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Ireland is grappling with a series of challenges that are impacting our citizens’ quality of life. TheJournal.ie is examining solutions to these issues which have worked or are currently being trialled in other states and asking: Would It Work Here?
AFTER THE COLLAPSE of Iceland’s banks during the financial crash, Iceland’s response to the economic downturn was somewhat different than most.
They ‘burned their banks’, refused to pay their creditors, and sent the bankers responsible for the crash to jail.
But their mortgage debt forgiveness, or ‘jubilee’ as it’s nicknamed, is the most interesting, and has been described as an “outside-the-box, practical solution to a real problem”.
That problem is namely, mortgage taken out by someone is more than the current price of the property they bought with it. This problem, known as negative equity, is one faced by a lot of Irish people after the crash.
So, should Ireland forgive some of that debt so that it matches the current price of their properties, both freeing people from debt, and ensuring they stay in their homes?
How did they do it?
In Iceland, a lot of mortgages adjust with inflation. And when the financial crisis hit, it caused a lot of inflation. So much so, that the total amount people owed the bank went up – in some cases by 30%.
So when Iceland’s Progressive Party found itself with very low poll numbers, it proposed the jubilee – in Icelandic, they called it ‘the correction’.
The party promised to return mortgage debt on properties bought between 2006-2008 to 110% of its real value, along with some other measures.
Thórólfur Matthíasson, an Icelandic economics professor explains this in his paper on the banks’ response:
“The principle of writing the value of debt down to the value of the income stream of the firm was adopted to property and to mortgages.
The twist was not to look at the discounted cash-flow but to evaluate the asset value of the property. In principle, the two should be equal.
The money to pay for the jubilee would come from a tax on three dead Icelandic banks – banks that many people blamed for Iceland’s part in the financial crisis. A lot of people were really into the proposal. The Progressive Party ran on the jubilee idea and won.
The idea behind the jubilee, or ‘the correction’ according to Thórólfur Matthíasson, was two-pronged: stop people from being evicted from their homes, and to ‘correct’ the record.
“It would save some real costs. Banks even losing money save money down the line, as when it takes over a property, it has lots of costs to cover buying the property, and it can be slow in getting money back.
“It also gave people a chance of staying in their homes. The Spanish system is crazy. Banks can evict you if you fall behind on one payment. There are stories of occupants being evicted and replaced by other people who’ve been evicted – it’s like musical chairs.”
Although the exact amount the debt forgiveness measures would cost is still unsure, as there were a range of measures and not every debt write-down was because of the jubilee, it was thought at the total cost for the country would be €1.4 billion – amounting to around €24,000 per household.
So could it work in Ireland?
“I think that Ireland should have done something similar at the height of your crisis,” says Matthíasson, adding that he hasn’t looked in any great detail at how the policy could be implemented in Ireland.
He explains that the plan was targeted at those with one dwelling and one car, and who bought mortgages at a certain time.
He add that Ireland has more options than Iceland did – Ireland have a scheme that allows people to sell their properties back to the government, who sells them to vulture funds, allowing the former-owners to rent the same property out.
“The Irish interest rate is quite low – ours is at 3-4%. That would not have worked in Iceland because of high interest rates.”
But it’s good to have a range of different things that work, he says.
He admits that a time could come where they might have to introduce a jubilee again. “I hope not, but I have a feeling 2007 is coming back.”
Past discussions
The idea of debt forgiveness was discussed by ministers and economic commentators in back in 2011 following a call from the UCD economist Morgan Kelly for the government to back a write-off scheme to the tune of around €5-€6 billion.
Joan Burton was among those who said that there needed to be a form of debt forgiveness that would be fair to both the debtor and the lender – using Iceland as an example of where the amount repaid is linked to the current value of the property.
Her comments appeared to echo those of housing minister Willie Penrose who said at the weekend that the idea should be discussed by the government.
But there was no write-off. Brian Lucey, economist at Trinity College Dublin, echoes the other side of the argument when he told TheJournal.ie that at the end of the day “someone’s got to pay for it”.
