12/6/15: Did Ireland Abandon Homeowners in Need?

An short, but informative article on the issue of mortgages arrears in Ireland:
http://www.herald.ie/news/state-has-abandoned-mortgage-holders-31296163.html

The article correctly points to the lack of state engagement with the issue of long term arrears and the banks' strategy of extend-and-pretend in hope that rising house prices will maximise their returns on future foreclosures.

But the real, the main, point here is whether the Irish state has abandoned the homeowners in need. In my view - the Irish State was never concerned with the interests of homeowners. To think otherwise is to delude oneself once again into a fallacy of seeing the State as an agent concerned with the interests of the people.

Here are the excerpts from the recent study commissioned by the EU Parliament on changes in core rights accruing to individuals across a number of European nations in the wake of the post-crisis austerity programmes. The selection addresses the view of the reporters on Ireland in the context of the right to housing.

"Right to housing was affected in Belgium, Cyprus, Ireland and Spain in two
principal ways: with the increase of foreclosures and evictions and by the
interventions into the allocation of social housing and rental allowances." (page 15)

Note: this is not 'new' as in being indicative of an 'abandonment' of homeowners - rather, this is an assessment of systemic, long-term changes enacted by the State. And it covers both: private structure of homeownership and rental markets, and public provision of social housing.

"At the same time, in Belgium, Cyprus and Ireland, rental allowances or the
availability of social housing are inadequate and insufficient to respond to the needs of people in the wake of the crisis" (page 123)

"The Irish social housing budget was cut by 36% in 2011 and by another 26% in 2012. At the same time, with the loss of jobs and turbulence in the labour market, it is not surprising that the number of households on waiting lists for social housing increased by 75% between 2008 and 2011, i.e. from 56,000 to 98,000. Moreover, it is estimated that in 2011, approximately 5,000 people were homeless in Ireland compared to 3,157 people in 2008. The continued rise in rents, particularly in the last 12 months, is seen as contributing to the problem498, while rent supplements, having been reduced by 20% to 25%, are becoming increasingly inadequate with the severe budget cuts. Certain vulnerable groups have been adversely affected in Ireland. Travellers have
experienced 85% spending cuts on housing since 2008. Moreover, resource allocations for asylum seeker accommodation were reduced by 13% in 20115. In 2008, 36% of all single-parent households were on the waiting list for social housing and one fifth of all people who relied on a rent supplement to meet their rental costs were single parents. The capital assistance scheme, which used to house people with disabilities, was also reduced from EUR 145 million in 2010, to EUR 50 million in 2012" (page 125)

So here you have it - the EU report does not document an act of abandonment as a departure from past policy. It suggests systemic, long term trend toward such abandonment. In other words, the report findings imply a lack of concern or interest on behalf of the State to secure rights to housing from the start of the crisis, not a sudden change of heart.

Full EU report is available here: EUP (2015: PE 510.021) "The impact of the crisis on fundamental rights across Member States of the EU Comparative analysis". Study for the Libe Committee, Policy Department C: Citizens’ Rights and Constitutional Affairs, European Parliament. February 2015: http://www.europarl.europa.eu/RegData/etudes/STUD/2015/510021/IPOL_STU(2015)510021_EN.pdf 

8/2/2014: Irish Mortgages Crisis: More of a crisis, less of a solution

This is an unedited version of my Sunday Times column from January 19, 2014.



With Dublin property prices and rental rates on the rise optimism about bricks and mortar is gradually re-infecting our living rooms and feeding through to the government and banks' expectations concerning the mortgages arrears.

The good news is that, per latest data, there has been a decline in the arrears reported by the Department of Finance. Across the six main lenders tracked by the department, mortgages in arrears were down by 1,903 in November 2013, compared to September.

The bad news, however, is that the very same figures show that the banks continue to focus on largely cosmetic debt relief measures. In many cases such restructuring tools are potentially pushing distressed borrowers deeper into debt. The fact that Official Ireland lauds such measures as 'permanent' also indicates a lack of serious consideration of the risks faced by the distressed borrowers in the future.


Let's take a look at the latest mortgages numbers, reported by the Department of Finance. To caveat the discussion below, these numbers exclude smaller, predominantly sub-prime lenders, whose borrowers are currently nearly all in arrears.

As of November 2013, there were 116,481 principal residences mortgages accounts in arrears, comprising 17 percent of all principal residences accounts. Counting in buy-to-lets, 148,727 accounts were behind on their contractual repayments, which represents 18 percent of all mortgages. The Department does not report the amounts of mortgages or actual cumulated arrears involved, but based on the data from the Central Bank of Ireland, at the end of Q3 2013, mortgages in arrears amounted to 26 percent of all housing loans.

Of the above, 20,325 principal residences mortgages in arrears over 90 days have been restructured representing just over a quarter of all arrears in this category of mortgages. This number is only 1,812 higher than in September 2013, and is down 89 on August 2013.

We do not know what exactly happened to the mortgages that were reclassified as no longer in arrears nor restructured. The omens are not great, however. Based on the Central Bank data, around half of all previously restructured mortgages relapse into arrears. Some properties have probably gone into repossessions or were voluntarily surrendered.

This lack of clarity signals a deep state of denial by our policymakers and civil servants of the true causes and extent of the crisis. Overall, figures supplied by the Department of Finance classify mortgages into ‘permanently restructured’ and ‘temporarily restructured’. There is no methodological clarity as to what these designations mean. The data reported is not audited and the process of restructuring to-date is not being independently tested by anyone. A systematic registry of various solutions applied by the banks simply does not exist and no one can see the models used in structuring these solutions and their underlying assumptions. The fog of secrecy surrounding mortgages arrears resolution process is thick.

Everyone involved in the process of mortgages arrears resolution knows that the real problem faced by distressed borrowers is the level of debt they carry. But restructuring data reported by the Department of Finance tells us nothing about total debt levels of the households before and after restructuring. Adding insult to the injury, our data excludes unsecured debt – a major barrier to mortgages sustainability and a huge obstacle to banks offering borrowers forbearance. No secured lender can be expected to agree a debt reduction plan for a mortgage, when unsecured lenders are expecting to be made whole.

The official data also separates principal residences from buy-to-lets, despite the fact that a large number of households with arrears on the latter also face difficulties funding the former. Are risks being shifted from one side of the household balancesheet to another?

We are living through a debt crisis of historically unprecedented proportions and yet we are still refusing to threat household debt in a holistic approach. Instead, the overarching belief in the system is that once a mortgage account is restructured, the borrower is no longer at risk. To achieve such an outcome, the bank can offer a household anything between extending temporary interest-only arrangement to offering a split mortgage.  A term extension, or arrears capitalisation, or a fixed repayments scheme in excess of interest-only repayments, or a hybrid of all of the above, is all that is officially available.

The strategy for dealing with distressed borrowers, therefore, is to roll the arrears into either a top-up to the existent mortgage or set up a future claim against the property, and forget the problem ever existed. In medical terms, the analogy is to removing a person off the hospital patients’ list, once she is transferred out of the emergency.

This treatment is problematic because it assumes that the distressed borrowers who went into the arrears will be able to service their new mortgages until full repayment. It further assumes that any future shocks to household finances and to the economy can be covered under the new arrangements.

None of these assumptions have been tested by the independent analysts. All of these assumptions can raise significant questions, when one considers what sort of arrears resolution deals are being offered by the banks.

Suppose a bank makes a mistake in its risk assessment of the proposed solution and, after years of making due payments, the household slips into financial difficulties once again. There is nothing in the system to address such a risk. The household will face the cost of the new crisis, plus the residual cost of the current one, plus the loss on all payments made between now and the moment the new crisis materialises.  In contrast, the bank faces lower cost. The officials responsible for the present system face, of course, no risks at all.

How likely is the above scenario? Per official data, 60 percent of all 'permanent' restructurings involved rolling up accrued arrears and/or stretching out repayments over longer time horizon. In other words, including interest payable, the debt levels associated with such restructurings are greater than those incurred under the original mortgage. This begs a question – how will these households deal with higher future interest rates that are likely to materialise given the longer horizons and larger life-cycle debts of their restructured mortgages? Another question worth asking is how can capitalisation of arrears address the original causes of the financial distress that has led to arrears accumulation?

