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The Sunday Times - Money Comment 01/11/09

Posted by Jill Kerby on November 01 2009 @ 14:18

 

Since there is no stomach on the part of the banks or government to allow mass foreclosures on the growing number of people with negative equity - a six month to one year moratorium on legal proceedings is already in place depending on the institution – it’s inevitable that the “something has to be done” brigade will get their way…but at what cost?

 

It is projected that 200,000 homeowners will be in negative equity by this time next year.  Up to 50,000 people are thought to be in mortgage arrears. The list of ‘solutions’ cropping up in the papers and on the radio call-in shows is growing and includes suggestions like 

reverting every mortgage holder in serious negative equity onto interest-only repayments and then freezing current, low interest rates until “the recovery”; 

the banks’ writing off all or part of the borrower’s negative equity but letting the mortgage holder remain in the property; 

lenders having to adopt shared ownership schemes in which the borrower repays their original loan as a combination of rent and capital payments, ideally based on today’s market rent; 

multi-billion euro equity-for-debt swaps with a new government agency that is funded by an annual 1% levy on the mortgage repayments of all mortgage holders. 

 

This latter proposal is just daft.  The pool of levy payers is too small, for one thing to make a dent in the huge negative equity bill:  it would cost €2.5 billion to swop just 10% of the typical mortgage debt held by 100,000 first time buyers, who typically borrowed €250,000 during the last years of the boom.  The proposed 1% levy, based on an average repayment of about €12,240 by 600,000 mortgage holders would raise a paltry €73 million. 

 

Seeing as how my rising taxes are already preserving the public sector and a government that doesn’t know the first thing about good housekeeping, I don’t fancy paying another levy to bail out adult, first time buyers who didn’t have the sense to tell a bank official to get stuffed when he dangled a no money down loan in front of them that was five or six times their annual gross income and could only ever be paid off at the end of 35 years if interest rates never went up and the price of the property never went down. 

 

There’s only two ways to sort out a big debt: you pay it off, however long it takes and at whatever cost, or you (and your lender) write it off.  Both are deeply painful choices and the latter can result insolvency and a period of financial depression, but also a chance to start over again.  

 

Beggaring your neighbour, or even the next generation by forcing them to pay off your debts doesn’t seem right or fair to me.  But then I didn’t think Nama was a very good idea either. 

 

Generously rewarded trade union bosses are convinced that there is a large constituency of “rich” people, still resident in this country (as opposed to in Monaco, Portugal or Switzerland), who are just waiting to be bled, like Masai cattle, for the substantial cash transfusions that are needed to preserve their public sector members’ pay, pensions and benefits, and of course their own, seeing as how so many of their incomes shadow those of senior civil or public servants. 

 

The offshore money of the super-rich is already beyond redemption so Jack O’Connor and Dave Begg might as well save their breath.  

 

Meanwhile, imposing a super wealth tax on the value of their capital assets in Ireland – or even confiscating their mansions, art, horses or cattle here – would, I expect see this stuff sold or torched first and their owners moving permanently to the ‘summer place’ in Monaco.  

 

Which leaves everyone else earning €100,000 or more – Jack O’Connor’s benchmark to target. Slim pickings here, I expect.  

 

Aside from the usual suspects – the builders, senior bankers, politicians, older medical consultants, barristers with their snouts permanently wedged in tribunal troughs, high paid RTE ‘talent’ and some other monied professionals, few enough “rich” earners in this country have sidestepped the property and stock market crash or the sharp fall in turnover from their businesses. 

 

Nearly everyone I know still earning from €100,000 in a private sector job is, (like friends working for that money in the public sector) up to their eyeballs in debt which has to be serviced, alongside with all their other bills, from what remains of their after-tax income.  

 

Since April, between the income levies, health levies, higher PRSI limits, the private health insurance levy and the rise in VAT, the so-called “rich” are paying a higher rate of tax of over 52% now, meaning they too, ironically, are working for the government…at least until sometime in July every year when what is left of their money is their own. 

 

The only “rich” people left, frankly, that the trade union leaders may have to target are the wealthy hoarders in our society, those people, most of them middle aged and older, who prudently paid off their mortgages and avoided other debt; who lived within their means before and during the boom years; who are luckily still employed or already retired and who perhaps even made a windfall selling their family home and traded downwards when prices were sky high. 

 

This segment of society– and they even include little old ladies – have now boosted the national savings rate to 12% of GNP and are sitting on bags of cash that the union leaders must see that they clearly don’t need, or they’d be drawing it down.  A great big, whopping new DIRT tax of 70% would teach them …and it’s all for the common good of course. 

 

You think it hasn’t been suggested?  Let’s hope the Minister for Finance wasn’t listening.  

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