“Debt jubilees can make a lot of sense if you can pay for them. Focusing on the hardest-pressed, the most-deserving, and that’s fine, I can see the moral argument.”
But those debts are carried on bank balance sheets as assets, he explains, meaning that whether the banks pay out or the government does – that’s loss of capital.
That might have been something to discuss during the bailouts, but I can’t see someone doing that now. We might be better off if the government used that €10 billion to build houses instead because supply of housing is a real problem.
Lucey says that the money could be better used in Ireland to build houses, as the homeless crisis isn’t caused by evictions, but by a lack of supply which is driving up demand.
The disillusionment with the policy is mirrored even by those it sought to benefit directly from it.
Problems with the ‘jubilee’
Heida Dora Jonsdottir got into debt the way most people do. She bought something she loved that she didn’t quite have the money for – in this case, a small wooden house in the capital of Iceland – Reykjavik.
She and her friend Baldur Hedinson, told podcast Planet Money about how their similar set of circumstances had very different outcomes after the jubilee.
Although Heida would get about $12,000, or €11,100 from the jubilee, Baldur got nothing.
Baldur has a mortgage too but bought it just after the cut-off for the jubilee. When asked by Planet Money reporter David Kestenbaum how it feels to be left out, Baldur understandably says ”It doesn’t feel great.”
“I mean, I had a student loan during that period, and that went up like crazy. I don’t see why they – if they’re doing this for mortgages, why don’t they do this for student loans, as well? So, I mean, I’m happy for Heida that she’s getting it, but the overall thing – it feels very unfair.”
Both agreed that the jubilee, though a nice idea, was more about correcting past mistakes, than about creating an environment that’s good for the future.
Outside the box
“It’s good to have an army of mechanisms that you can use,” says Thórólfur Matthíasson. “And it’s good to think about what to do in bad times during the good times. You pick up a smoke detector before a fire starts.”
In that sense, Iceland’s government did act as well: it set up a Debtors Ombudsman to liaise with debtors and banks about their options, and to check that the banks were doing all they could for people in trouble.
For businesses that were ‘underwater’ and should have gone to the bankruptcy court, that was stopped. The government again used the dead banks to bail the companies out, and most are still alive and doing well now – both big and small businesses.
I thought during the crash that the unemployment rate would go up to 20-5%. But it never went higher than 11% – I think it’s because Iceland were doing the right thing.
“Think outside the box, and look at how is the real economy working.”
So are there any plans for a jubilee, or to establish a Debtors Ombudsman here?
TheJournal.ie are still waiting for a response from the Department of Finance.
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So basically the question is – Should we make the people who didn’t take any risk pay for the people who did take a risk? Simple answer….NO!
Just how many bankers did Iceland jail? No one ever seems to be able to clarify that.
@Soccer T’s: agreed! Anyone with half a brain knew that the market was super inflated back about 10 years ago but people were buying houses at ridiculous prices. I shouldn’t have my tax money going towards paying for those people. Don’t get me wrong, I’ve no issue with my tax money going to fund social housing and even rent allowance for people who have lost their jobs and need help while looking for another one. Mortgage relief the same. But unless the money is coming directly from the banks themselves I don’t want tax money being used to write down/off debt.
@Soccer T’s: we already have paid for the risk when the banks were bailed out.
How is this even a real question…simple answer No. Government = people of Ireland lest we forget
@Leroy: The people of Ireland pay in all sorts of ways when families are evicted from their homes to enrich banks and vulture funds.
I think the Irish colloquial definition of a Vulture Fund is rather broad and includes any corporate entity which makes a profit.
The Govt bailed out the banks, took their toxic debts and forced the debts onto the backs of the people! We should have bailed out the mortgage holders, one mortgage per holder. If you had ten mortgages then only one is covered, ie main family home. This debt is protected, if it takes 30 yes to clear mortgage that’s how long it takes. In the meantime the home can not be sold unless agreed. The risk of homelessness is lifted, the banks are left to manage the bad gambles they permitted by providing the multiple mortgages they were getting commission on! The debt is a manageable debt which would eventually all be paid off in the fullness of time. The inept Banksters would be exposed for incompetence.
