Saturday, December 29, 2012

Irish Examiner 22/12/12

The unedited text of an article that appeared in The Irish Examiner recently is continued below the fold.

We need to face up to the repossession crisis

According to the latest mortgage arrears statistics there are 33,000 households in arrears of between 90 and 360 days and a further 35,000 households in arrears of more than 360 days. Both figures continue to rise. There is an expectation that they will level off in the middle of next year but we will have to wait for evidence of that to emerge.

Beneath this there are 39,000 households in early arrears of less than 90 days and a further 34,000 households who have had their mortgage restructured but are not in arrears. Across all levels there are around 150,000 households showing some sign of mortgage distress from very mild to very severe levels.

Research by the Central Bank shows that 44% of borrowers who fall into 90 day arrears return to performing mortgages over time. It is likely that 100,000 households need some form of intervention.

The figures show that nearly 65,000 households have had their mortgages restructured by their banks. Details provided by the banks indicate that 75% of these borrowers are meeting the terms of the restructured loans.

Many of these are a switch to interest-only repayments but this is only a short-term solution which will not be sustainable in the long run. A mortgage must be paid back at the end of the term and unless the borrower is making capital and interest payments they may not be in a position to do so at the end of the term.

A widespread debt forgiveness scheme for mortgage debt has very little going for it. For all borrowers in mortgage distress the goal should be to get them on a sustainable path of making capital and interest repayments.

A crisis of mortgage debt is not unique to Ireland and it is not a solely recent phenomenon. We can borrow from the solutions used elsewhere. In the 1930s, the US set up the Home Owners Loan Corporation (HOLC). The objective of this programme was to get borrowers back on a sustainable path. The target was to reduce the monthly mortgage repayment to 33% of gross income with the repayment comprising both interest and capital.

The payment reductions were achieved through two means: term extensions and permanent interest rate reductions. To date, term extensions have already been granted to 10,000 households here but permanent interest rate reductions have not been widely used.

A structured programme to try and reduce mortgage repayments to 33% of gross income for those who cannot return to their original repayment should be introduced. A borrower repaying a reduced-interest, 35-year loan is a better outcome for the bank than the borrower defaulting.

There will be many borrowers for whom such a restructure will not be able to reduce their repayment to 33% of gross income. This will be because the borrower’s income does not recover, the capital amount is so large that a term extension is ineffective or because the borrower is already on a very cheap tracker rate removing the possibility of an interest rate reduction.

In the US in the 1930s the HOLC took on the responsibility for 1 million mortgaged households. By restructuring the terms of the loans they were able to help 800,000 of these households. The other 200,000 loans were unsustainable and were foreclosed on. We have to accept in Ireland that foreclosures and repossessions are part of the solution to a mortgage debt crisis.

There is no point tinkering around with mortgages that will never be repaid. In the case of completely unsustainable mortgages the house should be repossessed and set against the capital on the mortgage. If there is still a balance outstanding, as will be the case for those in negative equity, the borrower should make a small contribution for three years of, say, 8% of gross income.

After three years these payments should stop and any remaining debt should be simply written off. The borrower will lose possession of the house but they will also lose the burden of an unsustainable debt that they could never repay. The bank will make a loss on the unpaid debt but that is the consequence of lending money to people who cannot pay it back.

There are probably 20,000 households who have unsustainable mortgages. This is the group that needs the most dramatic intervention, but is the group that has got the least attention. There is some provision for these in the Personal Insolvency Act but it does not go far enough.

People with unsustainable mortgages need to be given the chance to make a fresh start. The houses should be repossessed and after three years any remaining debts should be simply written off. The repossession can occur under a mortgage-to-rent type scheme where the former homeowner is facilitated in renting the house back from a housing agency.

It should be as simple as that. We do not need to complicate the issue with debt forgiveness, split mortgages and debt-for-equity swaps. If these were useful solutions to this problem they would have been used elsewhere but they have not.

We face a crisis that other countries have and are going through. What has been used is forbearance for those with sustainable mortgages and foreclosure for those with unsustainable mortgages.

In the US 1 million houses were foreclosed on in 2010 and 800,000 in 2011. The figures for the UK were 40,000 and 35,000. Translated into Irish terms the US figure for 2011 would imply 12,000 repossessions a year. The UK figure would be the equivalent of around 3,000 repossessions a year here. In Ireland there were 600 repossessions last year and nearly two-thirds of them were voluntary surrenders.

The repossession rate here is one-fifth that of the UK and one-twentieth that of the US. If the UK repossession rate was applied here for a few years it would clear many of the unsustainable mortgages. We do not need to do anything that hasn’t been done elsewhere, but we do need to face up the problems that are here.


  1. Surely talking about the US figure 33% of gross income does not make a lot of sense in comparison to Ireland where USC and tax @ 41% at a very low threshold.

    Has any work been done on getting a sustainability as % of gross income for Ireland?

    1. Gross income is not subject to individual choices in the same way net income might be. If it was a propoertion of net income the person could make AVC for pensions that would reduce net income. Gross income is a better measure.

      Marginal rates are high in Ireland and the top rate does begin at a low income but this is about the level of income not changes in income so it is average rates that matter. For low to middle income earners in Ireland average income tax rates, all inclusive, are low. They are higher for higher earners but not necessarily much higher than would be seen in the US. But this is only supposition.