Brendan Burgess
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I have an article in today's Indo challenging the consensus
Want to solve arrears crisis? Make repossession faster and cheaper
It was edited a little, so here is the original:
In every other country in the developed world, when a borrower doesn’t pay their mortgage, the lender gives them a few months to get back on track. If they are unable to do so, the bank repossesses the house. The family moves to a home which they can afford. The bank sells the house to another family who can pay the mortgage. If there is a shortfall after the sale, the bank may write it off or they may pursue the borrower depending on the borrower’s financial position.
Mortgage holders in these countries understand that if they don’t pay their mortgage, they will lose their home. As a result, they make a priority of paying their mortgage. They will cut their lifestyle expenditure. They will pay their mortgage before other unsecured loans. Above all, the risk of losing their home will encourage them to address any problem early on and not to bury their heads in the sand.
This system works well for the vast majority of people. Arrears are minimised. Repossessions are minimised. Mortgage rates are much lower because the banks have low losses on their mortgage lending.
This is the situation in every country but Ireland. In Ireland, if someone doesn’t pay their mortgage, we blame the bank and not the borrower. Banks have to comply with a complicated and bureaucratic Mortgage Arrears Resolution Process - proposed, incidentally, by an Expert Group of which I was a member. We place all the responsibility for solving mortgage arrears on the lender. We absolve the borrower of all responsibility saying that they are in arrears “due to no fault of their own”. We throw our hands up in horror at the very mention of the possibility of repossession.
The result? While most people have continued to pay their mortgage, a small minority have exploited the situation. When these people realised that there was no effective sanction for not paying their mortgage, they will try to get away without paying. 30,000 people have now built up over two years of arrears. Some of these have done their best to pay what they can, but many of them have taken advantage of the lack of any effective sanction and made little effort to pay.
Well-meaning debt campaigners have done these borrowers no favours whatsoever as they have just encouraged the borrowers to avoid reality and to delay facing up to their problems. They have given these borrowers false hopes of debt write downs. If these borrowers had addressed the problems early on, many of them could have got back on track. But many have now left it too late and the problem has gone beyond fixing. These people will lose their homes which they could have kept had they addressed the problem when it first arose.
I have been one of the biggest critics of the banks. The variable rates they charge Irish borrowers are scandalously high compared with the rest of the Eurozone. They offer better deals to new customers than to existing customers. They exploit customers who can’t move lenders due to negative equity. They have tricked many borrowers off their cheap trackers. They have classified some mortgages as unsustainable, where they are clearly sustainable. Where borrowers acknowledge that their mortgages are not sustainable and agree to sell their homes, the banks insist on pursuing them for the shortfalls, instead of writing them off.
But, bad as the banks are, we should also acknowledge the work the banks have done in dealing with customers in arrears. They have been able to come up with a solution for around 80% to 90% of borrowers in arrears who engage with them. Almost 100,000 mortgages have been restructured which has greatly reduced the borrowers’ monthly repayments. Many borrowers have had their mortgages split – in effect the banks have stopped charging interest on a portion of the mortgage. This flexibility by the banks has resulted in around 100,000 unsustainable mortgages being made sustainable. In any other country, the banks would have simply repossessed the vast majority of these homes.
Commentators who call for debt write downs for the 30,000 borrowers in arrears over two years, never specify who would bear the cost of such write downs. Some of the cost falls on the taxpayer who owns 100% of AIB, EBS, and ptsb and 15% of Bank of Ireland. But most of the cost falls on the borrowers who do actually pay their mortgages. Irish variable rate borrowers are paying, on average, 4.2% for their mortgages while the average rate in the rest of the Eurozone is 2.3%. This means that a borrower with a €200,000 mortgage is paying around €300 per month more than they should be paying. So those borrowers who are paying their own mortgages on time, are also, in effect, paying the mortgages of those who are not paying. And these high variable rates, in turn, are pushing some struggling borrowers into arrears, creating a vicious circle.
