The economist who most accurately predicted the financial crash in Ireland was back with new warnings recently. Morgan Kelly, who teaches economics at the biggest university in Ireland, was predicting that many small businesses here would be forced to close in the next year or two because they owe so much money to the banks.
That would have painful consequences because small businesses employ a lot of people here. If it does happen, the recent slight improvement in our unemployment figures would be quickly reversed.
The Irish banks, as well as banks across Europe, are due to go under new stress tests in the near future. According to Kelly, this is going to force the Irish banks to stop putting the debts of small businesses on the long finger.
Many of these businesses got involved in property plays and have been badly caught. Others are just victims of the slowdown in the economy. One way or the other, many cannot pay what they owe and the banks will be telling them to pay up or sell up.
The same pressure from Europe on the Irish banks to clean up their books – five years after they were rescued with billions in new capital – is also evident in new developments in the domestic mortgage sector which have caused headlines in the last week.
Even worse than in the business sector, the banks have failed to get to grips with the ongoing crisis in home mortgages. There’s a very simple reason why this is so.
If the bank forces the borrower to sell, the real value of the property appears on the bank’s books instead of the inflated loan value given to buy the home. And this plays havoc with the bank’s overall figures and requirements for capital.
So, even though they were given over €60 billion when they were rescued from near collapse, our banks have put off facing up to the mortgages problem, preferring to sit on their new capital and hope that property prices might recover in the future.
The troika and now the European Central Bank have been pushing the Irish banks to sort out their position without further delay. And the upcoming Europe-wide stress test for banks is forcing them to do so anyway.
In spite of all the talk here about turning the corner and a modest recovery, the reality is that there is still a huge unresolved problem in the amount of unsustainable debt being carried by small businesses and home buyers here. The figures are horrendous.
At the end of 2013, roughly 70 percent of the loan books of the Irish banks related to Irish commercial real estate, or about €23 billion, was in arrears. Around 30 percent of the loan books relating to small and medium sized businesses, also over €20 billion, was in arrears.
And for home buyers, 20 percent of mortgages on the books of the banks, worth about €90 billion, were also in arrears.
Over 95,000 residential mortgage accounts are three months or more in arrears, while another 40,000 are less than three months in arrears. This represents around 20 percent of the total mortgages out there.
And the problem in the buy-to-let sector is also substantial, with around 30,000, or up to 20 percent, of these mortgages in arrears. The majority of these investors are people with one or two extra properties, bought to provide a pension in the future.
Having done little or nothing to tackle this over the past five years, despite being stuffed with €65 billion in bailout money to be used partly to deal with non-performing mortgages and other loans, the banks are now starting to move.
Readers may be aware that last year the Irish government set up a new body called the Insolvency Service of Ireland designed to help people with mortgage arrears to deal with the banks. This new legal framework includes the licensing of a new breed of financial professionals called Personal Insolvency Practitioners (Pips) who can represent people dealing with the banks.
The banks are legally required to engage with the process, but at the end of the day the bank can still say no to a settlement arrangement the Pip may suggest based on the client’s ability to pay.
The fee charged to the client by the Pip can vary from a few hundred to a thousand euros or more, which is a lot of money for someone who can’t pay their mortgage. The process is very complicated and very few successful deals have been struck, so far at least.
But things may now be changing, thanks to the new willingness by the banks to get involved and to the efforts of a new voluntary organization called the Irish Mortgage Holders Organization (IMHO).
Over the past two weeks it has emerged that the IMHO has made agreements with Ireland’s biggest bank, AIB, on behalf of people with big mortgages who cannot pay. The agreements include large debt write downs and, significantly, the people are being allowed to stay in their homes instead of being forced to sell.
In one case, €195,000 of a Cork family’s €478,000 mortgage is being written off. Another €100,000 is being set aside for 30 years as part of a split mortgage. A split mortgage is where part of the money owed is put to one side, to be paid at a later date, or paid back when the house is sold at retirement.
The family also owes penalty charges, but the net result of the deal is that the amount they now have to make payments on is reduced to €200,000, which they can service. In another case that came to light, a Dublin family had €150,000 of their mortgage written off, and they will also remain in their home.
According to the IMHO, AIB – including its EBS savings and loans subsidiary – has now agreed around 100 deals with mortgage holders which have involved some form of debt write-off.
This is clear evidence that AIB is now accepting the reality that some people who were given very big mortgages during the boom to buy homes which are now worth about half what they were back then will never be able to pay all the money back. The IMHO said last week that after news of the deals spread it has received hundreds of contacts from distressed borrowers looking for similar debt write downs.
The reality is, however, that such deals are only being offered to a very small number of people who fit certain criteria (the main ones being that reduced income means they cannot pay and their home is deep in negative equity so selling it does not solve the bank’s problem.)
There has been a guarded welcome for what AIB has started doing. But the next biggest bank, Bank of Ireland, has already said that it does not intend to write down home-loan debts, although there were rumors last week that Bank of Ireland is no longer sticking to this policy.
And there are many people here who are far from happy with what is going on. The fact is that there is no such thing as a debt that vanishes. Someone always loses out, and in this case since AIB is now owned by the state it is the taxpayer who ultimately will end up paying for any write downs.
There are serious questions of fairness involved in all of this. There are many families who did not overstretch themselves during the boom to buy expensive properties. They were cautious about how big a mortgage they should take on.
As the downturn happened, they may have got rid of the second car, cut out foreign holidays, took kids out of fee-paying schools, no longer eaten out and generally cut back on everything so that they could keep paying their mortgage. Many of these people faced real hardship to do so.
How will they feel when they see other people who took on large borrowings they could not really afford now being given big debt write downs? Will they be happy knowing that in the end it is their taxes which will help to fund this?
It’s a real dilemma for the government, and it’s not being helped by rumors which were circulating last week that the banks are giving far more debt write downs than they are saying.
Some reports have said that people who get the write downs are being asked to keep the deals secret. The banks clearly are afraid that publicity could start a stampede with thousands of people demanding to be let off a chunk of their mortgage debts. This would apply particularly to anyone with a house in negative equity.
While all this is going on, property prices in Dublin are now climbing again, mainly because the market is still frozen. Very few new homes have been built in the last few years because so many builders and developers went bust. And people who might want to sell their house are hanging on to see if prices recover substantially in the next year or two.
So the shortage of supply in Dublin and some other places is pushing up prices again. In the best areas in Dublin prices are shooting up for the few houses being put on the market.
Soaring prices and debt write downs – welcome to the crazy world of Irish property.