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It’s time to make difficult decisions regarding the treatment of insurmountable mortgage debt

With greater enforcement activity by frustrated lenders, the Government needs to make a choice between the interests of society generally, and those of certain financial institutions.

In his well-publicised report on the performance of the Insolvency Service of Ireland (ISI) Lorcan O’Connor highlights that in the year to date 2017, 6,000 new applications for a Protective Certificate as part of a Personal Insolvency Arrangement by borrowers who are attempting to address their outstanding debt issues. Rather less publicised however are the numbers of those for whom their applications are successful, which is 600, or one in ten.

This is a remarkable statistic and it not being highlighted illustrates a number of things;

  • with such a limited success rate the Personal Insolvency Act 2012 (as amended) (“the Legislation”) is not fit for purpose, and

  • the ISI is completely detached from its function, which is the resolution of problem debt, and where this is not possible suggesting workable alternatives to the solutions that are on offer in the Legislation, and

  • that lending institutions are applying policies that actively frustrate the policy objectives of the Legislation by wholesale opposition to proposals for personal insolvency arrangements,

  • the media’s attention is limited to the effect of homelessness, and not its causes,

  • an almost inevitable impact of the people who unsuccessfully apply for a PIA is the loss of their home, and the resultant demand for non-existent rental properties, or homelessness.

As a society we need to deal with highly divisive issue of mortgage debt and its default. In my experience people’s attitudes to this is divided 50/50 between those inclined to a hard line approach, which is; I am repaying my debts, so the person in default can repay all the money they borrowed, or become destitute. Others have a different approach, which is that if people become destitute, the costs to society in terms of the residual impact on children and families is simply too great for such a simplistic approach to problematic mortgage debt.

Where the line falls in terms of allowing restructures is not a matter for this article; while I have thoughts about it, there are going to be losers in any reset of the process, and those losers will either be lending institutions or defaulting borrowers.

If lenders come out on the wrong side it will have a number of obvious effects; fewer mortgages being granted , more expensive mortgages, the value of the State’s shares in pillar banks decreasing, less appetite for disruptor lenders setting up operations. From a societal point of view, these outcomes are very undesirable.

If the impact is primarily felt by borrowers, the effects will include; rehousing of the borrower and their family in local authority or private rental accommodation (given their flawed credit history the borrower will not get a mortgage to buy replacement accommodation), and because of the lack of alternative housing, the real risk of homelessness.

Which effect is the most undesirable? To a certain extent this depends on your viewpoint. However using Central Bank statistics we can anticipate certain outcomes. These suggest there are still 90,000 mortgages in arrears in excess of 12 months, the majority of which we can anticipate will ultimately be subjected to the ISI process. If current success rates are applied (and on the basis of the failure of borrowers to engage heretofore this is doubtful), we can expect at least 81,000 households to fall victim to the ultimate sanction of the market, which is losing their homes. In the absence of accommodation alternatives for the people thus affected, it is not an overstatement to suggest the potential scale of this problem has the very real capacity to undermine the stability of the state.

The problem of profligate lending up to 2007 has had an extraordinarily long tail, principally caused by the failure and delay by the state and its organs to grasp the nettle and deal with problem personal debt in a comprehensive and definitive manner. So far, the political impact of wholesale evictions has been relatively limited because of banks reluctance to pursue this objective on the scale the problem is required.

However, with the performance of the economy improving, together with the demands by the ECB and bank investors for them to address legacy debt issues, this restraint is likely to change and this is where the tyre hits the road in terms of the interaction between the problem and the solutions that might be available. One thing is pretty certain though; unless serious attention is soon paid to the problem, the outcome is likely to be as bad as can be anticipated.

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