At most, less than one in six of all mortgages in arrears have been ‘permanently’ restructured without risking an increase in the overall life-time debt levels. Only one in twenty five of all defaulting mortgages were modified on the basis of some risk sharing between the banks and the borrowers. The vast majority of Ireland’s distressed borrowers are expected to pay the full price of their own and bank’s errors. Instead of restoring debt sustainability to Irish households’ finances, the system appears to be aiming to provide only a temporary cash-flow relief.


The key stumbling blocks to the successful resolution of mortgages arrears are, unfortunately, the cornerstones of the personal insolvency regime reforms and of policies aimed at dealing with distressed borrowers.

These include the fact that Irish homeowners are facing the full cost of dealing with the banks without any support from the state. This stands in contrast to the UK model where these costs are usually in part or fully covered by the banks. High costs and cumbersome bureaucracy deter many homeowners from engaging with the banks and from seeking professional and independent advice in restructuring their debts. So far, only one bank, the AIB Group, has voluntarily committed to helping its distressed borrowers to access independent support. The rest of the Irish banking system, including the regulators, are happy to make borrowers pay.

The pilot scheme designed by the Central Bank to deal with the problem of unsecured debt has now run its course. There is a complete silence across the official channels about its successes or failures, or about its potential renewal. Which suggests that the scheme was a flop. Meanwhile, the banks are refusing debt reductions to mortgages arrears, often citing lack of cooperation from unsecured lenders. We will never know how many of the 59,620 ‘permanently’ restructured borrowers could have availed of some debt relief but were failed by the dysfunctional system.

More ominously, we have effectively no regulation over the resolution schemes advanced by various banks. For example, through November 2013, there were 6,090 split mortgages solutions extended. Vast majority of these involve lower cost of borrowing offset by a delay in debt claim realisation. In contrast, one of the major banks currently is in the process of developing a split mortgage product that will offer borrowers an option of converting the capitalised portion of the split back into normal mortgage at some point in the future. In exchange, the borrowers will be offered a sizeable debt write-off for a portion of their mortgage.  Such a product is vastly superior to all other split mortgage arrangements in place, but it will be treated as identical to them in future reports.

The latest data on mortgage arrears resolutions clearly shows that the Irish State is unwilling to forgive those who fell into debt distress under the hardship of the Great Recession.  Instead of helping families to overcome the debt problem, our system is designed to help the debt problem to gain control over the debtor.

Box-out:

With the first issue of post-Troika Irish bonds safely away, it is time to reflect on the NTMA's opening gambit in the markets. Whatever one might say about the agency, its timing of this month's sale was impeccable. In the global markets, investment funds have been migrating out of fixed income (bond markets) and into equity markets pretty much throughout most of 2013. This trend is now accelerating. Usual bulk buyers of sovereign bonds are also starting to slow their appetite. Sovereign Wealth Funds, especially those located in Asia and the BRICS, are facing slowing domestic economic activity, reduced funding inflows from their exchequers and increased political pressures to reinvest domestically. Euro area banks, other large buyers of government bonds, are continuing to repay ECB-borrowed funds. They too are unlikely to demand significant amounts of Government bonds. And, looming on the horizon, large euro area issuers are about to swamp the market with fresh supply. Spain and Italy alone are planning to sell some EUR712 billion worth of new bonds to fund maturing debt and new deficits. All of this suggests that both supply and demand pressures later in 2014 can make it tougher for smaller euro area countries to tap the markets. Which makes NTMA's this month's timing so much wiser.

2/2/2014: IMHO-AIB Pilot - First Results

IMHO just published the results of the ongoing IMHO-AIB project for the first 55 days of the scheme operations:
https://www.mortgageholders.ie/blog/posts/progress-update-on-initiative-between-imho-and-aib-ebs-haven

The core numbers are sizeable enough to represent a good sample of borrowers and provide a strong basis for arguing that the independent, professionally provided and borrower-centric advice does work.

I want to stress that all credit for delivering on these results goes to the brilliant frontline team at IMHO!

12/12/2013: Measuring the Mortgages Crisis in Ireland

As the readers of this blog would know, I rarely comment on articles in Irish press, and rarer yet on articles in the Irish Times. So here is a rare occasion, not because of the article itself, but because of what it suggests about our national treatment of statistics.

Let's start from the top. The New York Times published an article on Irish crisis today. Here's the link: http://www.nytimes.com/2013/12/12/business/international/as-bailout-chapter-closes-hardships-linger-for-irish.html?pagewanted=2&_r=1&rref=business&hpw&pagewanted=all

Irish Times - in some ways correctly took the New York Times article to task: http://www.irishtimes.com/news/ireland/irish-news/are-we-really-reduced-to-shooting-pigeons-for-food-1.1625588

Let me take up one point in the two articles. Original version of the NYT article cited - quoting from the IT response - that "most startling is the assertion that two-thirds of homeowners have not paid their mortgage “on time for the last two years”".

IT correctly points that this is not true, saying that "The bank’s most recent arrears figures suggest 18.5 per cent of mortgage holders are in arrears of some sort or other.
They also indicate that 22 per cent of those currently in arrears are behind in their payments for at least two years or more."

The NYT published correction to their original claim. Story ends there.

But from the point of view of reality, it does not. This is pivotal to our narrative about the crisis.

Mortgages arrears have many meanings in the economy. But in the social context and in relation to mapping out the extent of the crisis here's what matters: Mortgages arrears are a signifier of the extent of the crisis. In this, they are neither the only indictor, nor are they a relative indicator. Let me explain.

1. Assume we want to identify the extent of the crisis as it impacted the households holdings of property.
2. Assume we have official data to do so only.

From (1) and (2), identifying the crisis extent is simple and yet hard. 

Take an analogy of identifying the crisis in the macroeconomy. That would be GDP. Or rather, the size of the crisis = the gap between the GDP at pre-crisis peak to GDP at crisis-period trough. One thing that does not matter to this analysis is where the GDP is today (post-trough). Should in the future the GDP hit a new trough and should the drivers for this be consistent with the drivers for the original crisis, then that new trough becomes the crisis metric. Should GDP recover to pre-crisis highs (as it will one day), the magnitude of the crisis will not be zero, it will still be GDP pre-crisis less GDP at trough.

Variants on the above are possible by looking at various GDP metrics and/or pre-crisis and trough metrics (trend, potential etc). But the essence of analysis is the same: GDP pre-crisis - GDP at trough = Crisis Impact.

Now, back to the original issue: How shall be measure the impact of the crisis when it comes to mortgages?

The IT comments can suggest (and usually the media obliges to take this as given) that Arrears Current = Crisis Impact. But are they?

My view is that they are not. Let's compute the total impact:

1. Peak of arrears (we are yet to reach that) = part of impact
2. Restructured mortgages that are not in arrears = part of impact for two reasons: (a) they face high probability of going back into arrears (just under 50:50 chance currently and declining slowly); and (b) restructured mortgages are no longer the original pre-crisis mortgages, so the mere fact of restructuring them is a sign of the crisis impact
3. Repossessed homes = direct impact; and
4. Voluntary surrenders = direct impact.

What do we know from official sources: Total mortgages outstanding: 915,746 per CBofI (composed of 768,136 principal residences-linked mortgages and 147,610 BTLs), of these:

1. Total mortgages in arrears: 181,946 per CBofI (composed of 141,520 principle residences and 40,426 BTLs)
2. Restructured, not in arrears: 56,186 (composed of 43,034 principal residences and 13,152 BTLs)
3. Repossessed homes - we have no numbers for aggregates repossessed - neither the CBofI, nor Department of Finance report these on any regular basis. But in Q3 2013 we had 1,566 properties in repossession (1,050 residences and 516 BTLs). These are properties held in possession by the banks. We do not know how many they have sold since the beginning of the crisis.
4. Voluntary surrenders - we have no data on these from any official source, but the properties that are surrendered and are still in the possession of the banks are aggregated into (3) above.

So, with incomplete information on (3) and (4), to-date, the extent of the crisis is for all types of properties:

181,946 in arrears + 56,186 restructured, not in arrears + 1,566 repossessed and surrendered = 239,698 accounts or, ca 26% of all accounts outstanding.

