Yes, there is an effective way of dealing with Ireland’s huge mortgage crisis
Let’s now talk about the huge mortgage crisis that we urgently need to face up to before catastrophe ensues.
And I’m carefully weighing my words here.
What’s the current mortgage landscape like?
There are at the moment, according to Central Bank figures, 761,954 mortgages amounting to €112.2bn in value.
But what is preoccupying is the 19,541 mortgages that are over 720 days in arrears. These mortgages are never going to be paid back. If your situation is such that you are two years in arrears, history tells us that it’s impossible to catch up (and the powers that be should face up to that).
There are 39,000 mortgages in less than 90 day arrears. The Central Bank tells us that 44% of mortgages that fall into 90 day-arrears return to performance. There is a total of 11.3% of the mortgage landscape in the dangerous category of over 90 day arrears.
In total, 100,000 mortgages are in need of some form of intervention, and 65,000 mortgages have already been restructured.
In my opinion, these mortgages need to be extended far into the future (just like the government is doing with its own massive debt), to relieve those households of the huge burden of financial pressure and anxiety that they are labouring under.
These two issues need to be addressed quickly, because as it is we’re sitting on a time bomb and the ticking is getting louder by the hour. And addressing those issues means we would all be better off, not just the mortgage holders who can’t make repayments.
Foreclosed, but not homeless
Let’s deal first with the 20,000 mortgages that are over 720 days in arrears. That’s two years! Even with restructuring, there is no way that these people will be able to catch up. On the other hand, debt forgiveness for the whole or part of their debt, would create a moral hazard.
But there is a more humane, and actually smarter, solution than putting these people out on the streets. Not only would this inflict terrible hardship and mental anxiety on the household, but it wouldn’t help the situation in the least – what would the banks do with those properties on their hands?
Rather, why not change these mortgages into rental schemes, supervised by the banks or a local housing authority? The property is in effect repossessed and the mortgage foreclosed, but only from a financial perspective, not from a living quarters perspective: those at-risk households can continue to have a roof over their heads, but as renters, not as owners.
And we do have the money to deal with that. The value of those mortgages in 720-day arrears comes up to €1.2bn. Compare that to the last bank stress test performed in April 2011, which allowed for €5.8bn default on the mortgages over a three year time horizon. We have lots and lots of room to deal with this, then.
We have to do something about it before the issue becomes completely unmanageable economically – and we have to help those people who are choking silently under a slowly constricting noose of anguish and worry. To put this qualitative statement into number, the Irish person has a legacy debt of 209.3% of their disposable income – the highest in Europe.
Easing this burden helps all of us
Now how about those 100,000 mortgages that need to be restructured?
Say a household signed up for a 20-year mortgage, of which there now remains 15. But they can’t make the payments. I suggest allowing them to halve those payments, thereby changing their 15-year mortgage into a 35-year one. This would give them breathing room and lift the crushing burden of anxiety they had been under.
But if they now have to repay a 35-year mortgage, won’t that mean they will have to pay an awful amount of interest? Yes, and this is an issue. However, I really think that the advantages far outweigh this drawback, because relieving these households propels them (and us) into a virtuous circle. In the most extreme cases, these people don’t have enough money to buy clothes for the children, absolutely dread “Back to school”, and have to rack up debt to tide them over at Christmas, which makes their situation even more debilitating.
Restructuring their debt would increase the amount of discretionary income that they have, allowing them to spend on the things they need but couldn’t afford previously. If we take the example of the clothes, their spending would support the labour-intensive retail industry, which would create jobs. Job creation on a certain scale would trigger wage increases (and by the way, Dunnes Stores has recently announced a 3% wage increase, the first time since 2007), which in turn sparks inflation, and inflation eats into the burden of debt.
This is where we come back full circle: by making debt repayment easier, inflation might allow the household with the restructured, 35-year mortgage to pay it off more quickly, shaving a few years off it – or, in the best scenario, economic recovery would even improve their situation to bring them back to where they were before they ran into difficulty, and they would ideally be able to revert to a 15-year mortgage.
I think that all of the households who need restructuring of their debt, should be granted it. 65,000 households have already engaged in restructuring, and of these, 75% are now meeting their loan payments. Why not face up to it? Extend restructuring to all those households that need it.
However, 62% of the mortgages that have been restructured got a deal based on the interest only, and hence for a limited amount of time. This temporary measure doesn’t solve the issue, just puts it off for a while. And that leaves us with yet another ticking time bomb, one that will go off if we don’t face up to the scale of it.
I heard the following absurd story on the radio the other day: somebody called into the radio programme to tell their story of being turned down four times – four times! – by their bank when they asked for their mortgage to be restructured. Why was that? Simply because their father was on the mortgage as a guarantor, and the bank assumed that, if anything went wrong, since he was a pensioner, all he had to do was pay up to help his children out.
Giving them the restructuring that they need would leave more money in people’s pockets and would help them get back on their feet. Also, a lot of people would like to trade down, but can’t, because of the negative equity they have amassed. The choice they have is that they could either trade down but only after the value of their mortgage has worked through that glut of negative equity (through gritted teeth); or they could reduce their negative equity when the price of their property increases – which would be brought about by economic recovery and a modicum of inflation.
Restructuring would make the loans sustainable and hugely decrease the risk of default; it would also be more profitable for the banks in the long term. And in the short term, banks do have the money to deal with it.
In other words, facing up to the mortgage crisis and helping out individual households by extending their debt into the future, just like the government has been able to do with the promissory note, would remove a huge bottleneck that has been slowing down economic recovery.
There is one snag in this plan and that is that only two thirds, or 66%, of mortgages, are in banks that are under guarantee. That leaves 34% of mortgages, and among those, some of the worst cases, outside of the government’s influence, since the government can’t dictate the decisions of those banks not covered by its guarantee.
Still, an awful lot could be done that would help not only those mortgagees who are in a very difficult position, but the economy of the country as a whole.
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