@Jarlath Murphy: Just to correct a few points there…no it was the Irish taxpayers (myself included) that bailed out the banks through decisions made by the government at the time, which personally I didn’t and still don’t agree with…however it was done…
Now since 2011 the FG government “wisely” decided to sell off “our” bad debt to the vulture funds, and it is these that are putting a lot of innocent and genuine people/families on the streets…
So,…what is the answer ?,…God only knows because it is a real mess with negative equity, bad loans/debt, rising rents, rising property prices and lack of social/affordable housing…ya just couldn’t make all this up….so I don’t think that debt forgiveness is a real answer unless everyone gets a fair slice of the pie,…and that just won’t happen….
@Jarlath Murphy: Yeah but in your situation you’d just delete a further several billion from the bank’s balance sheet meaning that they’d basically either go bankrupt or need another bailout..
Plus I’ve no idea why the government should be involved at all, when these people signed a contract, and have now reneged upon their end of it – unfortunately it’s that simple.
So if you were intelligent and responsible…. did your homework, saved a decent deposit, bought a house you could afford and continued to make the payments on it for a post recession decade….Tough luck.
And if you were foolish… took 110% mortgage, were already indebted, leveraged more debt to buy property you could just about afford and haven’t been making payments. You should get a right down on your mortgage at the expense of the taxpayer.
Got to love a society that rewards the latter at the expense of the former.
@Drew TheChinaman :): that’s pretty much how everything works .. those who contribute less always get the most ..
@Drew TheChinaman :): I think this particular scheme doesn’t differentiate between paying and non paying. Instead it would have applied to all properties during a certain time.
There would be people who are happy to have gone into debt and have made no effort to sort it well if they get something the rest of us who used our saving to pay our mortgages should be refunded. All this should have been sorted out before the bankers shown their collective 2 fingers to us and developers got the big fat allowances
Iceland burned the banks and bondholders..we give them a digout..sher it only our taxpayers money..I struggle to pay my mortgage..but still pay it..so No..
The difference is iceland has its own currency.
@Darren Carroll: and a population of 200,000
I’d prefer if those of us who scrimped and saved, cut everything back to the bone to keep the mortgage up to date got a payment holiday for a few months. I’d be okay with people who made genuine efforts to engage with the bank getting some debt forgiveness, but the chancers and the buy to letters who haven’t even attempted to pay for years can take a running jump.
The problem is the euro. We don’t have our own independent currency. With the euro we have to get permission from Frankfurt. Iceland have their own currency and with that they are more independent and able to enact certain policies.
@Cloud Jellies: yeah everything was perfect when we had our own currency.
Back in the early 80s when my parents had a mortgage at 18% interest, or in the early 90s when my sister had one at 10%.
The problem with comments like yours is you make it sound like our currency means total control. But it’s not as no country is economically an island.
If we had interest rates even close to what I mentioned above we’d be in serious trouble, the reason they are so low is down to the ECB.
@Cloud Jellies: it’s easier for our government to blame somebody else instead of taking responsibility. Sure that’s what we are doing in everything. They could have stood up and made some decisions benefiting the people. They did manage to stand up for the corporate tax for example after all even though that’s something bruxelles really wanted to get rid off. If our government is not blaming the EU for bad decisions it’s blaming us instead
@Barry Somers: When we had our own currency we did not have the IMF in the country bailing us out and we were building more social housing and as a result there were less homeless familys. We could devalue our currency to make our exports more competitive and we could higher our own interest rate to stop the economy overheating or been driven over a cliff like it was when we had low interest rates with the euro that clearly weren’t suited to our overheating economy but are set to help the German economy.
@sue: couldn’t agree more with you. You have to do it the EU told us so ,when it doesn’t benefit the Irish people.You should collect 13 billion that is owned to the Irish people in tax.No we can’t do that because we can’t have big companies paying their fair share of tax.
No because inallinanyways.
But didn’t the tax payers not already pay for all of the banks debt anyway, so any bank debt became taxpayers debt. So how can banks still threaten people when it should be the people able to threaten the banks?