And the number is growing...

This is not 2/3rds as claimed originally in the NYT, not even 1/3rd, and it is certainly not the percentage of mortgages in trouble over 2 years... and the above 26% include BTLs too... But the true extent of the crisis is that 26 out of 100 mortgages in the country have been directly impacted by it. And the crisis has not peaked, yet.

But here's what this tells us about our psychology when it comes to measuring the extent of the crisis: we commonly interpret arrears alone (and often only arrears in excess of 90 days) as the metric of the crisis. This is an error - an error based on the implicit anchoring of the idea of the crisis to the news and thus, to relative position in time. This is simply wrong. The crisis of WW2 is measured by the absolute level of destruction wrecked at the peak, cumulatively, not by where the losses were in 1955 or in 1948.


Actually, should you be interested, I track the evolution of the above metric (I call it mortgages in default, defaulted or at risk of default) in my regular posts on CBofI quarterly data. The latest was provided here: http://trueeconomics.blogspot.ie/2013/11/28112013-irish-mortgages-arrears-q3-2013.html.

And for the conclusion: I recall in 2007 CEO of AIB at the time stating in a meeting with analysts that "Irish people do not default on mortgages. They never do." I replied: "Never is a very precise term. Is there any uncertainty around this claim?" and he retorted: "None." Back to that 26% figure, then?..

29/11/2013: Central Bank: Failure of Own Sustainability Criteria on Mortgages Arrears Resolutions?

So things are getting better with mortgages arrears crisis… practically easing the worries of the nation, according to the Irish media and officialdom… And the Central Bank is delighted that the banks are so actively meeting targets etc… (Note: my coverage of the arrears figures is here: http://trueeconomics.blogspot.ie/2013/11/28112013-irish-mortgages-arrears-q3-2013.html)

Except…

Per Central Bank: “We expect that lenders will continue to progress and develop their approaches to ensure that future sustainability targets will be achieved.  With indications the banks are now offering long term sustainable solutions to customers, the Central Bank continues to encourage meaningful engagement between lenders and borrowers.”

And what these 'sustainable solutions' might be, you should ask?

Per CB: "As at end of September 2013 the lenders in total reported they had issued proposals to 43% of mortgage accounts in arrears against a target of 30%."

Now, let me be forthright here on my views:
1) Repossessions and voluntary surrenders are a part of the solutions tool kit and are unavoidable (and indeed optimal) in a number of cases.
2) However, the above can only be deemed sustainable if and only if they take place in the context of first (ex-ante repossession or surrender) concluding arrangements between borrower and lender on what is to be done with the residual balance on mortgage remaining at the end of the property sale.

Since we do not know what percentage of all repossessions and surrenders were accompanied by such an agreement, we do not know if there is ANY (repeat - any) sustainability of debt has been achieved in the process of such a resolution. In other words, the Central Bank cannot make a factual claim that 55% of the resolution measures proposed were sustainable (aka meet the CB own criteria for them satisfying the target requirement).

Worse, the massive number - 55% - is itself an indication that the entire Central Bank-led process is a complete failure. In fairness to the Central Bank, the language of the release (http://www.centralbank.ie/press-area/press-releases/Pages/CentralBankpublishesoutcomeofMortgageArrears.aspx) suggests that the bank is not entirely happy with the status quo distribution:

"There has been a change in the trend of proposed solutions from Quarter 2 to Quarter 3. In Quarter 2 62% of the proposals were in the Surrender/Repossession category, which decreased to 55% in Quarter 3."

But there are problems even with this claim. Firstly, there is no trend. There is not enough time series data to show ANY (repeat - any) trend up or down in the data. What we have is one quarter against another. Should the 'trend' of 7 percentage points per quarter continue, we will end 2014 with over 40% 'resolutions' leading to foreclosures or surrenders of properties. Given the bank wants to deliver 75% resolutions target by the end of 2014, this would imply that more than 40% of the mortgages accounts in arrears will be in liquidation. That is a trend to a national disaster.

28/11/2013: Irish Mortgages Arrears: Q3 2013

Numbers are out for Residential Mortgages Arrears in Q3 2013 and the data shows that the chronic problem of mortgages distress is still with us with little change after months of tough talks from the authorities, 'resolute' actions from the banks and a barrage of legislative, regulatory and rhetorical changes.

Top of the line numbers are still frightening, albeit things have largely faltered out on most fronts.

• Total number of PDH accounts at risk or defaulted (defined as all accounts currently in arrears, restructured and not in arrears, and in repossessions) at the end of Q3 2013 stood at 185,604, down 329 accounts or 0.2% from Q3 2012. 
• Over the 12 months through September 2013, number of BTL accounts at risk or in default rose 3,022 (+5.9%) to 54,094. 
• Thus, total number of mortgages accounts currently at risk or defaulted at the end of Q3 2013 stood at 239,698, which is 1.1% higher than in Q3 2012. 
• Total outstanding volume of mortgages at risk or defaulted for both BTL and PDH mortgages at the end of Q3 2013 was EUR46.77 billion, up EUR1.75 billion on year ago.
• As of the end of Q3 2013, 20.3% of all PDH mortgages accounts and 36.65% of all BTL mortgages accounts were either in arrears, restructured due to previous arrears or in repossession. 
• Across the entire system, 26.18% of all mortgages accounts and 33.6% of all mortgages volumes outstanding in Ireland were at risk or defaulted at the end of September 2013.

Deleveraging process is not working either:

• Total outstanding volume of mortgages debt in the country was EUR138.88 billion in Q3 2013, only 2.4% lower than a year ago.
• Total number of mortgages accounts fell to 915,746 in Q3 2013, down 3.08% y/y.
• Residential mortgages in arrears rose to 141,520 accounts (+0.1% y/y) and BTLs accounts in arrears numbered 40,426 (+10.35% y/y). Thus total number of accounts in arrears was up 2.2% y/y.
• Total outstanding volumes of mortgages in arrears stood at EUR36.56 billion in Q3 2013, up 5.8% y/y (comprising EUR25.56bn in residential mortgages volumes +4.75% y/y and EUR11.0bn of BTLs +8.32% y/y).
• Total amounts of actual arrears rose to EUR3.479bn in Q3 2013, up 28.2% y/y.
• Repossessions rose to 1,566 in Q3 2013 from 1,503 in Q2 2013 and 1,358 in Q3 2012. Residential repossessions rose to 1,050 from 1,001 a quarter ago and 944 a year ago. The process of repossessions remains very slow and is likely to accelerate in the near future.

These figures clearly show that banks-driven approach to the process of resolving the mortgages arrears crisis, adopted by the Government and the financial sector regulatory authorities is not delivering. To-date, the speed of mortgages arrears restructuring and resolution is disappointingly slow.

Some charts to illustrate the trends:

4/11/2013: IMHO's latest initiative to help distressed borrowers

Today was a big day for Irish Mortgage Holders Organisation. Here's our announcement:
https://www.mortgageholders.ie/blog/posts/imho-launches-an-initiative-for-aib-ebs-haven-borrowers

It is a big step for many distressed borrowers and we hope that other banks will follow the AIB Group steps and start treat seriously the need to help homeowners secure independent and client-focused professional advice regardless of people's ability to pay.

The scope of the crisis we face is unprecedented. Here's a reminder:
http://trueeconomics.blogspot.ie/2013/09/592013-sunday-times-september-1.html
and the latest data on arrears:
http://trueeconomics.blogspot.ie/2013/08/2382013-irish-mortgages-arrears-q2-2013.html

10/10/2013: Prof Honohan is correct on 'strategic defaults'... but...

It is good to see Prof Honohan making a substantive and strong statement on the issue of 'strategic' mortgages arrears, contrasting the current 'debate' with some reasoned commentary:
http://www.independent.ie/business/irish/patrick-honohan-some-mortgage-holders-not-paying-up-29649978.html

Prof. Honohan is correct - there are borrowers who are attempting to game the system. This is rational and expected. And often it is abusive. Prof. Honohan is also correct in pointing out that Ireland's environment for insolvency and bankruptcy resolution is different from the US, making comparisons to the US data and evidence incomplete at best.

