Struggling households need a Nama for distressed home loans

Mortgage debt is the only type of secured lending from which borrowers cannot hide. Hand back the keys after paying off a bit more than half a loan to pay for a car and the law gives the borrower some level of protection to shield from the finance company, possibly preserving a clean credit rating into the future. But the mortgage debt never goes away. The home loan borrower may lose a job and renegotiate with the lender and extend the period way out into the future to pay off the loan. Yet, unlike car loans, the law here gives very few protections to home loan borrowers. Evidently, houses are different from cars because people also need somewhere to live. Forced home sales at a time when prices continue to fall suits nobody - neither the bank nor the troubled borrower onr the taxpayer who directly or indirectly owns the banks. But the problem of mortgage borrowers in distress is so widespread that it could scupper the chances of an economic recovery here. Just over 24 months ago, the economy was, in effect, in full employment, with a jobless rate of over four per cent. The rate, which has since tripled to over 12 per cent, will likely peak soon just short of the disastrous level of close to 14 per cent of a shrinking labour force, as people leave the country or go back into education. The mortgage debt of the unemployed, or of those households with now reduced income who cannot repay their mortgage payments because of the massive jobs shakeout in construction, retail and other industries, continues to grow. The live register, the monthly measure of people who have lost their permanent jobs and people now working only part-time or in temporary posts, will soon reach over 500,000. That is a problem for every citizen or taxpayer because Ireland has one of the highest home ownership rates in the world. The flip side of the supposed virtue of home ownership is that when people lose their jobs, it has a triple impact on society and the economy. First, the lost income goes out the window and spending falls rapidly, as reflected in plummeting spending in the shops. Then, the cost of the social welfare bill soars to keep households and children out of absolute poverty. But, in a banking slump, there is a third adverse effect: the mortgage loans become distressed and will, if unemployment persists, have to be written down sooner or later on the accounts of the banks. In short, the mortgage debt crisis is the crisis of unemployment. Extending the period of the mortgage loan or moving distressed borrowers to interest-only repayments, with the State picking up the interest-only part of the payment, only works if the distressed mortgage-payer finds a job fairly quickly. However, it is difficult to see how the problem will go away - the number of jobs available is shrinking and a number of big firms are preparing to lay off big numbers of people in the coming months. Of course, the bad mortgage debts in the banks do no go away and need to be paid by someone. If the banks were making money, there would be enough in so-called pre-provision profits to cover chunks of the bad loans. The banks are making some profits but the provisions to cover the discount of the €54bn they will get from the National Asset Management Agency (Nama) for their €70bn-plus in foolish commercial property loans to big property speculators would effectively render the lenders, without the €11bn cash injections they have already received from taxpayers, insolvent. The Government arguably has made a big mistake in failing to introduce a Nama for stressed home borrowers when it set up the new agency for the banks' bad commercial property loans. The scale of the home loan problem looks, at first glance, daunting. There are €120bn in residential home loans on the books of the Irish banks. The prestigious international think tank, the Organisation for Economic Cooperation and Development (OECD), this month showed that Irish households, with our European cousins the Dutch and the Danes, have the largest mortgage debt in the world. However, the problem is worse here because house prices since 1995 rose the fastest of any country in the world, says the OECD, and when the bubble burst, Irish households had farthest to fall off the cliff. Irish unemployment has soared to levels way above Dutch and Danish rates and therefore the mortgage debts of those unable to meet all or part of their monthly payments are likely to be the highest in Europe. But cleaning up the mortgage mess may not be so huge as many believe. The economic benefits will undoubtedly be much bigger than the benefits from cleaning up the bank loan books of the lenders' reckless lending to a small group of property speculators. The €120bn in mortgage loans in many ways exaggerates the problem. Surprisingly, the precise figures are there that would allow the Government to build a costed and affordable Nama-style scheme for distressed home borrowers. At the end of last September, over 44,000 mortgage-payers were in serious arrears with their mortgage payments, according to the report the Financial Regulator published before Christmas. The 44,000 households, a number which is likely to have increased significantly since then, probably represents as many as 120,000 children and adults who are affected by the huge burden of mortgage debt. The regulator said the distressed households accounted for €8bn worth of mortgage loans. Again, at first glance, that looks like a huge number, but the figure shrinks when put alongside the €54bn that taxpayers are paying for the good, bad and awful commercial property loans that are going into Nama. Mortgage brokers and leading economists say that an affordable Nama scheme for house-owners that writes off half the value of their loans would cost the State about €4bn. That, coincidentally, is the same amount that has already been injected into Anglo Irish Bank. The economic benefits of lifting the intolerable debt burden from so many households would help the economy recover much more quickly, say economists. Critics say that reckless home l oan borrowers would be rewarded by triggering so-called 'moral hazard'. But any Nama for mortgage borrowers could be designed with clawback payments. In short, Irish society and the economy cannot afford not to have an affordable Nama-style rescue for the unemployed who cannot afford to pay back their mortgage loans.