“HE WHO DEFENDS everything, defends nothing” is a quote attributed to many wise men, from Sun Tzu to Frederick the Great and Napoleon, probably because they all had reason to contemplate its wisdom. It is a logic that carries from the martial to the economic and be applied to the defence of homeowners in this country who cannot pay their mortgages.
We are approaching the point, a mere seven years after the crash, when we will have to finally deal with this situation. It will be a live issue in the next election as it is a live issue for the increasing numbers of people facing repossession proceedings in the courts.
We face a simple question, when you cut all the crap and get to brass tax: are we going to kick people out of houses who cannot pay the mortgage, or is the taxpayer going to pay the mortgage for them?
We have simply frozen as a nation
The number of mortgages in arrears is so vast and the reverberations from this so profound that we have simply frozen as a nation and done virtually nothing to substantially address the problem. We are well into the second half of a decade after the property-driven crash that crippled the country and there remains over 117,000 residential mortgages in arrears.
This is massive, representing almost 8% of all the homes in the country, be they owned, mortgaged, rented or otherwise. Almost 38,000 of these mortgages have been in arrears for two years or more, a period of delinquency unheard of in most but this special of circumstances. This level of arrears is virtually unheard of globally, where people who fail to pay back debts then get their asset or assets taken off them by whomever they owe the money to.
The reasons for this Irish paralysis are many. For one, to date mortgage arrears have been preferable to banks rather than crystallising losses by taking any action against the property when the outstanding debt might be more than it is worth. Repossess a home and it becomes the banks problem to sell it on, and any losses on the loan will need to be made good in capital ratios the banks have to maintain.
Given that banking is a public sector industry since 2008, this will affect the Exchequer who will either have to fork in cash or accept a delay in payback from the banks that are returning to profit. Banks are also struggling to keep their heads above the waterline caused by tracker mortgages, which are operated at a substantial loss whilst interest rates are at rock bottom. This discourages them from taking radical steps in other areas of their business, and is screwing variable interest rate mortgage holders; which in turn leads to more arrears.
Politicians will be falling over one another to offer solutions
While the government and banks might be shedding a symbolic tear around rising house prices, they need the asset appreciation for the economy to begin functioning again. This is another incentive to avoid flooding the market with tens of thousands of houses that have been repossessed. The government faces the added headache of being the housing agent of last resort should folks be unable to afford to rent elsewhere.
Front of most minds might be that it is simply unfair and not at all right to be removing families from their homes. This added political element will come into focus as we head towards a general election, because rising house prices will see spikes in repossessions and politicians will be falling over one another to offer solutions.
All in all this is a horrifically complex situation that shows the far-reaching consequences of government intervention into markets that should never have happened. If Ireland was a normal and functioning country, we’d have let a few banks go to the wall and their investors and lenders abroad get burned for the crystallising of losses. People would have lost their homes in 2009, but we’d be back in business by now instead of having a debt overhang that is – like so many of our problems – uniquely Irish. But that’s wishful thinking, and a note for future generations when they face a bunch of brazen bankers with caps in their hands and numbers coming out their arses.
Should county councils pay the difference?
How we deal with the problem today will determine whether or not or how the reverberations of the 2008 crash will still be affecting ordinary homeowners in 2018 and even 2028. The Irish Mortgage Holders Organisation came out during the week to propose, among other things, that county councils be employed to pay the difference between what people owe and what they can afford to pay so that they can stay in their homes.
The IMHO is a great organisation among several that are working to help ordinary folks caught up in mortgage arrears. They are making honest proposals that try to bridge the gaps created by our paralysis on this issue, and if you want to keep people in their homes and prevent the banking system from falling over for the shock of having to cover a few billion in unpaid mortgages, then it is fair to say that government – and therefore the taxpayer – will have to step in. Again.
There’s no getting around the fact that somebody has to pay. That somebody has to be one of the following: the mortgage holder; the purchaser of a repossessed house; other mortgage holders, though increased charges; the taxpayer. You might ask why the banks don’t have to pay, but really they’re just a conduit for the money at this stage. We don’t have functioning banks, we have zombies that need to pay off debts to the State and make good other losses through their customers. Saying “the banks should pay” in isolation ignores the knock-on effects and reality of the situation. The banks are their customers and their shareholders and financial backers, all of which eventually means “the taxpayer”.
There is no magic money machine to make debts go away
Personally, I’ve always been of the belief that you cannot take out debt so that you can enjoy the benefit of an asset, and then continue to enjoy the benefit of the asset without paying back the debt. If a mortgage is secured against the value of a house, then that’s what needs to be used to make the debt good if it cannot be paid off by other means. Debt write-downs or write-offs will simply pass the parcel to other people, and is unacceptable as a long-term strategy for running a functioning economy.
If folks can’t afford the home they’re in, then they need to surrender it. If they have to move halfway across the country to afford something else, that is the result of their financial decision making. If you disagree with me, that’s fine: but are you going to pay their mortgage, either through your taxes or increased charges on your own mortgage? Those are your options. There is no magic money machine to make debts go away, as some of the fringier elements of the mortgage discussion might suggest.
End to end, from our banking sector to the way our bankruptcy system works, we have a cumbersome system for dealing with debt that is currently trapping hundreds of thousands of people in a situation they have not been able to escape. There are a lot of lessons we need to draw and things we need to change from the experience of the past decade. In the short-term, we need to simply decide who is going to pay for all the delinquent mortgages. The borrower, or the taxpayer?
Aaron McKenna is a businessman on columnist for TheJournal.ie. You can follow him on Twitter here.
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