However, Prof. Honohan is not correct in solely placing the blame for the insolvencies crisis on the shoulders of borrowers. Irish State and banks are to share in responsibility for this crisis as well by:

1. Banks - due to failing to properly price risks in issuing loans. Banks are paid to price these risks (this is what they collect the lending margins for) and they have not done their work in properly selling loans to some/many households.
2. State - due to failure to properly supervise loans risk pricing in (1) above and due to failure to protect borrowers from occasionally excessively aggressive loans origination practices of the banks.
3. Banks - due to failure to secure sustainable funding for loans origination, leading to excessive reliance on short-term borrowings and thus increased exposure to funding risks. These risks, once materialised, have been in part loaded onto the shoulders of borrowers with adjustable rate mortgages, in some cases potentially precipitating and in other exacerbating the extent of the crisis.
4. State - due to failure to properly regulate and supervise banks risk taking activities in funding markets.

None of the points 1-4 are liability of the borrowers. All of the points 1-4 are contributors to the crisis to some extent. 

There is co-shared responsibility by the State and the Banks and this responsibility must translate into liability to aid homeowners in distress. Such assistance can and should take form of cost-efficient and effective solutions. Unfortunately, current discussion does not even begin tackling this issue and Prof Honohan's comment today is not helping the process either

Note: my recent Sunday Times column on strategic defaults issue is here:

http://trueeconomics.blogspot.ie/2013/09/592013-sunday-times-september-1.html

My full position on strategic defaults and related matters of foreclosures is here:

http://trueeconomics.blogspot.ie/2013/08/182013-strategic-defaults.html

17/9/2013: CBI Sets New Targets for Mortgages Arrears Resolution

The Central Bank of Ireland has published new target for the mortgages resolution process: http://www.centralbank.ie/press-area/press-releases/Pages/CentralBankstatementonMortgageArrearsResolutionTargetsConcludedArrangements.aspx

The new target is that by the end of December 2013, 15% of mortgage holders in arrears above 90 days (as of the end of June 2013, ) should have "concluded agreements " completed. In March 2013, the Central Bank had requested offers of solutions to be made in respect of 20% of arrears cases, rising to 30% to Q3 and 50% by the end of December 2013. On foot of these targets, the Central Bank is now requiring that 15% of all arrears cases above 90 days should be concluded by the end of year.

March 2013 target of 20% offers of solutions by the end of Q2 2013 required the banks to submit formal offers on 19,575 principal residences mortgages accounts and 6,065 BTL accounts, while the new target of 15% concluded arrangement covers 14,681 principal residences mortgages accounts and 4,549 BTL accounts. In other words, the Central Bank’s combined targets are for the banks to issue formal offers of solutions to 25,640 accounts and achieve concluded arrangements on 19,230 accounts.

Detailed Central bank paper setting out original set of targets is available here: http://www.centralbank.ie/press-area/press-releases/Documents/Approach%20to%20Mortage%20Arrears%20Resolution%20-.pdf

IMHO will be issuing a more extensive press release on today's announcement later, stay tuned for the link.

14/9/2013: IMHO signs agreement with Alsop Space Ltd

Irish Mortgage Holders Association have signed an agreement with Alsop Space Ltd that ensures that Alsop Space Ltd will not undertake auctions of repossesses Irish primary residences.

Keep an eye out for more details: https://www.mortgageholders.ie/

1/8/2013: Strategic defaults...

This is "I am not drowning puppies for fun" note concerning my view on the problem of 'strategic defaults':

1. I do not allege there are no 'strategic defaults' in Ireland.
2. I do state that at this moment, there is no evidence of these defaults being a systemic problem of specific dimension.
3. Absence of evidence is not, in my view, an evidence of absence. 
4. I am aware that some people prioritise payments of unsecured debt over secured debt.
5. However, (4) does not automatically imply that a person doing so is out to 'game the system' to their advantage. They might be prioritising payment of unsecured debt for a number of reasons, other than personal gain, e.g.: (a) their credit cards or small credit union loans fund their day-to-day living expenses and as such they need their credit flowing to survive, or (b) their unsecured creditors exerted more pressure on them and they simply caved in, etc.
6. I do not allege that doing (4) above (including for the reasons outlined in (5))  is a correct or a good or an acceptable course of action. In fact, in my opinion, it is not. However, presently, the Irish authorities have failed to secure a clear, accessible and definitive pathway for resolving the conflict between secured and unsecured debt obligations for distressed borrowers. As the result of such a failure, we cannot fault people opting for acting according to (5) above, regardless of what we might think.
7. I am aware of at least one instance where an organisation I am working came across a case of a wilful and strategic default. As the case was brought to us for an independent external assessment and was not represented by us on a client basis, we advised to pursue all legally available courses of action to stop the person from continuing to engage in such activity and we advised the borrower to immediately cease such activities.
8. I am aware of the study that used US research (not US data) to extrapolate to the Irish situation. I find such an approach a good starting point for a debate, but I do not accept it as a robust evidence to base any policy design or analysis on. It is not an evidence and thus (2) and (3) above continue to apply.
9. I am aware of the statements by media and analysts that the problem of 'strategic defaults' in Ireland is growing and is already significant. 
10. My view is that (9) represent unsubstantiated claims, not backed by any real evidence and as such these claims have to be treated as speculative conjectures. Anyone is free to make a conjecture. Some might even opt to be so kind as to seek evidence to back one up. None have a right to impose their conjecture onto actual solution or policy mechanism.

I hope this explains my position on the issue and ends the nonsensical accusations that I am denying the problem. 

My personal conjecture on the topic (backed by anecdotal evidence, so not different from any conjectures on the topic presented in the media to-date) is that there are, most likely, some borrowers attempting to game the system. We do not know how many there are. We do not know who they are. We do not have a means for rigorously identifying them. The correct way for dealing with them is to penalise them at the point of discovery, make such penalty known in advance of any actions to give them a  chance to alter their behaviour.

If the resolution of onerous arrears requires repossession of the property, repossession is justified. It is not my position to argue that all repossessions are unjustified. It is my view that repossessions of family homes should be minimised and, crucially, all repossessions should be preceded by the full, binding and voluntary agreement between the borrower and the lender on how the residual debts, remaining post-repossession action, are to be settled.

Before a point of discovery of their guilt, however, everyone is innocent. 

19/7/2013: Spain's Bad Loans: Heading for the Eurotroit solution?

Spanish banks bad loans ratio of all assets for May 2013:

H/T: Ioan Smith @moved_average

The Eurotroit keeps rolling on... Notice how Spain has by now largely erased the reductions in bad loans driven by assets shifts to 'bad bank' Sareb (EUR50.45bn portfolio, with 76,000 empty housing units, 6,300 rented homes, 14,900 plots of land and 84,300 loans). Spanish bad loans as a percentage of total credit rose from10.5% in March to over 11.2% in May.

And they will continue rising.

That's because in Spain, ultimate level of bad loans is going to be closer to Ireland's, where over 50% of SME loans are non-performing, over 25.8% of all mortgages are non-performing or at risk of default, and as of June 2013, 24.8% of all loans were non-performing, against EuroTanic's average 7.5-7.6% (EUR920bn or so). Irish numbers exclude Nama.

So even with the sunshine and sea, Costa del Concrete is going to cost Spain over 20% in terms of bad loans ratio in the end.

17/7/2013: IMHO statement on Land & Conveyancing Bill

Irish Mortgage Holders Organisation response to the passing of the Land anf Conveyancing Reform Bill, 2013:
https://www.mortgageholders.ie/land-and-conveyancing-reform-bill-2013/

do keep in mind, while reading, that our view recognises fully that in many cases, in dealing with mortgages debt there will be no option other than foreclosure sale (voluntary or enforced).

The key to any economically and socially sustainable system for resolving this crisis is to create a symmetric balance of power and incentives between the banks and the borrowers to achieve a long-term sustainable solution to the debt overhang. This the current system does not allow for. 

