Posted by Jill Kerby on August 31 2011 @ 09:00
MORTGAGE DEBT FORGIVENESS IS UNLIKELY, BUT THAT DOESN’T MEAN YOU SHOULDN’T SEEK SOME RELIEF
Two domestic stories dominated last week’s airwaves and headlines – the price of sending kids back to school and the plight of indebted mortgage holders. I’ll get back to the former – and provide some suggestions on how to fund your children’s education - next week.
Meanwhile, Professor Morgan Kelly’s recent intervention regarding indebted mortgages has people wondering if anything will ever be done about the problem of nearly 100,000 mortgage holders in arrears and an estimated 300,000 in negative equity.
According to Prof Kelly, €5-€6 billion has already been factored into the capitalisation of the Irish banks (by the taxpayer) for the purpose of writing down their domestic mortgage debts. This money, he says, should now be put to good use and once a certain level of debt is cleared, will allow for more general spending in the economy.
If only if was so easy.
Some commentators accept Prof Kelly’s estimate of the cost of the write-off, based on approximately 10% of bubble-era mortgages going bad; others, even more pessimistic that him, say that this debt figure could double, especially if property prices keep falling. How deep are taxpayer’s pockets, they ask?
They also wonder whether mortgage debt forgiveness will be enough? What about the personal loans, credit card debt which also cannot be fully repaid. And what about the person down the road, who is struggling but still (just about) managing to pay their mortgage and car loan. What happens if they observe their neighbour spending freely again, because a part of his mortgage has been forgiven?
Moral hazard is a possibility, though it can be minimised with proper management of any debt write off plan. But even a well-thought out scheme that aims to target the most deserving cases only could be overwhelmed by the sheer numbers of people in trouble in this country – a number that has grown exponentially because the government has already intervened for the past couple of years to prevent (as well as possible) to stop foreclosures and repossessions.
I’ve stated and written on a number of occasions that stopping a repossession is not necessarily the correct course in every case; some people will never be able to repay the huge loans they took on, mainly because their incomes are not (and never will be) large enough, and the value of the property will never recover to bubble levels. Where the starter home or apartment was unsuitable to begin with – too small, or located in a far-distant suburb or estate with no public transport and other amenities – there is always the risk of buyer’s regret. In such cases, no degree of forbearance measures from the bank or state will convince them to stay tied to that house for the rest of their lives.
Nevertheless, many people with arrears or in negative equity are hoping for some kind of ‘silver bullet’ solution. There is none. It has been suggested that everything from outright capital debt forgiveness, to a debt for equity swop between the owner and bank or the state (perhaps in the form of the local authority) might work. But who pays? If a huge chunk of negative equity is written off so that mortgage value better reflects the true market value, this is a straight loss for the bank/tax-payer. It could be more than €6 billion. Some say if the economy worsens, it could result in further recapitalisation. Where would this extra money come from?
And where debt for equity happens, who pays for insurance, maintenance and property tax? Does the homeowner pay the lot or does their ‘partner’ – bank or local authority pick up a proportion of the tab?
Instead, I think we’re going to see more of the same: case by case assessments of impaired mortgages with the holder offered extended repayment terms, interest only repayments and new repayment terms or even writeoffs after short sales – that is where the person or bank sells the house and the sale price doesn’t cover the outstanding loan.
But even before this can happen, we need to have a workable insolvency and bankruptcy process so that people totally burdened by debt can have it written off in a structured way. This will involve agreement with creditors to pay back what can be paid over an agreed period (ideally no more than a few years) and the balance written off once and for all. Afterwards, the person can get on with their lives, though it will take them time to rebuild their credit record.
The first step, therefore is to lift the deadweight debt off the shoulders of the most seriously afflicted. Write to your TD demanding that the government put into law the recommendations of the Law Commission Report on this matter, so that the worst afflicted group of mortgage holder can get some genuine relief from an impossible situation.
And if you are part of the much wider group that is finding it increasingly difficult to make your mortgage payments (due to higher interest rates, higher taxes and falling incomes) make an appointment with your local MABS office for some advice.
Then see your lender and explain that you cannot repay your loan in full or at the pace you first agreed. See if you qualify for debt forbearance under the revised Code of Conduct on Mortgage Arrears (see http://www.itsyourmoney.ie/index.jsp?p=665&n=773&a=1437). With a new repayment schedule and a year’s worth of breathing space from potential legal action against you, you can try and improve your financial position, or you can use the year to decide whether it is realistic and in your best interests to hold onto your home.