Country must find a way to relieve mortgage pressure
A newspaper cartoon last week of a distressed and bewildered Irish citizen having both of his pockets picked by, on the one hand, the European Union/IMF bailout, and on the other by last week's mortgage rate hike, has summed up the situation well for a large proportion of this country's population.
With an estimated 10 per cent of all Irish home loans now categorised as being in arrears, the European Central Bank's interest rate increase of 0.25 per cent will be enough, in some cases, to push a greater number of borrowers over the edge. Unfortunately, the ECB hike last week is only the first of what is predicted to be many and this series of mortgage rises will end up taking thousands of euro in income from ordinary families who are struggling as it is.
Last week's increase will see the annual cost of a €250,000 mortgage rise by €420 - the ECB's previous peak rate of 4.25 per cent would see a loss of over €5,000 by 2013 for families on non-fixed loans. It may just be a quarter of one per cent, but when it's combined with rising oil prices, higher inflation and considerably reduced incomes for most, it will be a hammer blow for many people struggling to keep up with their repayments.
Much of the concentration in recent months has been on Ireland's banks and financial institutions and stablising the situation there. The recent bank stress tests have hopefully at least drawn a line under this problem, allowing the country to move forward from here with Europe and the wider world now believing we have got to the bottom of the crisis in the banking sector.
However, in the midst of the maelstrom surrounding the Irish banks, there has been an almost singular lack of focus on the country's struggling homeowners and the difficulties they are enduring. Many thousands of people are saddled with unsustainable and unmanageable debts, a real problem that will create the banks' difficulties of tomorrow.
The new government gave a clear commitment that the emphasis on tackling the mortgage crisis will be on keeping people in their own homes. There has also been a pledge to introduce a two-year moratorium on repossession of modest family homes where genuine efforts are being made to meet commitments. The majority of the country's banks are now in State ownership and have a moral responsibility not to raise variable rate mortgages by more than is absolutely necessary.
It makes no economic sense to throw people out of their homes in large numbers, as these unfortunate people will only join the 140,000 people already waiting for social housing and it would cost the State a fortune to re-house them.
Statistics currently suggest that there are at least 44,500 mortgages more than 90 days in arrears. When combined with the almost 60,000 mortgages that have already been restructured by financial institutions, the number of 'distressed' mortgages is probably over 100,000. Hundreds of thousands also find themselves in negative equity, trapped in homes worth far less than they paid for them and unable to move and with little or no money to spend in the economy.
The unfortunate reality is that tens of thousands of Irish families have debts they will never be in a position to repay and these debts are helping to further poison the balance sheets of the banks. This is delaying further the emergence of any kind of solid economic recovery and causing social misery on a grand scale. It is a huge problem that Ireland and its government needs to wake up to and confront.
Respected economists like Constantin Gurdgiev have argued that while the total numbers of mortgages in arrears could reach about €10 billion - compared to total mortgage debt outstanding in Ireland of €115 billion - in the context of the overall bank bailout scheme, it is relatively small. But at the individual level and in the real economy, it is a very big problem. In that context, full or partial debt forgiveness becomes a viable consideration.
However, while debt forgiveness sounds like a simplistic solution to a highly complex problem, it is something that would have to be handled extremely carefully and would be sure to ignite a fierce debate about help for some hard-pressed home-owners and not others. Wholesale write-offs of debt is a recipe for financial anarchy, but there are other options for banks to help customers in trouble - debt for equity swaps, for instance, where the bank takes a stake in the house in return for writing off a portion of the loan. Banks are already switching people onto interest-only arrangements and restructuring loans for people, so this would simply be a further step along that road.
There is a growing belief that the economic effects of the debt burden on ordinary people can be tackled through some kind debt forgiveness scheme. But, for a start, the country's banks need to acknowledge that current debt levels are unsustainable for many and timely write-offs may be necessary at some point. The mechanism to do this is where the real debate will begin.
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