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Ireland’s home mortgage crisis persists

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Though the property market in Ireland is showing signs of an uptick, ghost housing estates are still prevalent in many parts of the country.
Though the property market in Ireland is showing signs of an uptick, 
ghost housing estates are still prevalent in many parts of the country. 

A few weeks ago in this column we were looking at the signs of an end at last to the five-year downward spiral in the Irish property market.

In some areas and for some homes, mainly family size houses in good areas in Dublin, there has been a slight recovery in prices this year, although they are still around half what they were at the peak of the bubble.

That's good news, of course.  For those with money to buy or those with secure state-paid jobs who can get mortgages, the signs that the bottom of the market has been reached are prompting them to act now and not to put off buying a home any longer.

Such activity will help the wheels of the economy to start turning again.  There is even talk that a few new housing estates will be built in Dublin in the coming year to meet demand.

Good news, as I said, but it's important to remember that this is only half the story.
The other half of the story concerns the tens of thousands of people here whose lives have been destroyed by the property crash.

These are the people who bought during the boom and who are in negative equity – their homes are worth far less now than they paid for them a few years ago.  So they can’t sell to pay off their mortgage loan.

Unlike in the U.S., here you still owe the bank even if you give them back the keys.  If you do sell at a loss and give the bank the proceeds, you still owe the bank the difference between the sale price and the loan.  
The property price collapse over the past five years also triggered the crash in the wider economy which means that many people in this situation have also lost their jobs, or their businesses have gone to the wall.  That means they can no longer meet the payments on the huge loans they took out to buy their boom time homes.

The latest figures released two months ago showed that the number of homeowners unable to pay their loans has increased to close to 100,000 mortgage holders who are now 90 days or more behind in their payments.

That is nearly 13 percent of all residential mortgage holders in the country and it’s a huge problem for the banks.   Over half of these are more than a year behind in their payments.
The overhang of bad mortgages means that the banks are effectively bust again despite more than €60 billion having been pumped into them, for which the Irish taxpayer is now on the hook.

Instead of using a big chunk of this €60 billion bailout loan from the IMF/EU to write down the debts of Irish homeowners who simply can’t pay, the banks used most of the money to pay off their bondholders, and what was left was used to start rebuilding their capital reserves.

Part of the €60 billion was supposed to be used to allow solutions for distressed mortgage holders like loan restructuring and partial debt forgiveness.  But that never happened.  Instead, the banks continued to avoid the growing crisis and have continued to threaten and squeeze mortgage holders.

The problem for the banks is that once they accept that someone cannot repay the full amount of their loan, they have to show the loss on their books.  And if they have to do that for half of the 100,000 domestic mortgage holders now in trouble they will have a big problem.

For young families who bought their homes to live in themselves, the situation is an absolute nightmare.  They did not cause the property crash and now they have become the victims of it.  Although everyone has sympathy for them, nothing much has been done to help them.

It’s also hard not to have sympathy for many of the older buy-to-let investors who took out loans to buy a second property as a pension investment and now face the possibility of losing both homes.

Around half of the buy-to-let buyers were on interest only payments for the first few years and now cannot cope as full repayments begin.  It’s estimated that at least 15,000 buy-to-let homes are in this situation and could be repossessed by the banks.

The banks don’t want to repossess homes for two reasons.  In the case of owner-occupier homes such cases are highly emotional and attract very bad publicity for the banks.

Even in the case of buy-to-lets, repossessing so many homes and then putting them on the market could make things worse rather than better for the banks by driving prices downwards again.   And that would mean revaluing their entire mortgage loan books downwards.

The government has been struggling to find a way to sort out this mess.  They tackled the  problem of the billions in bad loans owed by the big property developers by setting up Nama, the state bad bank which bought in the loans from the banks at a discount.

Now they have put a structure in place to try to deal with the domestic mortgage crisis.  But it’s far from clear yet whether it’s going to be much help to the tens of thousands of ordinary people who are in trouble.

The government is tackling the problem in several ways.   Firstly, it ordered the banks to begin offering their customers who are in arrears a long-term solution, and they said they wanted at least 20 percent of cases dealt with by the end of June.

It also brought in new legislation that returned to banks the power to repossess properties, something which had been stopped by a court decision in 2011.

The boss of the country’s biggest bank, AIB, claimed recently that one in five of those in arrears on the bank's books were strategically defaulting and that repossessions were inevitable.  He didn’t produce any evidence for this claim, and he was heavily criticized as a result.

But there is no doubt that at least some people were playing this game, and the government's move on the legislation reflects this.

Various solutions are possible, like split mortgages with part of the loan being parked for 10 years or even much longer, like arrears being capitalized (added to the loan) and the slate wiped clean giving the homeowner another chance, or like the loan reverting to interest only payments.

Or even a system where the bank takes part ownership of the home which will be cashed in at some distant point in the future if the home is sold, but in the meantime the family stays on.  Or where the bank takes full ownership and the family becomes a renter of the home they once owned.
These and other possible solutions are all designed to do one thing -- allow the family to stay in the home.

To help people who are in difficulty the government also set up the new Personal Insolvency Service, a new body licensing debt experts to act as Personal Insolvency Practitioners (PIPs) and Approved Intermediaries (AIs).

These advisers will analyze an individual’s financial circumstances and draw up a debt deal and negotiate with the banks on the homeowner’s behalf.

The new law effectively means that a homeowner threatened with repossession can have the case adjourned so that a PIP can negotiate a personal insolvency arrangement with the bank.

The weakness in this is that the bank does not have to accept a proposed arrangement.  However, it then faces the prospect that the homeowner could decide on bankruptcy, and our law means that does not necessarily mean the person loses their home to the bank.  Plus the time to emerge from bankruptcy here has now been reduced from 12 years to three.

All of this has led to situation that is as chaotic as it is tragic, because no one knows how the government's new structure is going to work in practice, how quickly it will get going and how effective it will be.

For example, the new PIPs have to be approved and qualified, and we don’t know yet where they are suddenly going to spring from.  They will also be charging fees, and there is some concern that the system may develop into another quango which costs a lot of money and does not actually solve the problem.

It’s all supposed to be kicking off next week when the legislation says homeowners will be entitled to send in PIPs to their banks to look for a deal.  But no one here is expecting very much other than more confusion.

Meanwhile, the banks continue to harass frightened homeowners who cannot pay their mortgages.

 

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