Monday, 31 May 2010

Mortgage arrears and the case for assistance

Tom O'Connor: The comments last week by the Financial Regulator Matthew Elderfield display a callous indifference to the plight of 77,000 people currently in arrears with their mortgages. Mr Elderfield rejects government help for these people, as it would cost the taxpayer money. This is astonishing when we consider that he is supportive of the €33 billion in recapitalisation of the banks and the overall cost (including NAMA) of €73 billion according to the ESRI. This includes €10.44 billion to Anglo Irish Bank, which has very few ordinary people as customers and is well known as the bank of the property developers.

We are not being told of the extent of arrears. However, there are 77,000 householders in arrears. Even if every single one of these housholders had arrears totalling €20,000, this would still only add up to 1.54 billion. This is just 2% of the €73 billion being given to the banks. Now, even though it is the taxpayer who will be liable for the €73 billion, they are being denied what amounts to 2% of this figure to keep 77,000 people in homes.

The government’s 12 month moratorium on repossessions has ended for many, and will end for all in September. The truth of the matter is that if we are to take Mr.Elderfield's advice, then the government should stand idly by and watch the unfolding of a social catastrophe.

Mr Elderfield's justification is that other mortgage payers have 'gritted their teeth and are meeting their obligations'. So he is essentially blaming the 77,000 for their plight. This is an outlandish comment because: the vast majority of defaulters are victims of poor government policy arising from its cosy relationship with the construction industry which forced them to buy houses at hugely inflated prices; the government gave people no other option, building only 4,000 social and affordable housing units of the 80,000 a year demanded by the population over the period Celtic Tiger; and the mismanagement of the economy and the bursting of the housing bubble has seen unemployment hit 435,000 while the government does nothing to solve the problem. In fact, its taskforce met once last year before being disbanded.

Surely €1.54 billion could be set aside to pay these arrears. This could be given as re-mortages to defaulters by the Irish government. The defaulters could be asked to make minimum payments, covering interst on mortages at most, if possible, until they are in better financial circumstances. A further €460 million fund could cover the difference between the minimum payment and the actual monthly mortgage payment over the next 12 months until people get back on their feet. The situation could be reviewed at that stage. This is only one obvious way to tackle this problem. There are others.

The government would be foolish to listen to Mr.Elderfield. He is a financial regulator, not a policy maker, and has no democratically elected mandate. It is really time for people to demand a payback from the state, given the risk that they as taxpayers are being asked to take to solve the financial mess which they did not create themselves. The minium is to allow people stay in their homes. People need to stand up and not allow themselves be trampled on any further.


davo said...

He didn't reject government help for these people "as it would cost the taxpayer money" he objection was based on the moral hazard, which you completely ignore in your post.

Paying the arrears of householders won't address the ongoing problem that they can't pay their mortgage. Mr. Elderfield is a member of the working group which is looking for ways to address these problems.

No one was forced to buy a house at any price.

There are plenty of solution that address the issue of moral hazard and allow people to stay in their homes - interest only repayments, renting the house from the bank etc. Its just a case that the homeowners arrears or mortgages should be paid or else they will be homeless.

Anyway what about the idea of personal responsibility?

Joseph said...

I'm interested to know where you got the 77,000 figure from.

I doubt that we have sufficient hard data (i.e. full and truthful disclosure from mortgage providers and government) at the moment to predict the best and worst case scenarios we could be facing in Ireland... and it's not just the amount of arrears we need to be worried about - there is little sign of recovery or job prospects in Ireland and we are talking about defaults and repo's here, not arrears.

That most of this will be linked to the rise in unemployment (but not just that) over the past couple of years is, I think, a reasonable statement.

Just looking at the unemployed situation only…

By the time you add up those we know in arrears over 90 days (the 4.1 percent),

those who have ‘restructured’ and aren’t shown in this 4.1 percent figure (not in arrears because they have come to an agreement with their bank on a different repayment schedule)… but are clearly struggling,

those who are in arrears of less than 90 days (and moving towards the over 90 days),

those in receipt of mortgage interest supplement and will lose it soon enough (12,000 at the last count?),

those in receipt of some form of redundancy insurance - finite time limit on that cover,

those still living on savings and redundancy cheques until they run out,

those being supported by family until that route is exhausted,

those two income families where one has lost a job and they are beggaring themselves to pay the mortgage until it comes to a point where they can’t,


You get the picture.

Given that we still have… I dunno… another 60-80,000 to still go onto the dole over 2010-2011?

I could go on but I won’t. The point I’m simply trying to make is that there is a lot going on out there that isn’t readily apparent but once you start thinking about it, the figures start to add up and the problem looks - to me - a lot lot bigger than 4.1 percent… or 77,000... and it is a growing problem.

I blogged about this a year or so ago and back then, suggested a worst case scenario of 170,000 mortgages going into arrears in Ireland (and probable default) by the end of 2010.

170,000 defaulting sound over the top? That’s around a third of the people on the live register and given the push by government, financial institutions and even family to persuade people to buy their own homes in the past 10-15 or so years, it would be conservative to assume that only half of those who lost their job in 2008-2009 have a mortgage and that only half of those who will lose their job in 2010-2011 have a mortgage.

How much does 170,000 x average mortgage tot up to? €20-30 billion?

Who’s going to plug that hole in the banks (h’mmm I suspect the dwindling base of taxpayers and some 'promissory notes')?

What will happen when interest rates start creeping up again (that’s already started)?

Sounds pretty alarming to me. Will be alarming by the end of the year. ‘Jingle bells’ to be replaced by ‘jingle mail’ over Christmas anyone? Ho ho ho (not).

And I would guess those same people would have other debts too such as credit cards, loans, etc.

You see what I mean about the problem adding up…

Which makes me wonder… how many people out there have been/are borrowing money from other sources to pay the mortgage?

Has Mr Elderfield really stress-tested the banks for worst case scenarios (maybe they have but aren't telling us)?

170,000 mortgages potentially defaulting sounds bad enough. When you multiply that by the number of mums and dads and children in that figure,their plight is just too awful to contemplate.

Sorry it's such a long post. The whole debacle just makes my blood boil.

Anonymous said...

The usual stupid arguments about helping people who bought houses.

Here's the reality. Not one of them is a threat to the system here. The health of Irish bank's is.

Here's another moral hazard you didn't address. If it becomes apparent that people who default will get a contribution, the number will triple or quadruple overnight. You'd be stupid not to get in line for the gravy train.

Also, everyone with credit card debt and no mortgage should also get a dig out too...or do you think only the property owning class deserve help? If you do shame on you.

James Conran said...

There is a difference between "keeping people in their homes" and helping them buy their homes. It is surely no tragedy if people have to sell their houses (either to the bank or on the open market) and start renting/leasing (either the same house or another, cheaper one) so as to lighten their financial burden. There is a right to housing but not to home ownership.