This is unedited version of my article in Irish Mail on Sunday (October 16):
This week, we finally learned the official figure for what
it would cost to address one of the biggest problems facing this country.
According to the Keane Report - or the Inter-Departmental
Mortgage Arrears Working Group Report - writing off negative equity for all
Irish mortgages will cost “in the region of €14 billion”. Doing the same just
for mortgages taken out between 2006 and 2008 would require some €10 billion.
These numbers are truly staggering, not because of they are
so high, but the opposite: because they contrast the State’s unwillingness to
help ordinary Irish families caught in the gravest economic crisis we have ever
faced with the relatively low cost it would take to do so.
Let me explain.
Firstly, the figure of €14billion itself is a gross
overestimate of the true cost of dealing with negative equity. This is because
this figure appears to include not just owner-occupiers but also people with
buy-to-let loans in his sums.
Secondly, the real amount required to get rid of negative
equity where it matters most – for ordinary first-time buyers - is lower still.
For example the scheme could be set up in a sliding scale based on value of
house compared to average house prices. This would reduce the final cost of the
scheme and help those who need it most - moderate income and younger-age
households.
In other words, a realistic and effective debt cancellation
scheme can be priced at closer to €6-8 billion instead of the €10-14 billion
estimated in the report.
In its simplest form it would work like this: say you bought
a house for €300,000, with a mortgage of €250,000, and it is now worth just
€150,000. The government, or the bank using the recapitalisation funds they
have received, would pay off the €100,000 difference.
By doing this your monthly payments would be less, and you
could now sell up to pay off the debt or move house, and in the meantime the
extra money you have to spend could go back into the economy.
The scheme could even be set up so that write downs would be
smaller on houses with above average values so as to prioritise young and
low-earning families. In the above example, if the house was purchased for, say
€500,000 and is no worth half that amount, the bank would write-off, say,
€200,000, leaving the household with residual negative equity of €50,000. This
would still improve affordability, but will also cut the overall cost of the
scheme.
So why did the report completely rule this out? It was very
clear on this topic: “a blanket debt or negative equity forgiveness scheme
would not be an effective use of State resources and would not solve the
problem,’ it says.
But it goes further, claiming that “the primary driver of
mortgage arrears is affordability, not negative equity. While a write-down of
negative equity would help mortgage holders in arrears, in many cases it is
unlikely to create an affordable mortgage”.
I believe this rejection betrays the overall lack of
understanding by our senior civil service officials of the problems we face.
The Irish economy is suffering primarily from three things.
The biggest is excessive household debt.
While this would be bad enough, it is exacerbated by two
additional factors. The cost of the government’s policy of bailing out our
banks, which is being paid for with higher taxes on ordinary working
households. And the rising cost of mortgagesdue to aggressive drive by Irish
banks to improve their profit margins at the expense of the most vulnerable
mortgage holders - those with adjustable rate mortgages who cannot protest.
Both contribute to mortgages defaults.
By saying that cancelling negative equity will not be a
magic bullet solution to the problem of the defaulting mortgages, the report is
simply referencing the smaller problem of mortgage affordability to evade
addressing the effects of the much larger crisis facing us.
Negative equity is the single most egregious and damaging
segment of the debt problem faced by Irish families.
It is the most egregious because it was caused not by
reckless borrowing, but by reckless lending by the banks - actively supported
at the time by the Irish Government.
The problem of negative equity is the result of state policy
in the first place, and it is up to the state to rectify it.
And contrary to the assertion of the report and Government
claims, we do have the funds to deal with negative equity. Freeing these funds
to help ordinary families is just a matter of priorities for the Government and
the state-controlled banks.
To-date, the Irish Government has injected €63 billion worth
of taxpayers’ funds into Irish banks.
Various other commitments, and the banks’ own state-guaranteed
borrowings from the Central Bank bring the total cost of keeping our banking
sector working to a gross figure of about €125 billion.
Yet while they have saved the banks, all of these measures
have acted to increase, rather than reduce, the level of debt being carried by
the households of this country.
In addition to their own household borrowings like credit
cards or credit union loans, mortgages-holders are now in effect liable both
for banks’ debts and their losses on property development and investment.
In contrast, even at Keane’s upper estimates, the cost of
paying off negative equity liabilities for household mortgages would require
just one ninth of the funds we have made available to the banks.
Last July the Government injected some €19 billion worth of
capital into Irish banks. This capital is provided to cover potential future
losses on loans. This included €9.5 billion, which was the estimated worst-case
scenario for losses on residential mortgages. It also included another €8.9
billion to cover remaining expected losses on commercial property.
If some of these funds were used instead to restructure
negative equity mortgages on family homes it would do two things for the banks.
Firstly, because the banks would now have securities as
valuable as the mortgages they have given, a mortgage default would not be such
a threat in terms of losses. This then reduces the bank’s need for further
capital.
Secondly, the writedown of the mortgages will prevent
defaults in the first place, at least for some families.
This implies that prioritising how that money is used to
help mortgages rather than losses on commercial property loans, will be a more
effective way to improve their balance sheets.
And it’s not like the money is not there. Our banking system
currently has surplus capital available. Since August this year, our ‘pillar’
banks, instead of helping the struggling households, have used taxpayers funds
to quietly buy high-yield Irish Government bonds.
Some €3 billion worth of Government debt was bought by the
banks using our money in order to beef up their own profits. Don’t tell us that
the banks cannot afford negative equity restructuring when they clearly can
afford buying junk bonds in the markets to book higher profits.
And the farcical nature of Irish government responses to the
mortgages and personal debt crises continues.
The Keane report ruled out increasing tax relief on mortgage
interest finance for first time buyers during the boom, 2004-2008. Why? Because
the estimated cost each year would have been €120 million.
Yet, come November, the very same state will pay in full the
unguaranteed and unsecured €737 million debt of the bankrupt zombie Anglo.
Between Anglo and INBS, the state has also committed to repaying in full €2.4
billion more of similar bonds in 2012.
Instead of repaying un-guaranteed bondholders, the
Government should use the funds available to the banks to cancel commercial
property-related losses on banks books, freeing the capital injected for this
purpose in July this year to restructure negative equity mortgages.
Earlier this year, I proposed that Irish Government impose
an obligatory restructuring of all mortgages to achieve a maximum Loan-to-Value
ratio of 110%.
This would reduce the problem of ‘moral hazard’ because
households with greater borrowings will still be left with more debt than their
more prudent counterparts. But it would also reduce the overall debt burden
faced by our families, freeing them to return to active economic and social
life, helping to restart the Irish economy. Based on the Keane Report’s own
estimates of the cost of such a scheme we have more than enough money to make
this choice.
All we need is the will - the will to free hundreds of
thousands of Irish families from the negative equity jail that was built by
reckless banks which lent the money with explicit approval of the previous
Governments.
