Jill Kerby

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.  

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Forget saving for your child and pay your debts instead

 

ST writes from Dublin: I have recently started saving the child benefit of €140 per month to use for the education of my daughter who is one year old. Could you please advise on the best accounts for regular saving over the long-term. I currently put it in her credit union account, but am sure that we could be getting a better interest rate elsewhere. 

You don’t say how much of a dividend your credit union is paying but chances are it isn’t as much as the fixed deposit rates on offer from many high street banks or An Post.  We post the best rates on the market in our weekly ‘Best Buys’ column.

However, I think you need to consider more than just the best yield. Deposits are subject to 27% DIRT tax, which is likely to rise, and price inflation will erode the long term spending power of your savings. Leaving your children’s savings in an Irish bank, under the management of the Irish state (like the Solidarity Bond) or entirely in euro currency also carries certain risks in these turbulent times.

Do you have expensive credit card balances, with high double digit interest rates, that could be cleared faster if you used the child benefit money? Eliminating expensive debt at 18% or 20% makes more sense than getting a mere 2%-3% return from a savings account, even one ostensibly for the children.

If you are fairly debt-clear, it might be worth taking time now to find out more about the merits of buying precious metals or, when the markets settle down again, a low cost investment fund (like an ETF) made up of great, global companies into which you could pay on a monthly, cost-averaging basis.

Research these options yourself, or use the services of a good fee-based financial advisor.

 

 

Immobile shares

 

EC writes from Dublin: I am writing seeking advice on Vodafone Shares.  My mother passed away in August 2009 leaving 34 of Vodafone Shares.  We have looked at the option of transferring these shares over to one of the charities she supported.  However, the cost of the stockbroker's fees are greater than the value of the shares, the charities I have contacted are not in a position to accommodate this request. Surely there must be lots of people who find themselves in this situation, i.e. a holder of shares dies and it's left to the executor to dispose of them.  Would you have any suggestions?

 

It is unfortunate for the charities that the cost of transferring the 34 shares, worth only about €1.82 each now, is about €60. It would be helpful if the share registry company and your bank, which is also required to facilitate such a transfer – would waive their fees if the shares are being donated to a registered charity.  Perhaps you could ask them, and if that doesn’t work, offer to lobby for such a change on behalf of the charities.

Meanwhile, you might as well hold onto the shares in the hope that their value enough to someday justify the cost of the transfer.

 

Silver lining

 

GE writes from Dublin:  I have been researching a little buying silver instead of gold. While I am no expert or have anything to do with finance, I have discovered that silver is in lower supply than gold, because it has industrial uses as well as money and there has been huge demand for both in places like China. Many articles say it is underpriced compared to gold.  Any views?

 

Silver prices shot up over the year, peaking in early May at about $50 or €33 an ounce and then fell back sharply, mainly due to substantial profit taking. As I write, it is now selling for just under $38 or €26.50 an ounce (down 4% in 24 hours – a big swing.) You can follow the live price of silver, as well as gold at www.goldprice.org.

Silver prices are said to be more volatile, compared to gold, because it has both industrial and monetary uses and is affected by supply and demand. For example, industrial silver for the photographic industry effectively disappeared with the advent of digital cameras and computer photo files, but demand is growing strongly as an essential metal in the bio-medical industry and for high technology goods.

Silver is also a form of money – or could be again, which is the other reason why its price has soared during these uncertain times.  I was lucky enough to be persuaded back in 2005 to buy silver as well as gold:  the price of silver has risen by 186% since then compared to 139% for gold. 

Will it repeat this performance?  No one knows, but people who think pure silver (and gold) has more intrinsic value than paper and ink money issued by central banks and subject to being debased or devalued by them, prefer to keep some of their savings in precious metals.   

 

 

 

 

 

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Son may move to Australia if mortgage not forgiven

 

AH writes from Waterford:  Is there a chance that the government will intervene to reduce mortgage debt for people who can show that they were missold their mortgage at the peak of the Celtic Tiger?

 

My son and his wife were given a mortgage offer – in writing, by their lender for €340,000 mortgage in early 2006.  They then went to a well known mortgage broker – they were following advice to shop around for the best rate – and the broker got what they were told was an even better deal of a €440,000 tracker mortgage from the same lender.  They took it but now due to my son losing his job (they also now have a baby) they are now unable to pay their loan.  My husband and I are helping them meet the mortgage, but the house is only worth €250,000, even if they could find a buyer and they are keen to emigrate to Australia where they both lived before the got married.  We don’t want them to emigrate, but unless they can reduce this debt, I can’t see how they can stay.

