Borrowers having trouble paying their mortgages are comparatively well-protected from the banks at the moment, but some sources in both finance and debt counselling are predicting a rising tide of arrears and repossessions starting next year as the mortgage market changes for the worse.
Industry voices predict that banks are going to become less accommodating on overdue payments while at the same time increasing rates, leading to calls for the government to devise a comprehensive approach to mortgage arrears in advance to make sure debt problems do not pose a risk to recovery.
The fear is that a combination of zombie mortgages and negative equity will not only continue to stifle the housing market and damage bank earnings, but will limit the labour mobility that the economy needs to dig itself out of recession.
Two factors are currently keeping these problems at bay.
In February, the Financial Regulator imposed a code of practice preventing lenders from initiating repossession proceedings on delinquent loans until after a six-month grace period – 12 months for AIB and Bank of Ireland, as a condition of their recapitalisation in February. This is meant to allow the bank and customer to work out some kind of arrangement that allows the bank to get paid while the borrower keeps a roof over their head. Secondly, interest rates are extraordinarily low, which means repayments – at least on variable-rate mortgages – are easier.
But these conditions will not last forever. The banks have signalled strongly that they will raise interest rates to make the profits they need to rebuild their capital bases and lend normally again.
Foreign-owned lenders, such as Bank of Scotland Ireland, are charging rates as high as 5.9% in some cases to captive customers who are coming off fixed rates, but who have little prospect of switching lenders in a falling market.
Yet by squeezing customers for more money – especially those who cannot sell because of negative equity – the banks may end up increasing the kind of bad debts that destroyed their capital in the first place.
Dolmen bank analyst Oliver Gilvarry, who recently wrote about this problem on Daft.ie, told this newspaper that the twin problems of huge mortgage debt and huge negative equity could result in a "locked-down work force" made up of people who cannot move house for the sake of a job. He also said the banks, which are concerned primarily with stabilising their loan books, are not in a position to address the broader social ramifications this entails – in other words, government needs to step in with some kind of policy solution.
While there is plenty of concern over the state of the mortgage market, there is not a solid consensus on how it should change.
On Thursday, for instance, the Professional Insurance Brokers Association called for the government to introduce measures to promote counter-cyclical lending – crudely put, lending more in bad times and less during booms – as a way to overcome the banks' very strict credit criteria. However, chief executive Diarmuid Kelly neglected to specify what course of action government should take. Moreover, his comments said nothing about the market-inhibiting problems over indebtedness and negative equity, focusing instead on how to get money flowing again.
Every interest group has their angle, but some are putting forward attempts at more broad-based approaches.
Debt mediation and counselling
The banking industry has been moving away from taking the adversarial legal route with debtors, preferring instead a more mediated approach involving non-profit debt counsellers, Mabs. The IBF/Mabs operational protocol which went into effect last week is one sign of this, but the banks have been proactive in this area for years, going back to the successful IBF/Mabs debt-settlement pilot scheme from 2002. The protocol essentially offers a formal process whereby the borrower and lender come to a revised arrangement for repayment. There are social and cultural reasons for the banks to play nice on debt, the aversion to repossession chief among them. There are reputational reasons, too. Banks that come down too hard on distressed borrowers may get their money back in the short-term, but at the cost of long-term damage to their brand. And, practically speaking, a bank that keeps its customers onside often has a better chance of recovering something by renegotiating the terms of a loan than by treating borrowers too aggressively. This was certainly the approach they took with property developers.
Bank recovery fund
"The IBF protocol is going to dump a load of debt recovery work onto Mabs for free. It could sink Mabs," said Liam O'Brien, director of commercial debt counsellor One2One. "Banks need to bring in debt counselling as part of a recovery programme. It has to go this way from a political point of view to appease the public, who are in real trouble."
O'Brien's idea, backed by others in the commercial debt management area, is to have banks pay a statutory levy into a recovery fund which would pay for the type of services he offers when and as borrowers run into trouble. A former retail banker, O'Brien contends that Mabs, although it does good work, lacks the scale and expertise to deal with the size of the coming mortgage debt problem in Ireland.
Outspoken mortgage broker Karl Deeter, of Irish Mortgage Brokers, has been advocating what the Americans call "moving paper", or selling your mortgage with your home. This offers an elegant solution both to the problem of repossession and negative equity, provided the seller has an attractive mortgage such as a low-cost tracker. Essentially the seller persuades the buyer to take the property at a premium to clear the debt by throwing in favourable mortgage terms that are no longer available in the current market.
This type of transaction does not exist in Ireland and there is little incentive for banks – apart from avoiding foreclosures – in allowing new customers to get outdated, money-losing mortgage terms, so the government would have to get involved for this to work.
Forbearance, or 'Nama for mortgages'
For a government which has been pre-occupied for a year with saving the banks, politically there is now a lot to be gained from saving the consumer. Widespread forbearance, funded by the state, would at a stroke relieve borrowers of debt and banks of uncertainty. It would be expensive, though, and provide all the wrong signals on moral hazard – for borrowers and lenders alike.
Moreover, it would be another example of the profitable bailing out the profligate. That doesn't mean it wouldn't be popular, though.