4/7/2013: IMHO Letter to Governor Honohan

Updated:

Here's this week's letter to the Governor of the Central Bank of Ireland from the IMHO on the topic of Declaration of Last Resort for Family Home Repossessions (you can click on each image to enlarge):

23/6/2013: On Dealing with Mortgages Arrears: Adverts v Process

A reply to @cbolgerr regarding the issue of contacting your bank when experiencing financial pressure in relation to mortgages:

In simple term (omitting some considerations), prior to the crisis people were mis-sold mortgages by the banks. Many mortgages were mis-sold on the basis of poor risk pricing by the banks - the job that the banks are paid to do. There was so much mis-selling that the problem of unsustainable mortgages is now structural.

People who mis-sold them these mortgages are still in the banks and are now the same people working on 'resolving' the problems. There were no involuntary layoffs of banking staff and there was no clearing of the banks lending officers or risk management staff on a systemic basis to match the problems in the lending markets. Hence, these staff members are still there. And accepting that they have no new lending to do, these are now the staff working on resolving the mortgages problems. As such, they have neither ability, nor credibility, nor incentives, nor compassion to do anything to repair the damage they have done.

In this environment, and provided the information and power asymmetries awarded to the banks by the Government & Regulator at the expense of mortgagees, the only thing that mortgagees should do is, simultaneously:
1) continue contributing to servicing their mortgages to the extent feasible,
2) prepare as much relevant financial information as possible in order to be able to file FSS,
3) identify an independent, properly regulated and knowledgeable/experienced representation for their case,
4) treat any engagement with the bank as potentially hostile and detrimental to them.

Their first step should be to seek independent advice and representation in the process. Unfortunately, the PIP system put forward by the state is itself at risk of being biased in favour of the banks. Still, it is better than following through on the banks advertising and contacting them before securing independent representation.

There are very few practitioners who have any relevant experience in dealing with the banks. And fewer still willing to help with advice before securing large payments from the homeowners. Care must be given to how the banks and the PIP system are approached.

Key issue, however, is that any mortgage holder under stress should continue engaging with servicing the loan to establish 'good will'. The banks are not required to establish any 'good will' toward borrowers, so the system in inherently unfair and asymmetric, but that is the reality of the fundamentally unjust legal framework established by the government and, for now - until challenged and changed - it has to be obeyed. 

30/4/2013: 2012 Was Not a Year of Brilliance for the Central Bank

From the Opening Statement by Governor Patrick Honohan at the publication of the Central Bank of Ireland Annual Report 2012, 30 April 2013


"Two major elements of the Bank’s work during 2012 came to decisive junctures early this year – the liquidation of IBRC and related replacement of the promissory notes with marketable government bonds; and the introduction of an enhanced mortgage arrears resolution framework, which was announced in recent weeks. All of these measures are ultimately concerned with creating the environment for sustainable economic growth and reduction in unemployment."

It is my opinion that 2012 marked the year when the Central Bank has done the least to deliver on any meaningful reforms and change that can create or sustain "the environment for sustainable economic growth and reduction in unemployment". The bases for my opinion are:

1. In 2013, the Central Bank attempted (key word here) to introduce an enhanced mortgage arrears resolution framework. The new framework is 'enhanced' only to the extent that the previous framework was proven to be a complete failure. However, looking forward and setting aside the failures of the very recent past, the new framework is not consistent with the goals for either reducing unemployment or enhancing prospects for economic growth. Some of my criticism of the new framework in the context of these two objectives can be found here: http://trueeconomics.blogspot.ie/2013/04/1842013-legalising-modern-version-of.html
2. In 2013, the Irish Government has undertaken a swap of one financial liability (promissory notes) with another (government bonds). This transaction has been deemed by myself, many others, including the IMF, to have near-zero impact on debt sustainability when it comes to the Irish Government debt. The transaction was net positive for cash flow, albeit moderately, and hugely positive for PR. while th CB of Ireland did benefit significantly from improved security underlying the ELA, this benefit came at a cost to the rest of the Irish economy in the form of the conversion of the quasi-sovereign debt (promo note) into long-dated sovereign bonds.
3. Beyond the above two points, there has been very little progress on any tangible reforms in the banking sector in Ireland. We are still pursuing a duopoly model of the domestic banking market,  and there is no effective discussion, let alone effective resolution of the problem of lack of new entrants and lack of restructuring of the existent lenders. We have no new models of banking and lending in the country emerging after six years of this crisis and, if anything, we are now consolidating the strategic space in our banking services to a singular model of low-quality, low-access services supplied at an excessive cost. Both AIB and Bank of Ireland are pursuing this model, leaving customers to pick up the tab for reduced access to services and increased charges on the remaining services. This hardly supports Governor Honohan's claim that the Central Bank is working on creating and sustaining environment for growth.
4. All banking sector performance parameters have been either not improving or deteriorating over 2012 within the directly state-influenced covered group of financial institutions.

Slapping ad hoc targets on the banks to reduce mortgages arrears and then introducing masers to give them power well in excess of that awarded to the borrowers is about as productive of a measure for dealing with mortgages crisis as giving hospitals management targets for reducing the number of trolleys in corridors while removing patients protection from malpractice.

The Central Bank-supplied 'framework' is thus simply not fit for purpose, neither by the criteria of dealing effectively and humanely with the debt crisis (by first removing the unsustainable debt in systemic, transparent and fairly-priced fashion, then by addressing future moral hazard), nor in terms of placing the burden of crisis resolution where the causes of the crisis rest (proportionally with both the banks and the borrowers), nor in respect of the Central Bank claimed objectives of delivering supports for economic recovery.


Updated: Central Bank of Ireland has made a claim of 2012 'profit' of EUR 1.4 billion. But wait, a business makes profit by taking investors' / equity holders' / lenders' or own funds, purchasing inputs into production, producing something and then selling that something to willing customers who pay for these goods from their own funds. Central Bank of Ireland took claims imposed by the Government of Ireland on consumers and taxpayers, gambled these claims on the banks, who were basically compelled to take 'as offered' these Central Bank-supplied 'goods' and then collected from these captive banks pay (which the banks promptly ripped-off their customers - aka consumers and taxpayers). The Central Bank subsequently relabelled these rip-off charges 'profits' and remitted them back (EUR 1.1 billion) to the Exchequer. So can anyone explain to me what Central Bank produced that someone voluntarily was willing to buy with their own cash?

18/4/2013: Legalising Modern Version of Slavery

Insolvency guidelines published today were wholly and fully written by the banks and for the banks.

The core points are that under the new regime, Irish mortgagees will be:

1. Treated as de facto strategic defaulters until they are proven not guilty of such behaviour in a biased process that will see them face fully resourced lenders while having no practical and meaningful means for defending themselves. 'Innocent until proven guilty' principle no longer applies in the Irish State.
2. Permanently branded as defaulters for the rest of their lives as there record of applying for the resolution process will be kept indefinitely, independent of success or failure of the process.
3. Will lose basically any means to sustain real savings, investment, pensions provisions for the duration of up to 6 years or even longer without any guarantee that their engagement with the system will end in resolving the debt overhang at the end of the process.

This means that the Irish economy will continue to struggle with the debt overhang and, materially, the current change in the regime will only serve the purpose of further shifting financial resources from the households to the banks.

There was no real functional process for consultation with the current providers of services to those facing the insolvency. There was no transparency in developing these Guidelines. Give you one example, there is no reference to the protection of consumers, mortgagees or borrowers in the entire text of the document.

Take it from the top: "A debtor should be able to participate in the life of the community, as other citizens do. It should be possible for  the debtor ‘to eat nutritious food …, to have clothes for different weather and situations, to  keep the home clean and tidy, to have furniture and equipment at home for rest and  recreation, to be able to devote some time to leisure activities, and to read books,  newspapers and watch television" according to the Guidelines.

In other words, from get-go, a debtor is not to be allowed to plan or provide for the retirement, to arrange for health cover, to build functional (as opposed to token) precautionary savings, or to have incentives to better their lives. 

Presumably, Irish social inclusion does not provide an allowance for dental care either. At EUR5 per week in allowed savings, a debtor would have to wait around 140 weeks in agonising pain before they can get a tooth cap. Children braces will take as much if not longer. And you better not dare go to a doctor more than once every two months during your dental affordability waiting period.

Now, let's give it a thought - we are releasing households with children into the wilderness of living without providing a single cent for uncovered (beyond those stipulated by the guidelines) eventualities - e.g. dental emergency or a breakdown of the sole family vehicle. And we give them no capacity to acquire such means by working harder or undertaking different jobs which pay more.

