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.