Given that Ireland has experienced one of the most spectacular housing booms and bust, capsule it is of little surprise that many are now struggling to pay the mortgage. Many received loans which are simply unaffordable now, cialis due to reckless lending and significant drops in net income. The latest Central Bank figures on Mortgage arrears support this notion. Out of 761,000 mortgages 135,000 are in arrears. In addition to this another 43,000 accounts are not in arrears but have been restructured, these are cases where the mortgage holder has been up to date with their mortgage, but now feel they will not be able to meet their repayments.

So almost a quarter of all mortgages could be described as being “in distress”. It would seem that many of these cases are those that bought close to the top of the market and now find their mortgage unaffordable. People simply have too much debt (and any increase in interest rates will not help either). The implications of this are well established, excessive household debt slows growth considerably. It seems pretty intuitive that if people are up to their eyeballs in debt they will be reluctant to spend, they become very cautious economic agents.

The current policy of the banks to deal with problematic mortgages has been to restructure them. This incorporates temporarily reducing payments, extending the term of the mortgage and giving mortgage holders a “payment holiday”. All of these measures are short term measures, they do not deal with the fundamental issue: many people have too much debt. They cannot afford to pay it now and will not be in a position to pay in the future.  There has been a limited amount of write downs on mortgages. It is importan

t to clarify this, the banks have accounted for losing about €6bn on mortgages, but this does not mean they have written down peoples mortgages. The banks seem to be hoping that if they adopt this “wait and see” approach of reducing payments now, people will be able to pay the mortgage at some stage in the future. An immediate write down of mortgages which are vastly unsustainable would be better for growth prospects.

The main Government response has been the personal insolvency bill. The main consequence of this legislation is to reduce the term of bankruptcy from 12 years to 3 years. However, at any stage of the bankruptcy, the bank can apply to the courts for a bankruptcy payment order. If granted, the bank can access a portion of the borrower’s income for a further 5 years. While the headlines may say bankruptcy only lasts 3 years, it can be 8 years.

The other important element of the legislation is the introduction of personal insolvency practitioners. They will mediate between banks and borrower when the borrower is unable to pay. They will propose an agreement along the following lines: the borrower agrees to pay an affordable amount for 5 years, after this the mortgage is written down to an affordable level. The mortgage holder stays in their home and the bank gets as much money back as seems possible. This scheme is desirable because it gives the mortgage holder some hope and certainty for the future and allows them to participate in any potential recovery.

The only problem with the scheme is that it requires the cooperation of the bank. The bank can always decide to reject the recommendations. In order for the legislation to work the banks must be forced to accept the findings. What will happen? Will the banks engage? Well, like the banks we’ll just have to “wait and see!”

-Niall Conroy