Matthew Elderfield: rates on the rise

Each quarter the banks issue figures, endorsed by the Financial Regulator, of people they say are facing mortgage arrears, which officially means borrowers who have skipped three or more monthly payments. At the end of last year, just over 28,600 households had skipped three monthly payments, suggesting that only €5.3bn worth, or 3.6%, of the €118bn borrowed by householders in mortgages were in arrears in Ireland.

However, looking behind the figures, the Sunday Tribune was the first to identify the real scale of distressed mortgage debt in Ireland. This newspaper showed that another 30,000 households had in recent times been forced to switch to interest-only payments, or refinance their mortgages in other ways, because they could not pay the full capital and interest payments.

In truth, about 70,000 households, or €8bn worth of mortgages – about 7% of the total Irish mortgage loans of €118bn – were in trouble by the end of the year. The amount of mortgage debt stress is therefore €8bn and the cost of debt forgiveness could, experts say, be pegged at about half that by identifying those most in need.

Set alongside the €42bn that taxpayers will likely inject directly into the banks to write off their commercial property loans, forgiving about half of the €8bn would be a small price to pay in return for huge economic benefits, leading experts say.

Last week, the Sunday Tribune revisited the two leading commentators on mortgage debt here – Michael Dowling of the Independent Mortgage Advisers Federation (IMAF) and Gerry Dowling (no relation) of the Money Advice and Budgeting Service (Mabs) – who argue that a package of debt forgiveness would be both affordable and boost the economy. In short, mortgage debt forgiveness could be the economic stimulus package that the country needs.

"Matters are getting worse," said Michael Dowling of IMAF. "We have seen the first increases in mortgage rates and there is more to come. Even the Financial Regulator Matthew Elderfield acknowledged at the Oireachtas regulatory affairs committee last week that interest rates were going to rise outside what the European Central Bank does with official interest rates. There are 30,000-plus households in arrears with their mortgages at the moment and we have another 30,000 who have rescheduled their payments from capital and interest to paying interest only. That problem is only going to get worse as interest rates increase. Everybody seems to be skirting around the problem. They accept that the numbers are there but nobody wants to look at solutions beyond what is available anyway in terms of extending the term, switching to interest-only or protection through codes that the bank agrees with borrowers in trouble."

Dowling said these measures can only work in the short term. "Thirty thousand can only afford to pay interest and are not classified as being in arrears, so more will come into play as interest rates rise. We need to look at other solutions. The regulator last week was not ruling out some sort of debt forgiveness. It is not beyond logic that we can wrap around some rules for those who will qualify for debt forgiveness," he said.

He argues that there are thousands of people who have much smaller amounts of debt "and €5bn or €6bn will resolve much of those problems. It is a much smaller amount and will arguably have a bigger positive effect on the economy. We need to look at the issue. It could be a real economic stimulus plan. We are putting in place plans for everybody but those on the street. There have already been positive reviews of Nama outside the state. We should put the same amount of thinking into solving ordinary people's debt. And sovereign bond holders will probably welcome it. They want the economy to start recovering, and that cannot happen without ordinary people being freed of their debt. If you think about it, the ten borrowers going in the last two weeks have ten votes. The 60,000 households have up to 200,000 between them."

Gerry Dowling of Mabs argues that some sort of mortgage debt forgiveness is a good idea. "Anything that gives people a chance to recover is always welcome. Anyone in Mabs will tell you that. There is a whole range of issues the government is looking at. Why don't they got on with it? I think they fear creating a precedent that may cause problems in other areas. To be honest, there may be factors in terms of economic policy. It is still the same problems in Rathfarnham and Dundrum. Yes, the banks are prepared to deal with borrowers if they come forward with some proposal. But you have still got the debt for life. Interest rate hikes will decrease income and people will have less money to pay the ordinary day-to-day bills. Anybody already in difficulty will go further into debt. If people are going to restructure their mortgages, the banks are going to take them off the tracker rates."