender in trying to find a credible payment compromise the participating bank cannot institute any legal proceedings against you for 12-24 months depending on the form of engagement.

 The protocol provides something more important to struggling mortgage holders than an empty promise from a politician – time.  You can use those two years to make plans: to find another or a better paying job; to retrain; to house share or arrange a family loan (in exchange for a share of the ownership); to immigrate or even – the worse scenario perhaps - to accept that you may never be able to repay the loan, especially if it’s very large, and that it is in your best interests to no longer remain the owner. In that case voluntary insolvency may be the only way to eventually be able to unfetter yourself from this huge debt.

Interestingly, Bank of Scotland Ireland has now said it will be writing off some of the debt of some of their borrowers. It’s a very realistic attitude on their part, but you may not want to count on the Irish owned banks following suit too soon as they will have to stiff the taxpayer for the write-off. 

Nevertheless it’s another sign that real solutions are in the offing. 

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