Mortgage Debt: “A Lot Of The Money Here Will Not Be Recovered. It’s Simply Gone.”

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The Central Bank is to reveal the exact number of people in mortgage arrears later this week.

Yesterday the Sunday Business Post estimated that 10% of mortgage holders are in arrears, while economist Constantine Gurdgiev, in the Sunday Times, put the figure at 14.1%.

Gurdgiev also reported that, contrary to claims by the Central Bank and Finance Minister Michael Noonan, that there are a significant number of strategic mortgage defaults,Department of Finance official Michael Torpey said last week strategic defaults “amount to a negligible percentage of those in difficulties”.

Paul Joyce, a senior policy researcher at the Free Legal Advice Centre (FLAC), spoke with Gavin Jennings on RTE R1’s Morning Ireland about the mortgage arrears crisis earlier.

Gavin Jennings: “The Central Bank will publish these figures later on this week and it’s expected the Sunday Business Post are fairly accurate with their numbers here. I know it’s a psychological barrier but it’s a very good indicator of just how much trouble the nation’s mortgage holders are in. It’s a stark figure.”

Paul Joyce: “Absolutely. Last quarter the increase was 13%, if that’s replicated this time around, you’ll be looking at over 80,000 mortgages being 90 days or more in arrears. That’s not taking into account the number of rescheduled mortgages that may not be in arrears but where the full payment is not being made.”

Jennings: “This is where the banks already agreed some form of deal, to keep some money coming in.”

Joyce: “Such as interest only or a portion…”

Jennings: “But the full mortgage is not being paid”

Joyce: “No, no and that figure is about 40,000. And what’s not included here are mortgages that are in arrears but are under 90 days in arrears so the problem may be deeper than we think. Plus, this does not include local authority mortgages which are not part of the Central Bank figures and it doesn’t include buy-to-let mortgages. These figures are just on principle private residences.”

Jennings: “I’ll move on to what this means for people individually in a moment. But just overall, when the last stress tests were done on the banks to see how much money they needed to fill in for bad loans,  a worst case scenario was looked at. We’re fairly close to it now, if not beginning inch past it.”

Joyce: “Yes.”

Jennings: “Which means could the banks need more money?”

Joyce: “Well we had a conference recently with invited international speakers and some domestic speakers – Tom McDonnell from TASC, an economist, said very clearly at that conference that from his perspective a second bailout was almost inevitable.”Jennings: A second bailout for the banks or for the country?”

Joyce: “For..well I think he meant for the country but that may well encompass the banks themselves. We don’t know how much of the capital that’s been assigned to the banks has been already used up to deal with mortgage arrears, but we suspect not that much.”

Jennings: “Because the figure cited is up to €16 billion worth of loans at risk and we don’t know how much of that bailout was there to cover mortgage arrears but it’s unlikely that it was as much as €16 billion.”

Joyce: “I wouldn’t have thought so.”

Jennings: “At an individual level will the Personal Insolvency legislation that the Government has envisaged to be passed would it help with this at all?”

Joyce: “Well that depends on how it’s framed. There’s been some worrying indications recently, there was a report in the Sunday Times last week that the IMF was concerned that the Personal Insolvency Scheme, as presently drafted at the end of January, might lead to widespread strategic mortgage default. That’s a very worrying indicator from that perspective, I don’t particularly understand where that’s coming from. There is an out-of-court option in the Personal Insolvency Scheme that’s outlined called a Personal Insolvency Arrangement which is designed to cover both secured and unsecured debts. The Irish Banking Federation though appears to have been lobbying fairly strongly for mortgage debt to be left out of the legislation. And that’s even with the sizeable creditor veto that’s built in there. Our concern in FLAC at the moment would be that the, that mortgage debt may well fall out of the bill.
And, now with substantial delays, it was to be published at the end of March, then it became the end of April. Now it’s destined, we believe, to be published by the end of June but there’s no certainty about that. By the time the summer recess comes, even if the bill has been published, it’s not going to have progressed very far. And the whole infrastructure that’s going to be required to deal with this setting up and insolvency service, licencing trustees, how long is all of that going to take?In the meantime there are thousands of households out there in deep financial stress.”

jennings: “And because the Central Bank started publishing these figures on 90 day arrears back in 2009, it’s unlikely that the trend is going to change. Since it started the figure for those in trouble has been rising every quarter. So presumably by the time this legislation does come into force, we’re going to be looking at an even higher figure than we are this week.”

Joyce: Well 2011, quarter 1, 6.3%; quarter 2, 7.2%; quarter 3, 8.1%; quarter 4, 9.2%; and the first quarter of this year it looks like it will be about 10.5%.

Jennings: “If it’s as urgent as you say it is, why do you believe there’s been a delay?”

Joyce: “Well I think there’s quite a lot of fear perhaps particularly in the Department of Finance. There are concerns that out-of-court debt write down might be unconstitutional. There are concerns about the costs of mortgages in the future, there’s concern about strategic default and so on. All of these…”

Mac Coille: “Remind us again about these concerns over strategic defaults.

Jennings: “Well there’s a belief that some people will try to jump on the bandwagon, who don’t have genuine debt problems but would see this as an opportunity to ditch some of their debt. We don’t believe there’s anything but a very, very small percentage of people in that situation. You have to understand that debt settlement involves making payments of your surplus income over five to six years, it’s going to be very difficult for people. And it’s not going to be an easy ride. And I don’t honestly think that there are huge percentages of people who will…”

Jennings: “However small though you’d think that there would be some people who would account for this increase, who are holding back to see what plans the Government or other legislation may have in store for them and are simply waiting.

Joyce:“That’s a possibility. If that’s the case I don’t think it’s going to be good for them. And, secondly, a huge vacuum has built up over the last few years. There’s been talk about this legislation for some time but a lack of policy direction, a lack of leadership. What’s needed is to articulate very clearly what the strategy is here and why it’s being put in place.A lot of the money here will not be recovered. It’s simply gone. And debt settlement legislation is about putting place a formal system for dealing with over indebtedness. In the long term it’s in the economic interest of the country, quite apart from being a matter of social justice.”