Thursday, 25 August 2011

Dealing with Mortgage Over-Indebtedness

Sinéad Pentony: The issue of mortgage indebtedness has re-emerged. The number of mortgage holders in arrears for more than 3 months has reached 50,000 and this figure will continue to rise. Although we often hear that the level of repossessions in Ireland is low compared to our nearest neighbour the UK, the latest Global Distressed Property Monitor survey from the Royal Institution of Chartered Surveyors published today puts the scale of the problems in the Irish property market in a global context.

The survey finds “that Ireland has the highest projected number of foreclosures and sales by owners who cannot meet rising repayment fees”. The RICS survey also highlights the problems in the Euro periphery (Ireland, Spain and Portugal) where “the property market in these countries is riddled with both a high number of foreclosures and brand new homes which can't attract buyers. To boot, investment funds have lost interest in these markets as their economies try to balance bank bailouts and rising government deficits.”

The issue of mortgage over-indebtedness has been exacerbated by austerity measures, with more and more people going into arrears as their income declines through pay cuts and through unemployment or underemployment. Unsustainable mortgages are not just a problem for individual mortgage holders; they are a problem for the wider economy - given the scale of the debt overhang. Over-indebtedness has a strangling effect on the economy as a growing proportion of spending goes towards trying to service debts from a declining income.

The economy is caught in just such a debt deflation stranglehold. Historical experience has shown that lingering private debt overhangs delay the exit from stagnation because private spending takes longer to recover. The next three years of cuts will amplify this phenomenon.

Although Ireland is not unique in experiencing the problem of unsustainable mortgages the vast scale of the problem requires some fresh thinking and consideration of measures that have been tried and tested in other countries. Debt forgiveness (write-down) and debt restructuring are just two such measures.

In recent months there have been reports of individuals negotiating a write-down of their mortgage debt following the sale of distressed properties. However, these measures need to be part of a robust policy framework that mortgage holders and lending institutions can work within. Radical problems sometimes require radical remedies, and while proper analysis of the likely knock-on effects is required, it makes no sense to take any option off the table at this point.


Martin O'Dea said...

I wrote here a couple of years ago that we (as a state) should try to use our ownership of the banks and the circularity of our societal indebtedness to those same banks, in in an innovative way that could free up some of this indebtedness, have an ongoing positive effect on people's disposable income, and a sense of equity, with a little bit of political recognition of the political class' negligence and an acknowledgement of the unique circumstances we find ourselves.

The suggestion was for the banks to reduce all mortgages by 20%, this should apply to one individual for one property up to a value of €1 million. It will be around 15 billion of a write down by the banks that should be forced as losses, truthfully, on everyone but the taxpayer.

Ultimately the Irish banks can only lend into a non-stagnant economy; and this is a measure to partially correct a politically mismanaged over-emphasis in property.

In the end the idea also gets beyond the idea inequitable arrangements of only helping those in debt and not those who are trying to pay

Martin O'Dea said...

Accepting the necessity that we avoid the social disorder and compounded financial difficulties of large numbers of house repossessions and so the need to do something significant in this area what would the obstacles be to offering home owners the option of changing 25/30/35 year mortgages into 100 year mortgages

Sinead Pentony said...

For some people, extending the term of their mortgage may be an option and inter-generational mortgages exist in some countries e.g. Japan. But the cost would be enormous - you would probably end up paying 3-4 times the orignal purchase price. However, if there was flexibility to reduce the term as your circumstances improve, this would bring down the overall cost of the mortgage.

For others, extending the term won't solve their problems. Their only chance of improving their situation may be to move to find work - so trying to sell a house in negative equity AND carry the balance of the debt with you is not going to solve their problems. This is where debt write-offs come in and/or the bank taking a equity stake in the property - there is evidence of banks negotiating write-downs of distressed mortgages on a case-by-case basis. For some, this will be the only option.

As for those who are trying to pay, at the expense of meeting basic needs - there needs to be proactive measures that calculate the income that is required to meet basic needs and service other debts. The balance is what goes towards the mortgage which can calibrated as 'interest only' or extending the term. However, this is not a permanent solution and will need to be kept under review, but if the person's circumstance do not improve in the medium term that's when debt write-offs come into the mix.

Martin O'Dea said...

What of writing down all mortgages by 20% and using this as a means of stimulating the economy (and unlike Bush's cheque in the post) not being a once off but an average of €200 extra spend per month for mortgage holders. Do something creative to assist renters for equity and further stimulus.

And if there is a major concern with moral hazard (leaving aside the difficulty of banks being bailed out) let's put in a condition - that this will only ever be considered in the future when the property market grows by a 400% in ten years and falls by 50% in another five.

Or another idea that says lets do the right thing by the people and their economy and not be constrained by past practices

I also take your point and agree that debt equity transfer and updated private bankrupcty laws are needed