This article was originally published by The Business Post.
For the past six years, the banks have not trusted those in mortgage arrears. Instead, they have pumped out propaganda that large numbers of borrowers are not engaging with banks and that many can pay but won’t.
It’s clear that, with 37,778 people in mortgage arrears over two years and a further 19,317 in arrears over one year, there is a complex housing and debt crisis on our doorstep.
The government’s insolvency legislation, along with the Central Bank’s mortgage arrears targets, was supposed to stop mass repossessions. This has failed spectacularly.
In recent weeks, the idea of a one-year bankruptcy has re-emerged, having been cast aside when many of us suggested it at the time of the Insolvency Act being launched. A one-year bankruptcy period would help some in dealing with banks, but will not resolve the housing crisis facing those in arrears. Fear of homelessness has overtaken fear of debt.
What can be done to provide a fair solution for the 25,000 people who could lose their homes through repossession?
Real families in long-term arrears are scared, and currently faced with the less than attractive solutions put forward by banks: either surrender their home, or face repossession. The government has accepted the spin by the banks that many of these are strategic defaulters who can pay, but won’t.
But it is now clear that we are facing a major housing crisis and debtors are now more scared of being homeless than of their debt.
Within this group of those in long-term arrears, there are some who can pay in full, some who can pay something (but not enough for a bank to do a restructure), and others who can pay little or nothing. Neither I, nor any advocate, will defend those who have chosen not to pay. But those who genuinely can’t pay, and who have been abandoned by the system, need our assistance.
I believe that there is a fair solution to prevent unnecessary repossessions – one that’s fair to the mortgage holder, the bank and the state. It’s a mortgage supplement for those who can’t pay.
This is how it could work.
Mary and Joe are married with two kids. They have a €200,000 mortgage, property valued at €120,000 and €1,100 due per month in payments. The mortgage has been extended to the maximum possible term. They live in Kildare, and their council would have to pay them up to €750 per month in rent supplement if they lost their home and had to rent accommodation.
Under our proposals, Mary and Joe are determined to have “affordability” of €300 per month, as per an Affordability Certificate, which could be issued by the Insolvency Service, by Mabs or the IMHO.
The mortgage is then split into two tranches:
Tranche A: €140,000, attracting capital and interest repayments of €770 per month.
Tranche B: €60,000, parked at 0 per cent interest for the lifetime of the loan.
The €750 is funded by Mary and Joe’s €300 plus €470 from Kildare County Council. This is less than what the council would have to pay if they were liable for rent supplement. The repayments are subject to interest rate variations and reviewed every two years for a new Certificate of Affordability. When renewed, the payment by the borrower increases or decreases in line with review, as does the council payment – up to the maximum rent supplement the county pays.
In addition, we are proposing that the council would receive a second charge on the property for the value of Tranche B. This is an incentive for the council to make the payments. The bank will receive, over the lifetime of the loan, a greater return than if they repossessed the property now.
We are further proposing that the bank would receive the €425 directly from the council, thereby giving them certainty of cashflows.
Given the scale of the crisis, some will lose their homes. This is, sadly, unavoidable. But a fair society should want to help those who need help.
This scheme has a built-in affordability/engagement process. It saves the state money on rent allowance, and administration involved in processing the numbers in line to lose their homes.
The cost in mental health terms of this crisis is immense: sleepless nights, families broken up. People are afraid, and with good reason.
Given the failure to address this over the last six years, we are now at crunch time. This is the moment to show leadership and implement a workable plan that is fair to the mortgage holder, the lenders and the state. What I have outlined above is such a plan.
David Hall is director of the Irish Mortgage Holders Organisation