When it comes to access to car, the guidelines do not distinguish between the need to commute to work and to commute to deliver children to schools or childcare facilities. The guidelines also appear to ignore the fact that shopping for a family is not the same as shopping for a single individual when it comes to transportation options allowed. There are no provisions for households that may require two cars. There are no realistic provision for caring for the old-banger vehicle that Guidelines allow for and which cost more in repairs than newer vehicles which the households will be forced to sell.

The real flaw in this approach is that we start from the point of allowed disposable income and work our way back to earned income. This means that a household has absolutely no incentive to earn more, no allowance is provided for them to take up risk and become entrepreneurs, no capacity to fund change in employment. 

This is precisely what wage slavery is all about. And we are now putting people into it.

The Guidelines talk vaguely about the need to incetivise households to engage in economic activity, yet provide a cap on savings of EUR5 per week per adult. None allowed per child. 

In other words, suppose you satisfy the conditions of the Guidelines and you get a new job paying an extra EUR50 per week. You cannot save anything out of this, which means all of the additional income immediately accrues to the banks.

Now, imagine that a new job offer comes with the prospect of better pension down the line, greater promotional opportunities, better life satisfaction and other benefits you might want to have and that can significantly improve your and your family wellbeing, not to mention the economy. Alas, also assume that the new job requires you to commute to work by car while prior to that - with your old job - the Guidelines allowed only for public transportation option. You have no savings to buy the car and no access to new credit. Which means that you will either have to turn down the new job (at a loss to you, employer, the bank and the economy) or to borrower on terms and conditions from the bank with which you have arrangements in place (at a loss to you, as you can't keep the upside of the new job pay). 

This is like taking slave labour and forcing it to consume bank-provided services at prices set by the bank. In the 19th century this was the practice with monopsonist employers and it led to industrial unrest on a massive scale and even revolutions. Welcome to the New Ireland, folks.

Thus, even in theory, the Guidelines are not consistent with one of their intended purposes - that of supporting economic activity and participation in this activity by the households.

In a summary: From the beginning of this crisis I have argued that we need to import UK insolvency regime into Ireland, so as  to allow effective and efficient bankruptcy resolution. 

What we have done instead is put forward a modern-day, democratically legislated slavery in the name of protecting our banks and created an incentive for tens of thousands to convert current bankruptcy tourism into a permanent bankruptcy emigration. 

Welcome to the 21st century model of a Dickensian nightmare grafted onto, as Namawinelake puts it perfectly world's most exemplary Nanny State.


Updated:
Two excellent posts on the Guidelines that are a must read:

Brian Lucey's: http://brianmlucey.wordpress.com/2013/04/18/pettifogging-nanny-state-gone-mad/

and

Namawinelake's: http://namawinelake.wordpress.com/2013/04/18/hey-world-if-you-want-to-see-what-a-true-nanny-state-looks-like-look-at-what-ireland-has-just-done/

10/4/2013: IMHO Submission on the Review of Code of Conduct on Mortgages Arrears

The Irish Mortgage Holders Organisation Ltd.,
www.mortgageholders.ie
Not for profit organisation.

Submission on the review of code of conduct on mortgage arrears consultation paper CP 63

Irish Mortgage Holders Organisation, April 9th 2013.

Attention: Mr. Bernard Sherridan, Central Bank of Ireland.



Dear Mr Sheridan,

We would like to thank you and your team for meeting us recently about issues and concerns we have at the treatment by banks of Mortgage Holders.


We are very concerned by the statements made by Mr. Elderfield at the launch of the “targets” (set by government and the Central Bank) for banks, with respect to dealing with those in arrears as well as comments surrounding the changing of the Code Of Conduct on mortgage arrears to allow banks to take swifter action against mortgage holders.

It is our view that the process of mortgages arrears resolution is being facilitated in an unsupervised and unstructured way, without due regard to the need for transparency and openness which would be consistent with the best practices for arrears resolution and consumer protection. The process – as outlined to-date – leaves the mortgagees fully exposed to banks putting their own objectives and strategies ahead of the needs of the Irish economy, society and borrowers, and provides a large deficit in consumer protection.

We would like to make the following specific points regarding the review of the code of conduct on mortgage arrears notwithstanding the fact that it may already be predetermined as demonstrated by Mr. Elderfield’s comments as referenced above.


Legal standing:

In the first instance and reluctantly we have to raise the issue of the legality of the Code Of Conduct. This issue has been discussed behind closed doors for some time now and it is an issue of the utmost importance as the legal status of the code of conduct on mortgage arrears is by no means certain. We wish to reaffirm our concerns about the legality of the code which we expressed originally in our email to Governor Honohan last month.

A number of recent high court cases refer to this issue including Irish Life and Permanent v Duff where Justice Hogan raised “the somewhat troublesome issue of the precise legal status of the code of conduct”. Justice Hogan followed recent high court precedent in the Fitzell case and warned The question, for example, of what constitutes a “reasonable effort” on the part of the lender does not easily lend itself to judicial analysis by readily recognisable legal criteria. How, for example, are “reasonable efforts” to be measured and ascertained? If, moreover, non-compliance with the Code resulted in the courts declining to make orders for possession to which (as here) the lenders were otherwise apparently justified in seeking and obtaining, there would be a risk that by promulgating the Code and giving it a status that it did not otherwise legally merit, the courts would, in effect, be permitting the Central Bank unconstitutionally to change the law in this fashion’.

The Code itself has no specific legislative status. It is neither a piece of primary legislation in the form of an act of the Oireachtas nor a secondary piece of legislation in the form of a ministerial regulation issued by the Minister for Finance. The Code is not even stated to be admissible in legal proceedings. It is a Code issued under the terms of Section 117 of the Central Bank Act 1989 and therefore lenders who infringe its terms may be subject to the Central Bank’s Administrative Sanctions Procedure. This is an internal process that allows the Bank to control the conduct of and helps to define its regulatory relationship with financial service providers, but it is not one that a consumer as a borrower has any involvement in. This we believe is a matter of extreme urgency that needs addressing.


Right of Appeal:

Section 49 & 52 as proposed allows for a lender to have 3 senior staff act as an appeals board. This is completely unacceptable and allows for no independent oversight. The appeal process must be fully detached from the banks or banking sector representative institutions and vested with an independent authority acting to protect the interests of all parties involved in a dispute. The process must be made explicitly transparent and any asymmetries in representation during the dispute that may arise due to (a) nature of the processes that lead to the appeal, and (b) resources available to the parties prior to and during the appeal should be removed. In practical terms, this requires provisioning for the independent and fully funded counsel for borrowers who cannot afford such professional help, and an appeals board that is fully operationally and membership-wise independent from both borrowers and lenders.


Moratorium:

The proposed and current code is flawed in not being prescriptive in defining the periods of time over which the moratorium clock is ticking. No time is given for gathering of financial information or indeed an exchange of offers between the lender and the borrower. This will become a significant issue when the legislation is introduced to reverse the Dunne Judgement, which will lead to a significant rise in repossession applications. Lenders can initiate delays in corresponding with borrowers, as they have done on many occasions to-date, and such periods of delays will account for time eaten into a moratorium period. Borrowers, however, are not accorded similar powers. Again in the absence of prescriptive process and recording of times borrowers can be seriously and unfairly disadvantaged by losing time that is taken off them ahead of potential repossession proceedings.

Provision 37 proposes ‘Prior to completing the full assessment of the borrower’s standard financial statement, a lender may put a temporary arrangement in place where a delay in putting an arrangement in place will exacerbate a borrower’s arrears or pre-arrears situation. Such a temporary arrangement should not last for more than three months. Any subsequent arrangement should be based on a full assessment of the standard financial statement’.

This provision should state that the duration of this temporary arrangement does not count for the purposes of the 12 month moratorium on repossession proceedings. Similarly, Provision 57 should state in relation to the twelve month moratorium that ‘the twelve month period does not include any time period where a proposal for an alternative repayment arrangement is being negotiated’.


Unsolicited Contact by Lenders with Borrowers:

The Central Bank “themed inspections” as to the banks adherence to the previous rule of no more that 3 unsolicited contacts in one month was typical of light touch supervision. The lenders seem to have
had significant influence in this proposal and the Central Bank seem to have accepted the industry’s lobby position on this. In addition the Central Bank gave advance notice to banks before their “inspection”.

