Climbing the Debt Mountain
The Keane Report into Mortgage Arrears has been roundly condemned as an unimaginative and potentially harmful stab at a growing problem in Ireland. If there is to be no legislated mortgage write-down, and it is assumed that we don’t wish to drag Ireland’s middle class through bankruptcy proceedings, what other solutions are there?
Firstly we need accurate figures as to the scale of the problem. The Keane Report flashed out a blanket figure of €14 billion for total negative equity, noting that only 10-13% of negative equity mortgages are in arrears. But this does not give us an actual figure for the number of homes in negative equity or the actual number of unsustainable mortgages in Ireland.
The first figure should be available to the Department of Finance through the Central Bank, but in order to assess the actual number of unsustainable mortgages in Ireland, we need a set of tests to assess the sustainability of household debt. Ultimately, unsustainable mortgages which are not written down must result in bankruptcy, repossession or the leasing of the property from the State. It seems those who oppose debt write-downs are comfortably blind to the fact that unsustainable debt will never be repaid. It will either be scratched off through bankruptcy or kicked down the road through ongoing forbearance. But ongoing forbearance of unsustainable debt poses a systematic threat to the process of recapitalising the banks and the restitution of domestic consumer confidence. It will only get worse with time as the current working population approaches retirement.
‘New Beginnings’ are also challenging the existing amortisation schedules in court, but there is another imaginative solution being proposed which deserves special mention. Independent brokers are working on structured write-downs to current market value with a covenanted profit share for any uplift. This middle path allows debt to be written down, but gives the lender a share in any appreciation over time. A valuation methodology along with time frames must be agreed in order for this to work – but it can work.
We also require radical reform to our punitive Victorian bankruptcy laws which set out to punish ‘reckless borrowers’. Tens of thousands of families erred by paying exorbitant prices for their homes through spurious speculation between banks and developers – all under the watchful eye of the Irish Financial Regulator. Without categorising them as victims, it is urgent that the social contract be addressed to include relief for these households. We need a swift purging of the system to bring these consumers back into the economy, especially as they represent the income earning middle class of Ireland. The Personal Insolvency Bill proposes reducing the current bankruptcy term of 12 years to five years, but this is still too long. The US and UK have already reduced the term to a single year for some category of borrowers and their policy deserves careful study.
One thing is absolutely certain – We must take action now. Any further delays will only cause us all more pain.
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