Compare the repossession situation in Ireland with our nearest neighbour in the UK. We have had a much bigger housing bubble. We have had a much steeper rise in unemployment. Around 10.5% of Irish borrowers in arrears over 90 days, compared to only 1.5% in the UK. Between 2007 and 2014, UK banks repossessed 236,000 homes out of the 11 million homes with mortgages. If we applied the same rate to our 600,000 mortgages in Ireland, we would have repossessed around 13,000 homes. In fact, only around 1,400 homes have been repossessed over that period. So we have ten times the level of arrears, yet only one tenth the level of repossessions.
The UK’s mature attitude to mortgage lending and arrears has allowed the UK lenders to offer much lower mortgage rates. A borrower over the border in Northern Ireland can take out a tracker mortgage at rates as low as 2.2% because they don’t have to also pay for their neighbours who don’t pay their mortgage. The lowest rate available in the Republic is 3.6% and that is not a tracker rate.
Imagine the reaction of a foreign bank considering entering the Irish mortgage market to bring a bit of much needed competition. They would see that the way in which they could deal with borrowers in arrears would be severely limited by the Mortgage Arrears Code. They would realise that if a borrower didn’t pay their mortgage, the lender could impose no effective sanction. They would see that it would take two years and many expensive court appearances to get an order for possession. And they would see that if they attempted to enforce the order and actually repossess the house, they would be condemned by the media and by politicians and that they might well be met at the gate by a group of vigilantes. They would reasonably conclude that mortgage lending in Ireland is more akin to unsecured lending in bandit country and so would allocate their capital elsewhere.
Our failure as a society to face up to the necessity for repossessions early in the crisis has resulted in a huge backlog building up. It has made the position far worse today than it needed to have been. If we had been repossessing 2,000 homes a year, for the past 7 years, we would not have an arrears crisis now and we would not be facing the disruption caused by 20,000 repossessions.
So what needs to be done?
As a society, we need to face the reality that those borrowers who pay their mortgage are also, in effect, paying the mortgages of defaulting borrowers and this has to stop.
The government must change current court procedures to make repossession faster and cheaper so that it is both a real and imminent threat to people who persistently refuse to pay their mortgage. The government needs to address the lack of supply of low cost housing and the lack of social housing to make housing available to those who must lose their homes.
Want to solve arrears crisis? Make repossession faster and cheaper
It was edited a little, so here is the original:
In every other country in the developed world, when a borrower doesn’t pay their mortgage, the lender gives them a few months to get back on track. If they are unable to do so, the bank repossesses the house. The family moves to a home which they can afford. The bank sells the house to another family who can pay the mortgage. If there is a shortfall after the sale, the bank may write it off or they may pursue the borrower depending on the borrower’s financial position.
Mortgage holders in these countries understand that if they don’t pay their mortgage, they will lose their home. As a result, they make a priority of paying their mortgage. They will cut their lifestyle expenditure. They will pay their mortgage before other unsecured loans. Above all, the risk of losing their home will encourage them to address any problem early on and not to bury their heads in the sand.
This system works well for the vast majority of people. Arrears are minimised. Repossessions are minimised. Mortgage rates are much lower because the banks have low losses on their mortgage lending.
This is the situation in every country but Ireland. In Ireland, if someone doesn’t pay their mortgage, we blame the bank and not the borrower. Banks have to comply with a complicated and bureaucratic Mortgage Arrears Resolution Process - proposed, incidentally, by an Expert Group of which I was a member. We place all the responsibility for solving mortgage arrears on the lender. We absolve the borrower of all responsibility saying that they are in arrears “due to no fault of their own”. We throw our hands up in horror at the very mention of the possibility of repossession.
The result? While most people have continued to pay their mortgage, a small minority have exploited the situation. When these people realised that there was no effective sanction for not paying their mortgage, they will try to get away without paying. 30,000 people have now built up over two years of arrears. Some of these have done their best to pay what they can, but many of them have taken advantage of the lack of any effective sanction and made little effort to pay.
Well-meaning debt campaigners have done these borrowers no favours whatsoever as they have just encouraged the borrowers to avoid reality and to delay facing up to their problems. They have given these borrowers false hopes of debt write downs. If these borrowers had addressed the problems early on, many of them could have got back on track. But many have now left it too late and the problem has gone beyond fixing. These people will lose their homes which they could have kept had they addressed the problem when it first arose.