‘Feedback from industry would indicate that the current requirements, particularly the limit of three successful contacts, are preventing lenders from making contact and engaging with borrowers and are therefore impeding the consideration and resolution of borrower’s cases. The Central Bank does not believe that this is in the best interests of borrowers’.

There are no provisions for the engagement with mortgage holders in this feedback system. Similarly, there are no explicit, transparent and enforceable provisions to ensure that lenders engagements with the borrowers will be “proportionate and not excessive”. There are no data disclosure provisions relating to inspections and any remediation measures applied to institutions violating code of conduct.

The new unlimited contacts must not be “aggressive or intimidating”. Once again, how is it proposed to ensure this will be the case? How will it be proven that all attempts to contact the borrower have been made and that these attempts have been made within the confines of the Code-permitted procedures? The removal of this limited protection of mortgage holders is a significant regressive step in consumer protection and has left the borrowers unprotected against potential abuses by the banks.

Debt collectors acting on behalf of lenders are still unregulated within the existent structure and under the proposed code. How does this code cover their activities or can they adopt any means they deem appropriate to recover monies?

The Central Bank will have failed to provide symmetric protection of the interests of the borrowers and the lenders unless it allows for explicit, enforceable and transparent safeguards to protect many vulnerable people who are in arrears and will be set upon by lenders who have been given a free rein.


Unsustainability: 

Many actions taken by the bank to repossess property are predicated on a decision by a lender that a loan underlying the property is unsustainable. The Code should include prescriptive rules defining what is sustainable and what is not sustainable. This may involve some sort of expenditure guidelines. These rules and guidelines should be transparent, public, enforceable and compulsory for all banks, and applicable to all borrowers.


Trackers:

It is vital that provision 12 (d) is not changed unless there is a clear system for borrowers to seek advice to ensure that any removal off a tracker is of benefit to the borrower. Such advice should be delivered on a professional basis and borrowers in need of funding for procuring such advice should have access to such funding. Page 4 of the consultation paper suggests that the removal off a tracker might have merit if in the interest of the borrower. This determination cannot be solely in the remit of the lender nor can it be left subject to the appeal system that incorporates explicit conflict of interest between the appeals process and the bank interests per note above.


Engagement:

Our experience, confirmed by the experience of other organisations working on behalf of the borrowers in distress, is that lenders do not respond in a timely manner to borrowers proposals or engagements, which is unacceptable. What happens to a lender who does not engage, who does the borrower appeal or complain to, other than the bank, which is alleged to engage in the abuse of the system?

Engagement by lenders with borrowers can be painfully slow, tedious and difficult leaving the borrower exhausted, their financial resources significantly reduced and without a resolution. There needs to be a clear code of conduct enforcement by the central bank on lenders for their behaviour and engagement and such enforcement should be transparent, effective, verifiable and not based on an ad hoc system of inspections, criteria and judgements.


Borrower representation and advice:

Even in normally functioning bankruptcy regimes around the world, those in debt are at a significant disadvantage compared to the might of creditors. They face corporate strength and power that can crush any debtor financially, emotionally, socially and psychologically. Observed by passive regulators, as in Ireland, compounded by the insolvency regime that is both under the current statutes and in its ‘reformed’ reincarnation nothing short of draconian, leaves the debtor in great peril.

When this financial crisis happened it was the citizen who suffered where the regulated entities and regulators enjoyed protected pay, conditions and functionality. Now, the very same citizen is facing the immense power of the state backing the already significant powers of the banks when it comes to the personal debts.

Bankers have a Banking Federation that represents them. Bankers are also availing of the weaknesses in the Irish competition laws to sustain and even consolidate their market powers at the expense of the taxpayers. They discuss issues and present their views publicly and to the government rather effectively and are assisted by a receptive media. They tend to be in sync with government announcements and findings and have direct access to the Social Partnership process and all other avenues of policy formation.

Debtors lack any statutory or institutional power. They need assistance and protection, care and support. This is best achieved by a coming together of advocates and organisations that provide services and assistance to debtors. Organisations and bodies such as MABS, The Irish Mortgage Holders Organisation, Flac, Phoenix Project and others are providing exceptionally effective and professional services to debtors usually on the basis of voluntary engagement of experts and ordinary citizens, and in the majority of cases, with no cost to the state. These and other organisations have a combined knowledge, experience and passion of their volunteers to help those is debt.

Mabs has been effectively assisting debtors for the last few decades and they have experience and a national foot print from where services and supports could be head quartered.

Yet, even with these organisations behind them, Irish debtors do not have the resources needed to deal with aggressive and disruptive creditors. With many commentators and practitioners expressing concerns and uncertainty as to how the new personal insolvency act will work there is a need to address the imbalance that exists today between debtors and lenders, as well as prevent the exacerbation of this imbalance threatened by the new legislation.

The new Insolvency regime will add additional hurdles for debtors, allowing vultures prey on the hundreds of thousands of households saddled with excessive debts, while providing little certainty to the debtor or any chances for a renewal to the economy.

Successive governments have chosen to ignore the one constant support debtors have had which is Mabs, in favour of diluting their effectiveness and giving banks and creditors a strengthened hand. Successive governments have also opted to ignore all other organisations currently working on the frontlines of the debt crisis. Despite the governments’ best efforts these organisations continued to offer a better balance and chance for debtors to be represented and protected effectively. These organisations deserve to be recognised as the de facto debtors’ representatives and be allowed to fund professional provision of services to debtors by linking arrears and insolvency resolution savings delivered to the economy at large via their efforts to the resources available to them to achieve such savings.

The insolvency bill raises a serious question of how those deeply in debt will be able to afford professional representation to assist them deal with their debt in favour of those with cash flow who can avail of professional services. This will promote a two tiered system leaving the most vulnerable to fend for themselves in unchartered waters full of predatory creditors and commercial service providers.

What would be helpful to debtors in the years ahead would be a number of organisations that compete to provide a full suite of services to debtors including legal, financial, negotiation, mental health, conveyancing and creditor payment services. These organisations should be modelled around Mabs, with Mabs established on a stand alone basis with an independent Board filled with experienced directors. A Board with a strategic plan that addresses the needs of debtors in the years to come.

Mabs is currently funded from the department of social protection to the tune of EUR18,5 million per annum. This funding could be directed towards the new organisation and additional funding could be raised by charging creditors as is done in many other jurisdictions. Many consumer credit counselling services agree voluntary payment arrangements with creditors on behalf of debtors and facilitate the cash transactions for a fee. A truly independent and well-resourced Mabs can act as a coordinator and supervisor over other organisations that compete with each other for representation of debtors in the
process of developing systemic resolution to the debtor arrears or insolvency.

Given the disproportionate powers granted to the banks by the new legislation, existent debtors’- representing organisations will undoubtedly try their best to help but they are not adequately funded to achieve significant scale and scope of their operations to fully function as representatives of families and people in difficulty. Indeed, majority of them are not funded at all. There is an urgent need to consolidate these organisations’ efforts, provide them with proper supervision and supports, and allow them to raise resources to deliver meaningful and effective change.


Yours sincerely,
David Hall
Dr. Constantin Gurdgiev
Directors
Irish Mortgage Holders Organisation.
Dublin, Ireland
April 9, 2013

THE IRISH MORTGAGE HOLDERS ORGANISATION LIMITED is Registered in Ireland No: 517549 Directors: Arthur Mullan, David Hall, Lucy Cronin, Tracy Mullan, Constantin Gurdgiev

22/3/2013: Sunday Times, 17/03/2013

This is an unedited version of my Sunday Times article from March 17.


Economics is an art of contention. In so far as economics body of knowledge is concerned, the world is largely composed of an infinite number of things that are either uncertain, or open to interpretation. One of the very few near-certainties that economists do hold across the ideological and philosophical divisions is that an economy undergoing deleveraging of household debt is likely to experience a lengthy period of below-trend growth. The greater the debt pile to be deleveraged, the faster was the period of debt accumulation, the longer such a recession or stagnation will last.