 

 

Your son’s case may be of interest to the New Beginning group of solicitors who are interested in taking legal action against the banks for reckless lending. Their website is www.newbeginning.ie.

 

Meanwhile, there has been a great deal of speculation recently about whether there will be a programme of mortgage debt forgiveness introduced by the government and banks and whether, as UCD economics professor Morgan Kelly has suggested, that there is already a €5-€6 billion write down built into the capitalisation of the banks.

 

With concerns about moral hazard risk still being expressed, many commentators are now suggesting that the case by case review of distressed mortgages will continue, with lenders providing some forbearance to homeowners who can cope over the course of a year with a revised repayment schedule, as laid down by the Revised Code of Conduct on Mortgage Arrears,

 

In some cases, the banks will undoubtedly agree to some debt forgiveness, perhaps if the alternative is for the mortgage holders to hand back the keys and decamp to the other side of the world. I’m not suggesting that this is what your son and his wife are about to do, but where there is a small shortfall/or arrears between the sale price of a house and its market price, it isn’t unthinkable to imagine that the lender will settle for the lower value.

 

If your son and daughter-in-law believe they have no choice but to seek work abroad, they should speak to their lender (and perhaps to New Beginnings) now and explore their options:

Can the house be rented and the mortgage repaid?  If they have no arrears (because you are helping them with repayments) but will if your support ends, can they seek the sanctuary of the Mortgage Arrears Code, qualify for more reasonable repayment conditions and STILL rent the property out if they find work in Australia? Can the house be sold and would the bank accept and write off a loss if they emigrate? If the bank declines to write off the shortfall could they afford to repay it once they find work in Australia? This would help safeguard their Irish credit record, should they want to return home some day.

 

German muscle

I am wondering about an advertisement from PNI Mortgages in the national press advising that if a person wanted to open a German bank account, that they would do the paperwork. The costs are €150 for a current account and €200 for current and deposit account.  I am interested and the set up costs are not an issue, but I am wondering who PNI mortgages are and more importantly who is the German bank and if they are regulated?

 

 

PNI Mortgages are based in Delgany, Co Wicklow and is regulated the Central Bank to sell mortgages.  The German current and deposit bank accounts they are offering to help people open, is with HypoVereinsbank, a German subsidiary of the largest Italian bank Unicredit. You will need the services of a notary to complete the paperwork. I didn’t find PNI’s website particularly helpful, but it does provide a telephone helpline.

 

The e-banking account comes with a HVP Maestro card, with which you can withdraw funds. Variable rate interest of between 0.25% and 1.05% is paid, but the latter only on sums of €25,000 or more.

 

You should know that UniCredit, the Italian parent bank of HypoVereinsbank was one of the banks, along with the giant Societe Generale of France that the markets sold off heavily earlier this month over concerns about the vast amounts of sovereign debt they are carrying. Since the end of February, Unicredit’s share price has fallen from about €2 to just 89 cent at time of writing, which reminds me of the huge fall in bank shares prices that the Irish banks experienced throughout 2007 and 2008.

 

Anyone thinking about opening an account in another country should always choose as financially sound bank as possible and only deposit up to the sum guaranteed by the bank’s deposit guarantee scheme.

 

The third estate

GP writes from Carlow: My sister died leaving an estate worth €895,000 to be divided equally between myself and my two surviving sisters. I was the nominee for her credit union account and received from the CU a cheque for the €14,700 in her account plus a Death Grant of €1,300 for a total of €16,000.  I cashed the cheque, but later her solicitor wrote to me and asked me to return the Death Grant portion saying this was to go to the estate and not to the nominee.  (The Credit Union manager said he never heard of this before.)  I returned the €1,300 to the solicitor and this was included in the estate which was divided equally between the three of us.  When the solicitor returned my IT38 Form he had included in it the funds that were nominated to me in the Credit Union as well as my share (1/3) of the estate.  Probate tax was paid on the total amount of these.  After reading Larry Breen's recent article in your pages about how Credit Union accounts, up to a specified limit, are not subject to normal probate rules but are paid out based on a member's signed nomination I now think that I should have paid Capital Gains Tax on the money that was nominated to me in the Credit Union some of which I could have written off against share losses. I also think I was entitled, as nominee to the Death Grant of €1,300.