Yes. This is part of the problem with the EU. Socialism for the rich – Capitalism for the poor.
Of course there should for those in negative equity. Would be too smart for this country though.
@Toon Army: not sure you’ve thought this out,
I’m in negative equity, I’ve never missed a payment on my mortgage. It’s been seriously hard at times but we managed. But I should get debt forgiveness based on your comment.
Now, my home was very far from millions. But I’m sure there are plenty of homes worth millions that are also in negative equity. So they should also have debt forgiven?
What about all the buy to lets in negative equity, or people that bought a house as a hope to make some money to retire on?
@Toon Army: why negative equity? It’s only affects you when you sell, also why reward those who purchased wisely ? Many of those in negative equity have trackers and as such their repayments are less than those who are in positive equity, with a smaller mortgage.
Why not just force the banks to drop because interest rates to what European banks offer
@Barry Somers: I think you have made many fair points there….and negative equity only really comes into play if you are going to move/sell i.e trade up or down or go foreign etc…
Negative equity doesn’t mean you lose you’re home, you still make the payments etc, and you still have somewhere to live, it just means that it is worth less than what you paid for it…that is no different than buying a new car…as soon as you drive it off the forecourt it has lost money…whereas property is a long term investment and “hopefully” increases in value so when you do sell/move on you made a few bucks..
No! Why should people who did not over extend pay for those who did?
I like the last line.. “Think outside the box and see how the real economy is working”.
That doesn’t happen here unfortunately, we just make it up as we go & make a dogs dinner of the whole lot of it. Everyone has full confidence in everyone & no one takes responsibility & then off into the night with a big fat pension for failure.
Why doesn’t the gov take some of he Catholic church’s ridiculous wealth to pay Europe some of the foreign debt being asked of us ?
@Seán Domhnall O’Sullivan: wouldn’t it be great if you could take another organisation ‘s money. ..
@Suzie Sunshine: how on earth can you argue it is truly theirs
@Suzie Sunshine: an organisation refusing to pay victims for the abuse they suffered.
Stupid idea here, great idea there when you see why. Here it would be another Nama forgiving those that took all the risks and punishing those that didn’t. We’re back at square one again and nobody is acting differently. Mortgages of 700,000 being signed off for people, house prices through the roof again – fukin merry go round
There is already deals being done through Personal Insolvency arrangements
Not everybody is the same as this example :
“When the High Court approved a €12m write-off of debt owed by Pia Bang Stokes and her husband, Jeffrey Stokes – formerly of Unicorn Restaurant fame – it sparked fears that our new personal insolvency regime was failing ordinary debtors while working for high-profile ones.”
“The couple walked away from their debts after their creditors agreed to a lump sum payment of €145,000. ———Mr and Mrs Stokes also retained their €800,000 home in Kilternan, South County Dublin, although the home carries mortgage debt of about €680,000 on which they pay monthly repayments of some €700.”—-
People went out and bought the big houses , where is the government to get cast to bail them out , something will have to be taxed and the people will have to pay for someone else’s house .We are been screwed as things are and cannot pay .
That should be the bank’s responsibility, they lent money out to people whom they knew couldn’t really afford it, they are the experts in this game… and therefore should share the blame for the mess, so yes those mortgage holders should get some relief, but from the banks not the government.
I’ve my own mortgage to pay back, I sure don’t need to pay back someone elses……
not at all, only those that created the crisis should be relieved of their debts and be bailed out, the rest of us can go and $h1t3
I’m it sure of the solution at this stage because it’s such a mess but I know that. Anna have been allowed to make the situation much worse.
I k is of several cases where people who had performing loans forced to sell their property because it was in negative equity.
The government as usual sitting on its hands.
@Stephen Maher: # Banks#
Fir anyone who took out a loan for €500,000 plus or fir investment, no
We should try and introduce something similar here. It’s a scandal that people are being put out on the streets because of greed on the part of the banks and vulture funds
In no article since the red thumb demise have they been more needed that this one.
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