Another near-certainty is that in a debt crisis, economy is unlikely to recover on foot of either monetary or fiscal stimuli. Monetary easing can help the deleveraging process if and only if low policy rates translate into cheaper mortgages on the ground. This requires a functioning banking system, in addition to monetary policy independence. Fiscal stimulus can only help to the extent to which it can temporarily stimulate growth, and even then the impact on more indebted households is unlikely to be any stronger than on less-indebted ones. Longer-term effects of a significant debt-financed fiscal stimulus in an economy already struggling with government and household debt, are more likely to be detrimental to the overall process of deleveraging. Higher debt today necessary to fund economic stimulus translates into higher burden of that debt in the future.

Meanwhile, deleveraging of the households in and by itself, even absent banking and other crises, is a process associated with dramatically reduced economic activity and growth.

Households struggling with a debt overhang are effectively removed from being active participants in the economy. Indebted households do not save, thus depleting their future pensions provisions and reducing overall levels of investment in the economy. Indebted households tend to cut back their consumption, both in terms of large-ticket durable goods and in terms of everyday items. They also reduce consumption of higher-quality higher-cost goods, adversely impacting domestic producers in higher-cost economies, like Ireland, favoring more competitively priced imports.

With banks beating on their doors, indebted households abstain from entrepreneurship and engage less actively in seeking improved employment opportunities. The latter means that indebted households, fearing even a short-term spell in unemployment, do not seek to better align their skills and talents, as well as future prospects for promotion with jobs offers. This, in turn, implies loss of productivity for the economy at large. The former means slower rate and more risk-averse entrepreneurship resulting in further reduction in future growth potential for the economy.

Last, but not least, household debt overhang results in increased rates of psychological and even psychiatric disorders, incidences of self-harm, suicide, stress and social dislocations. These effects have a direct and adverse impact on public services, the economy and the society at large.

In Irish context, the effects of household debt overhang (most acutely expressed in mortgages arrears) are likely to be significantly larger than in normal debt crises episodes and last longer.

Consider the sheer magnitude of the problem. In an average debt crisis, household debt arrears peak at around 7-10% of the total debt outstanding. Per latest data from the Central of Bank of Ireland, at the end of 2012, 143,851 private residential mortgages accounts and 37,995 buy-to-let accounts were in arrears. Total number of mortgages in arrears represented 19% of all mortgages outstanding.  Total balance of mortgages in arrears amounted to EUR35.4 billion, or 25% of the entire mortgages-related debt. Mortgages at risk of default or defaulted (defined as all currently in arrears, relating to properties with repossession orders and mortgages restructured during the crisis, but currently not in arrears) amounted to 238,663 accounts and EUR45.3 billion of the outstanding debt, or 25.3% and 31.9% of the respective totals.

Given expected losses from the above mortgages in the case of repossessions and/or insolvency, and inclusive of the interest costs due on this unproductive debt, over the next 3 years Irish economy is likely to face direct losses from this mortgages crisis to the tune of EUR20 billion. This will reduce our current level of gross fixed capital formation in the economy by 40 percent in every year through 2015.

In indirect costs, the crisis currently is impacting some 650,000-700,000 individuals living in the households with mortgages at risk, as well as countless others either in the negative equity or arrears on unsecured debt (credit cards, credit unions’ loans, utility bills etc).  Using basic cost of health insurance coverage, the relationship between health insurance spend in Ireland and cost of public healthcare, and assuming that annual cost of higher stress associated with debt overhang amount to just 10% of the total annual insurance costs, direct health costs alone from the debt crisis can add up to EUR400-500 million per annum. Factoring productivity losses due to stress, the total social, psychological and psychiatric costs of the mortgages arrears can run over a billion.

Costs of foregone entrepreneurship are even harder to quantify, but can be gauged from the overall decline in investment. In 2012 the shortfall in aggregate domestic investment activity compared to 1999-2003 annual average (taking the period before the rapid acceleration in property bubble) was running at ca EUR6.9-7.0 billion. This shortfall is roughly comparable to the above estimated annualized cost of servicing defaulting and at risk mortgages. Gross investment in Ireland is now running at a rate not seen since 1997.  Meanwhile, net expenditure by the local and central Government on current goods and services is running above 2005 levels, same as personal consumption of goods and services. This suggests that our current rates of domestic investment and associated entrepreneurship are down more significantly than personal and Government spending.

In some sectors, things are even worse.  Construction sector is clearly seeing no turnaround with new residential construction permits down 88% in 2012 on the peak, heading for historical low of estimated full-year 14,022 permits based on data through Q3 2012. Extending mortgage arrears crisis or deepening the households’ already significant debt overhang through the means of forcing them into repaying the unsustainable loans will only exacerbate the crisis in Irish construction sector and in all sectors of domestic economy.

In years to come, the mortgages crisis today is likely to cost Irish economy around 10% of our GNP.

And it is unlikely to ease significantly any time soon, since the above costs exclude the effects of likely acceleration in mortgages defaults in months and years to come due to the adverse policy and economic headwinds.

Firstly, ongoing fiscal consolidation is shifting more burden of paying for our State onto the shoulders of Irish households, including those subsumed by the debt crisis. This process is not going to end with Budget 2014.

Secondly, reform of the personal insolvency regime will add fuel to the fire by giving banks disproportional powers over the households in structuring long-term solutions to the mortgages distress. Changes to the Central Bank code of conduct for the banks in dealing with borrowers, along with the accelerated targets for restructuring non-performing mortgages announced this week are likely to push the banks to more aggressively deal with the borrowers. These factors will amplify the rate of mortgages arrears build up, driving more households into temporary relief measures. These measures will structured by the banks in absence of transparent and efficient consumer protection to suit banks’ objectives of extracting all resources out of households for as long as possible before forcing the households into bankruptcy in the end.

Finally, mortgages arrears will continue to rise on foot of weak economic growth and continued re-orientation of the Irish economy away from domestic activity toward MNCs. This headwind closes the loop from the household debt overhang to depressed domestic investment to higher unemployment and lower domestic growth to an even greater debt overhang.

In order to deal with the mortgages crisis, we need a prescriptive approach to long-term solutions based on principles of borrower protection, standardization and transparency.

All lenders operating in Ireland should be required to publish a full list of solutions offered to the distressed borrowers which complies with the minimum standards set out by the Central Bank and a borrowers’ protection watchdog, such as reformed and independent Mabs. The financial criteria and conditions that qualify borrowers for such solutions should be disclosed. The process of finalizing the details of solutions should involve borrowers supported by an adviser, fully resourced to deal with the lender and independent from the lender and the state.

Only by matching borrower and lender powers and resources in a transparent and strictly supervised manner can we achieve a resolution to this crisis. Until then, this economy will continue operating well below its potential rate of growth, condemning generations of Irish people to debt slavery. The status quo of the state granting ever increasing powers to the banks in dealing with mortgages arrears is not sustainable and is likely to lead to both economic misery, continued emigration, and in the long run to political and social discontent. Sixth year into the mortgages crisis of extremely acute nature, we can not afford another round of half-measures and fake solutions.

Box-out:

This week auction of Irish bonds put to some test the theory of yields divergence with the euro area periphery. Compared to Italian Government bonds auction carried out on the same day, Irish 10 year bonds were greeted by the markets with a cheer.  While supportive of the analysts’ consensus view that Ireland is decoupling from the peripheral states, such as Italy, Portugal and Spain, the results of the auction were at least in part driven by factors outside the Irish Government control. This was the first 10 year bond issuance for Ireland in 3 years and the issue came without much of the adverse newsflow surrounding the economy. Complete absence of 10 year bonds in the secondary market prior to the auction assured some of the demand. For Italy, this was the first auction following Fitch downgrade of the sovereign to Baa1 rating – fresh in the memory of the markets. Italian newsflow has also been disappointing recently with elections outcome unnerving the markets and with GDP figures (Italy has reported its 2012 full year growth almost a month ahead of Ireland, which is still to post results for Q4 2012).

Just how much of this week’s result for Ireland can be accounted for by the factors unrelated to the Government policies or real economic performance is impossible to determine. Nonetheless, Minister Noonan’s cheerful references to the auction as ‘extraordinary’ in nature sounds more like a political PR opportunism than of financial realism.