Friday, March 13, 2015

Resolving the Mortgage Crisis

The mortgage arrears crisis rumbles on.  It is a failure on many sides that the problem persists.  There needs to an increased focus on the issue of sustainability, and in particular what should happen if a mortgage is unsustainable. 

One approach to sustainable is that the mortgage balance is decreasing, or at least non-increasing, with a high likelihood of being repaid over a 15 to 25 year period (depending on the age or circumstances of the borrower).

The course of action that should be taken is relatively straightforward and needs to

  1. Every effort should be made to make a mortgage sustainable.  This can involve interest-only periods if the problem is temporary or more permanent, and costly approaches, such as:
    • split mortgages with a portion of the loan warehoused at low or no interest, or
    • interest rate reductions with the banks temporarily reducing rates to one per cent, or lower if necessary, in order for the repayment of the borrower to reduce the balance.
  2. If the mortgage cannot be made sustainable the mortgage should be ended, the property repossessed, and a residual, if any remains, should be cancelled in a short period (two to three years).

It really does not need to be more complicated than that. Interest rate reductions have been favoured here since November 2010 (and also April and June 2011)

Of course, around half of mortgages are outside of the state-owned banks and we cannot compel them to offer generous interest rate reductions to their customers.  It is likely that a publicly-funded scheme will be necessary to pay the interest to the banks.  The State can negotiate with the banks  on the total interest paid but the objective should be to reduce the interest rate faced by the borrower to one per cent or less.  Some of the previous posts went through some mechanics of achieving this.

This is far better than a “mortgage-to-rent” type scheme and has the added advantage of being temporary rather than permanent.  In time the borrower’s repayment capacity may improve and they will be able to pay more of the capital and, in turn, more of the interest (but on a reduced capital amount).

Will some undeserving non-payers benefit from reduced interest rates? Yes. But the priority has to be help those who could meet their mortgage with some assistance and to provide a way out for those who can’t reduce their mortgage even if it made almost interest free.

As stated in these cases the mortgage should be ended, the property repossessed and any residual debt, if any, should be written off in a short period.  Will some undeserving non-payers benefit from the cancellation of the residual debt? Possibly.  While the cancellations should be widespread some consideration should be given to the borrower’s ability to pay as a poorly-designed system that allows people to walk away from their obligations without consequences will lead to other problems.

Writing off debt that can never be repaid is what should happen.  We don’t need a public scheme for this. If banks have lent money to people who can’t repay it they have to absorb the losses.  But we do need to accept that repossessions are part of the solution of the mortgage crisis.

So lets get interest rates down for those that are in some difficulty and allow those who are in over their heads to make a fresh start.

2 comments:

  1. "This is far better than a “mortgage-to-rent” type scheme and has the added advantage of being temporary rather than permanent. In time the borrower’s repayment capacity may improve and they will be able to pay more of the capital and, in turn, more of the interest (but on a reduced capital amount)."

    Hi Séamus

    As usual, I agree with most of what you say. The above point is particularly important.

    Where a family is in a home which is suited to their needs, and they are on social welfare, and so the state will end up paying for the housing anyway, the state should pay Mortgage Interest Supplement.

    This will nearly always work out cheaper than any alternatives. Where the borrower has a cheap tracker, it will work out much cheaper and there will be very little administration. This also has the other advantages you mention. The borrower has an incentive to get back on track and start paying their mortgage again, so that they can benefit from any increase in house prices.

    Brendan Burgess

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