Here come the bad house debts - Irish family with mortgage debts left in nightmare situations


In many cases the properties are in negative equity, meaning they are worth far less than what they cost.  In the worst cases, the mortgage debt owing on them can be twice as much as the property is now worth.  And because of the downturn the owners may have reduced earnings or may have lost their jobs altogether.

The scale of this is staggering.   In the middle of last year, about 10 percent of ALL domestic mortgages in Ireland were in trouble, either behind in payments, making reduced payments or not paying anything.  By the end of 2012 and the start of this year, that had climbed to over 12 percent.

To put an actual number on this, it means that 186,000 mortgages here are now in some form of arrears or have had to have repayments lowered with the permission of the bank.  

About half of these, close to 95,000 according to the Central Bank, are at least three months or more behind in payments.   Half of those are at least nine months behind.  And  close to 25,000 are two years or more behind on payments.

If those 25,000 worst cases are beyond saving, that's an awful lot of houses to repossess and a lot of families to be putting out on the road.

Apart from the human anguish involved, what would that do to the "recovering" property market when the banks put all these repossessed houses up for sale again?   It would collapse the property values to a new low, and banks would either collapse or require another rescue. It's economic Armageddon, and it has to be avoided somehow.  

In total the domestic mortgages in arrears add up to somewhere between €15 billion and €20 billion. If we assume that at least half of that value is already eroded by the property collapse to date and a fire sale could make it even worse, the banks are looking at needing maybe €10 billion or €15 billion to plug the hole.  

All you bright students in the class will now be going Hey! Hang on a minute! Wasn't about €10 billion of the 2010 bailout money specifically allocated to us to deal with the potential mortgage debt problem, and haven't we pumped all that and a whole lot more into the banks?

And of course you're right.   The problem is that the banks have hung on to that money to improve their capital reserves and they don't really want to use any of it to enable debt forgiveness for ordinary householders who find themselves facing an impossible situation on their mortgages.  

All kinds of schemes are being suggested by the government to avoid both putting people on the road and collapsing the banks.  They vary from the banks retaining ownership and people being switched from buying their homes into renting them, to joint ownership with banks, to various restructuring packages, most of which push out the repayment term into the distance.

For the past year, apart from urging the banks to begin to deal with the problem on an individual basis, the government has not actually forced them to do anything, even though we own the biggest bank and most of the second biggest.

Now in the past week the government -- prodded by Lagarde and the IMF -- has told the banks, rather than asked them, to get on with it.  It's still unclear exactly what will emerge and how it will work in practice, but we will be watching it from here.

It's a disastrous situation for many young families who stretched to start buying a home over the last five or six years and now find themselves in a nightmare of debt from which there is no escape.

They can't just throw the keys back at the bank, like you can in the U.S.  Here you still owe the mortgage debt, even if you hand over possession.  And for the individual buyer there is no Nama (the new national bad bank where the loans that speculators and developers can't pay were shifted).  

The main banks are still pursuing individuals for full repayment even in cases where the property has halved in value and the buyer's income has collapsed.  All of this, of course, is doubly unfortunate because it is coming at the very time when our new property tax is about to kick in.  

The demand letters from the Revenue will be dropping in letterboxes here all over the country in the next week or two.  We will be returning to this in detail here, but for the moment, an observation -- how are people who cannot now pay their mortgage going to find hundreds of euro to pay the new property tax?  Answers on a postcard to Enda Kenny, please, not to me.

One final word about Lagarde, whose Gallic poise and slightly melting froideur charmed everybody here last week.  She's a lawyer, not an economist, as we pointed out.  But that's not the only reason to treat her pronouncements on our economy with some restraint, especially if they have anything to do with tax.

You do remember, don't you, that this is the woman who told the Greeks (with a good deal of froideur) that they would be doing a lot better if they paid their taxes.  And then it emerged that because her position of IMF head has some kind of semi-diplomatic status, she does not pay tax on her roughly $500,000 a year paycheck.