 

First, the tax that you and your sisters have paid on your inheritance is capital acquisition tax (CAT), not probate tax, which no longer exists, though there is a probate process.

According to Sandra Gannon of TAB Taxation Services in Dublin, the money nominated to you by your sister that was in her credit union account may be described as ‘shares’ by the credit union, but it is considered savings for inheritance tax purposes and is subject to CAT, not CGT.  As for whether you had to share the credit union savings insurance with your sisters, you should have this clarified in writing by your Revenue Inspector of Taxes and then, if applicable, ask your sisters to refund the amounts they received, less the CAT. 

 

 

 

 

 

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By all accounts its easy to set up a euro exit strategy

 

MS writes from Dublin:  For some time you have highlighted  the possible danger to holders of Irish Euro accounts if Ireland exits the single currency in the future. Please advise how an Irish citizen can open a euro account in another 'euro' country.

 

Irish people who own holiday homes or investment property abroad – in Spain, Portugal, France, Italy  – are able to open euro accounts with no difficulty (aside from the usual bureaucracy and the fulfilling on anti-money laundering requirements.)  There is no EU restriction on EU citizens opening bank accounts in a member state, but it is left to individual banks (and they sometimes leave it to individual branches) to decide whether they want to accept your business.

One of the easiest ways to open an ‘off-shore’ euro account is to do so by travelling to Northern Ireland. Ulster Bank and National Irish Bank both have sister banks in the north – Ulster Bank and Northern Bank respectively and they will both open accounts for their own Republic of Ireland account holders as well as non-customers.  You need to bring all the required anti-money laundering identification with you and NIB, which is owned by the Danish Danske Bank (which is outside the eurozone altogether) recommends that you get a letter of introduction from your own bank to bring with you; because it is a cashless bank, it will impose a 1% charge on the value of cash deposits.

Finally, If you have a sizeable sum – at least €200,000 - that you want to deposit in another EU country – you can use the services of the fee-based, independent financial advisor Vincent Digby of Impartial.ie.

It can arrange for the setting up of DeutscheBank euro deposit accounts in Germany that pay 1.9% interest without the client having to travel. The minimum cost for this service is €500, he says. 

 

 

Cheque it out

 

AB writes from Dublin: Can you explain why the banks in Ireland take five days to clear a cheque?  They bleat on about preventing fraud, which they should well be able to do without taking five days. This is this is simply customer unfriendly. Is it true that in Sweden it just takes one day to clear a cheque?

 

I called my own bank, and asked them how cheque clearance works and this is what they told me:

A friend gives you a cheque over the weekend. You lodge it into your account in your own bank, on Monday, Day 1.  On Tuesday, Day 2, the cheque arrives at your friends’ bank. By Tuesday your bank will start paying interest on that cheque if it has been deposited in an interest bearing account. On the Wednesday and Thursday, Days 3 and 4, your friend’s bank has the right to withdraw the cheque he wrote if they are not happy to verify it.  If they do verify the cheque, on Friday, Day 5, you can start spending it. All this assumes there are no glitches and that the weekend doesn’t intervene.

By the way, on top of clearing delays, cheques cost 80 cent each,including a 50cent government stamp duty.

 

 

Ditch the dirt

 

 

PW writes from Waterford:  My mother died leaving my two children, aged 11 and 14, €10,000 euro each. I was told there was no inheritance tax to pay.

We decided to use your Best Buys list to find a good fixed rate account for the money and decided to go with the PTSB account where the interest in paid upfront for one year. However, I then found out that 27% DIRT is payable on this account, even though neither of the children have any income of their own. Is this correct?  Also, is it correct that no DIRT would be payable in a credit union account? (I know Post Office savings are tax free.)

 

It is indeed correct that children pay DIRT on interest earned even if it is their only earnings.  Only pensioners with earnings below the income tax threshold, disabled people or their trustees, charities and non-residents are exempt from DIRT. Certain longer term credit union accounts, called special share accounts, that only earn up to €480 or €635 of dividend interest are DIRT free.  Over those amounts and the interest is subject to DIRT and will be deducted by the credit union.  If they open an ordinary regular share account the DIRT on any dividends must be declared to the Revenue in an annual tax return.  Post Office three year bonds and five year certificates pay all returns tax-free.

