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Hemingway’s comment that people go bankrupt slowly at first , but then speed up, is beginning to have a certain resonance in Ireland. Ireland’s developing mortgage crisis, about which I first wrote in August 2010, has moved firmly to the centre of the political stage over the last few weeks.
The writing has been on the wall for some time but the latest quarterly figures have concentrated minds, on the problem at least. At the end of June, 55,763 residential mortgages were at least 90 days in arrears (7.2% of the total), with 40,040 over six months in arrears. A further 69,837 mortgages had been “restructured”, i.e. some deal had been worked out between lender and borrower, whether switching temporarily to interest only payments, lengthening the mortgage term, or some other form of (temporary) relief for the borrower. In other words, roughly one in seven mortgages are running on empty.
Those affected are not sub-prime borrowers. Cut backs, short time or the loss of one or both household incomes has left thousands unable to meet heavy mortgage commitments entered into when credit was cheap. Selling is not an option as the property market has dried up and any property bought since 2002 is in negative equity. The debt left after resale – even were that possible – would remain as a burden on the borrower.
None of this is new. I wrote about the potential consequences last year, when the number six months in arrears was around 25, 000, pointing out that it was extremely unlikely that any economic recovery would come quickly enough , or be extensive enough, to throw them a lifeline. I asked whether Irish society could deal with 25,000 repossessions, evictions or bankrupcies and forecast the issue would come to a head towards the end of 2011.
The last government was grappling with more pressing macroeconomic problems and confined itself on mortgages to postponing the day of reckoning. It encouraged a moratorium on repossessions and negotiations between the principals, kicking the can down the road in the hope that something would turn up. An “expert group” reported but ruled out any form of debt forgiveness.
Well, nothing has turned up and we are now edging towards the end of 2011. The number six months in arrears is 50% higher. There is no economic recovery in sight. The number of repossessions and court proceedings remains low, but is increasing. Interest rates have risen. The mortgage issue has now reached the critical mass at which it becomes a focus for public attention.
Moreover, the public mood has changed, battered by three years of belt tightening, with even more to come. The middle classes are now being affected. People who could comfortably cover their mortgage repayments this time last year are now struggling to cope, have exhausted most of whatever financial fat they might have had, and are now worrying about what will happen next. And these are the ones who are actually paying their mortgages.
The public have also realised that kicking out Fianna Fail has solved little. The economic mess remains. The realisation is dawning that after the excesses of the Tiger era we have, collectively, to bite the bullet of harsh fiscal measures to restore the public finances. The issue now is who pays what, in taxes or cuts and what has become very clear is that everyone will seek to hold on grimly to what they have in what is seen as a zero sum game. So far the new government has had broad support but the next three months will see it’s mettle tested, when it has to announce further cuts and tax increases.
The options over the mortgage issue remain unchanged from last year . Do nothing and watch the problem grow; it has. Encourage dialogue between lender and borrower to “restructure” the mortgage, in effect a type of temporary placebo, leaving the debt unaltered in the hope that something will turn up; this has been happening – but to what end, apart from staving off repossession (i.e. eviction), and for how long? And nothing has turned up.
Deals of a permanent nature, with the bank agreeing privately to write off some of the mortgage debt (i.e. whatever is left owing after the property has been sold and the debtor squeezed of any other assets) are also reportedly happening in a small number of cases. This is currently being touted as the least bad way forward. But how realistic a solution is this unless the banks are leaned on, heavily? What is in it for them? Disposing of properties at even 50 % below the peak price is not easy, with would – be purchasers finding credit difficult to get.
The elephant in the room remains debt write-off; “forgiveness”. The battle lines were drawn on this one last year as well. Those who are paying their mortgages (five out of six), or who have no mortgage, are clearly unwilling to agree to bail out those having problems. Any official endorsement of the concept carries with it the obvious risk of a stampede to take advantage and the sheer impossibility of separating the can’t pays from the won’t pays. Who would continue to pay if they could avoid it ?And, overlaying this is the grating cloak of moral superiority worn by many of those not affected.
The government knows it must do something (40,000 repossessions are simply not on). The report of another expert group is imminent, after which some action can be expected. But what? Ministerial pronouncements have concentrated on the need to preserve the family home – but most of the mortgages in difficulty are family homes – maybe not the dream home but the place of abode just the same. There is certainly no talk of doing anything to help those who bought investment properties. Will families be helped rather than young singles or childless couples? These are thorny issues indeed.
There is no neat solution. The cost of the bank bailout – corporate debt forgiveness with a vengeance – has snookered the government financially. One leading player remarked to me several years ago that “We had to get the banks moving again”. It hasn’t worked. Except in so far as they have been resuscitated to resume their more objectionable practices. If people overborrowed, the banks were equally complicit in over-lending. The public perception is that the banks have weaseled out of their co-responsibility.
This is surely the time for some lateral, and tough, thinking . They are our banks, bought metaphorically with our blood. The housing market is shot. The property escalator does not function. This paralysis extends beyond those in mortgage trouble. The banks have a key role to play in the economy, granted. But the government has a much greater one and has society as a whole to consider. One thing is certain. The situation will not improve if left to the banks; their dismal history demonstrates this. A new body with powers to compel the banks to negotiate equitably has been mooted. The government should ensure that any such body is properly empowered and resourced.How the government handles the mortgage issue could be one of it’s defining moments.