I have been one of the biggest critics of the banks. The variable rates they charge Irish borrowers are scandalously high compared with the rest of the Eurozone. They offer better deals to new customers than to existing customers. They exploit customers who can’t move lenders due to negative equity. They have tricked many borrowers off their cheap trackers. They have classified some mortgages as unsustainable, where they are clearly sustainable. Where borrowers acknowledge that their mortgages are not sustainable and agree to sell their homes, the banks insist on pursuing them for the shortfalls, instead of writing them off.
But, bad as the banks are, we should also acknowledge the work the banks have done in dealing with customers in arrears. They have been able to come up with a solution for around 80% to 90% of borrowers in arrears who engage with them. Almost 100,000 mortgages have been restructured which has greatly reduced the borrowers’ monthly repayments. Many borrowers have had their mortgages split – in effect the banks have stopped charging interest on a portion of the mortgage. This flexibility by the banks has resulted in around 100,000 unsustainable mortgages being made sustainable. In any other country, the banks would have simply repossessed the vast majority of these homes.
Commentators who call for debt write downs for the 30,000 borrowers in arrears over two years, never specify who would bear the cost of such write downs. Some of the cost falls on the taxpayer who owns 100% of AIB, EBS, and ptsb and 15% of Bank of Ireland. But most of the cost falls on the borrowers who do actually pay their mortgages. Irish variable rate borrowers are paying, on average, 4.2% for their mortgages while the average rate in the rest of the Eurozone is 2.3%. This means that a borrower with a €200,000 mortgage is paying around €300 per month more than they should be paying. So those borrowers who are paying their own mortgages on time, are also, in effect, paying the mortgages of those who are not paying. And these high variable rates, in turn, are pushing some struggling borrowers into arrears, creating a vicious circle.
Compare the repossession situation in Ireland with our nearest neighbour in the UK. We have had a much bigger housing bubble. We have had a much steeper rise in unemployment. Around 10.5% of Irish borrowers in arrears over 90 days, compared to only 1.5% in the UK. Between 2007 and 2014, UK banks repossessed 236,000 homes out of the 11 million homes with mortgages. If we applied the same rate to our 600,000 mortgages in Ireland, we would have repossessed around 13,000 homes. In fact, only around 1,400 homes have been repossessed over that period. So we have ten times the level of arrears, yet only one tenth the level of repossessions.
The UK’s mature attitude to mortgage lending and arrears has allowed the UK lenders to offer much lower mortgage rates. A borrower over the border in Northern Ireland can take out a tracker mortgage at rates as low as 2.2% because they don’t have to also pay for their neighbours who don’t pay their mortgage. The lowest rate available in the Republic is 3.6% and that is not a tracker rate.
Imagine the reaction of a foreign bank considering entering the Irish mortgage market to bring a bit of much needed competition. They would see that the way in which they could deal with borrowers in arrears would be severely limited by the Mortgage Arrears Code. They would realise that if a borrower didn’t pay their mortgage, the lender could impose no effective sanction. They would see that it would take two years and many expensive court appearances to get an order for possession. And they would see that if they attempted to enforce the order and actually repossess the house, they would be condemned by the media and by politicians and that they might well be met at the gate by a group of vigilantes. They would reasonably conclude that mortgage lending in Ireland is more akin to unsecured lending in bandit country and so would allocate their capital elsewhere.
Our failure as a society to face up to the necessity for repossessions early in the crisis has resulted in a huge backlog building up. It has made the position far worse today than it needed to have been. If we had been repossessing 2,000 homes a year, for the past 7 years, we would not have an arrears crisis now and we would not be facing the disruption caused by 20,000 repossessions.
So what needs to be done?
As a society, we need to face the reality that those borrowers who pay their mortgage are also, in effect, paying the mortgages of defaulting borrowers and this has to stop.
The government must change current court procedures to make repossession faster and cheaper so that it is both a real and imminent threat to people who persistently refuse to pay their mortgage. The government needs to address the lack of supply of low cost housing and the lack of social housing to make housing available to those who must lose their homes.