Sunday Times MoneyComment - 07/02/10

Posted by Jill Kerby on February 07 2010 @ 18:56

The Sunday Times

MoneyComment  Feb 7

By Jill Kerby



Last weekend the Minister for Communications, Energy and Natural Resources Eamon Ryan told The Sunday Times that the government planned to appoint a panel of external experts to provide proposals to deal with the huge problem of residential mortgage debt and defaults.


I wish I could believe that there is such a thing as ‘a panel of external experts’ in this country, especially regarding mortgages and property.  The ones in the banks who claimed expertise, turned out to be morons.


Anyway, the minister says this expert panel will consider every option, such as stretching mortgages over longer terms to reduce monthly repayments; debt-for-equity swops where lenders would take ownership stakes in borrowers’ homes; and even purchase or rental arrangements similar to the joint ownership schemes that are now operated by local authorities.


The lobby for legal aid quickly joined in too to say that new insolvency rules will also have to be introduced to allow those mortgage holders for whom none of the above will be suitable, to be able to hand back their keys without facing financial ruin.


All of these proposals, said Ryan, are in addition to the repossession moratorium already in place with the main banks and the mortgage interest supplement (MIS) currently being paid to struggling mortgage holders. 


I reread the Minister’s comments several times, but couldn’t find any reference to the most important consideration of all: how much will all this cost, and who pays? 


If, by some miracle, the billions of euro that will undoubtedly be required are found, what about the moral hazard – the danger that homeowners who are just about coping with their negative equity mortgages might decide it’s also in their interests to walk away from their debt?


The Economic and Social Research Institute now estimates that a third, or up to 196,000 of all households are in negative equity- owing more than their homes are worth. 


The Financial Regulator says that at the end of last September 26,271 mortgages were in arrears for more than three months, with 17,767 mortgages in default for more than six months.  If the mortgage interest supplement was cut off tomorrow, the arrears figures could theoretically double.  Given than the figures are six months old, they probably have done so anyway.


At the end of last year, according to an Oireachtas report by Deputies Thomas Byrne and Olwyn Enright, 15,100 people were in receipt of an average €367 monthly mortgage interest supplement and another 1,000 applicants were being turned down every month.  (At the end of 2007, just 4,111 mortgage holders were getting this supplement.) 


The annual cost of this bail-out is already over €66.5 million. So who will pick up the even larger tab?


The last time I looked, the Irish banks were still on life support. Loading them up with yet more arrears doesn’t sound like a very likely solution. 


As for the state carrying the can, the national debt, you may not have noticed, is already €76.976 billion as I write and rising by the hour. Check it out at: http://www.financedublin.com/debtclock.php



The Minister might want his panel to look at the experience in America before endorsing the idea that borrowers could exchange their unaffordable mortgages for a rental contract under which they lease some or all of their home from their lender.


In some places where this state or federal backed ‘solution’ has been tried, many first time buyers in particular have come to regret signing up. The monthly outgoings might be lower, and the threat of eviction removed, but they are now repayments might be more affordable and they aren’t in danger of being evicted, even more tightly locked into starter homes that they never intended to live in for more than a few years. 



As the resentment increases,  lenders will find more sets of keys pushed through their letter boxes.



It’s possible that the Minister and his panel of mortgage experts will come up with a set of proposals by the summer…but affordable, workable ones are another matter altogether.



*                      *                          *



The Irish League of Credit Unions told a Joint Oireachtas Committee on Economic Regulatory Affairs last week that it was unhappy with “the over-zealous and intense” approach that the Registrar of Credit Union Brendan Loguehas taken in his regulation and supervision of them.



It’s nice to know that at least someone in the Financial Regulator’s office has been doing their job properly. 



Too bad the ILCU doesn’t see it that way.  It’s convinced that credit unions are being subjected unfairly to onerous regulation when the banks and building societies have got away with ‘soft-touch’ regulation.


Credit unions had no part in bringing the country to the brink of financial ruin, but in the few years that Brendan Logue has been in charge of regulation, he has uncovered all sorts of debt and solvency problems, poor investment practices and compliance and administrative shortcomings in several credit unions.


Logue will retire shortly and I hope his successor takes the ILCU’s criticism for what it is, and keeps doing was Logue has been doing.  It’s clearly working.


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