 

 

 

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GET STARTED ON YOUR LONG TERM HEALTH CARE COST REVIEW

 

With €700 million cuts on the cards for the health service in the coming year, an additional 350,000 people joining the public health care rolls – these were the extra people latest census unexpectedly discovered – and health insurance inflation running at over 20% per annum, it’s going to take some manoeuvering for the average family or individual to get a proper healthcare plan in place.  

 

However, it has to be done.

 

Healthcare is the second personal finance pillar that I think we all need to prioritise in the coming years, whether you are part of a family, are an older couple who no longer have children to care for, or just a individual no longer in the first flush of youth.

 

 

That healthcare is going to get more expensive should be a given:  the government cannot afford to provide the same level of services, however inadequate you may already believe they are and there are clear signs that there are not enough consultants available to treat you in the public hospital sector.

 

Meanwhile, the private health insurance companies say they must adjust their premiums in line with the increases being imposed by the government for access to public hospital facilities, by the private hospital operators and as a result of the health insurance levy, the subsidy for the publicly owned VHI which all private health insurance members must now pay and which adds a whopping €542 onto the insurance bill of every family of two parents and two children. (It amounts to €185 for an individual adult and €55 for a child member.)

 

 

Last week, Aviva Health announced a 9.5% increase in the cost of their most popular plan, Level 2 Hospital after a 14% hike already announced last March.  VHI members with its most popular plan B, have seen their premiums increase by 45% while Quinn Healthcare’s plans are up just 6% since last September but more increases are certainly on the way in the autumn as well.

 

Cost control is a huge issue in a market where the incomes are falling – both for the state that runs the public health service and for individuals who opt to also have private insurance cover.

 

The Minister for Health, Dr O’Reilly said last week that he is not at all happy with cost control at his own insurer – the VHI – or in the management of the public hospitals, also in the sole ownership of the Department of Health.

 

Health care consultants, who advise private companies on their health insurance purchases, tell me that much more also needs to be done by all parties to control medical cost inflation. “Everyone needs to downscale their expectations and delivery of the latest, the most advanced, the best drug treatments and surgery.  There is no end to the innovation and cost, but the sources to pay for it are finite,” he said. 

 

So what should you do to ensure that you maximise your healthcare euro in a climate where public services are going to be increasingly restricted due to the economic downturn, and where the cost of private insurance looks set to keep going up until their costs are better controlled or reduced?

 

1)    If you have a private health plan, get it reviewed by a good broker or do it yourself using the Health Insurance Authority comparison site at www.hia.ie

 

2)    Consider switching to a cheaper provider and check out the usually cheaper ‘corporate’ version of your plan. Downgrading your plan will cut the cost, but there may be a waiting period if you want to upgrade again some day.

 

 

3)    Aviva and Quinn still allow you to cancel your existing plan and renew before the next price increase in order to lock in at lower 2011 prices. The VHI no longer allows this and will not reimburse unused premium payments if you switch before the end of your contract to a new provider.

 

4)    Don’t automatically include your children on a higher plan. They are the family members least likely to need expensive accommodation in hospital. A basic, lower cost plan will still allow them to avoid long treatment delays. the single, main reason for having the private cover.

 

5)    If you must downgrade or cancel your plan, consider a health cash plan from the likes of HSF instead. They charge single premium for the entire family, and tax-free cash payments for a wide range of treatments and hospital stays.  See www.hsf.ie for details.

 

6)    If you don’t have health insurance, start a health contingency fund – money you set aside every week for medical emergencies. It won’t be enough to pay for an operation privately, but it should pay for the specialist so you know what is wrong. You will then, hopefully, be able to get faster treatment in the public sector.

 

7)    Stop smoking. Drink less. Lose weight. Exercise more. Stop speeding.  Much of our chronic ill health, injuries and the bulk of the cost of healthcare in this country is down to the bad things we do to ourselves.  This economic downturn could last for many years, with a huge restructuring of state expenditure and less, not more access to free or low cost public services.

 

8)    If you can, make sure vulnerable members of the family – pensioners on low incomes, unemployed members with an ill child struggling to keep paying the premiums are helped out during this great recession.  Helping to pay for your elderly aunt or your sister’s children’s private health membership can be the best Christmas or birthday presents ever.

 

 

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