Mortgage defaults: cut a deal with lender, or just cut and run?
Homeowners have a few choices for coping with debt in Ireland
Officially, 35,000 households are in mortgage arrears in the lowest base rate environment in Irish history. This doesn’t include the people who have had to start paying their loans on an interest-only basis, nor does it count the shadow arrears cases manifesting in fewer than 90 days’ delinquent figures, and it doesn’t show those who are surviving by going through their savings. It also fails to include figures from local authority loans.
The Irish solution so far has been to put the problem off; indeed it was only in 2010 that we acknowledged the scale of the issue by formally creating the expert group on mortgage arrears.
The defaults are not due to banks increasing their margins: most existed before the current non-ECB rate hikes, and recent hikes will merely send more households quickly and silently over the edge.
How might homeowners face the debt wave washing over them?
Outright default would be the most ideal situation in a market economy. In any business transaction that doesn’t work out there is always a winner and a loser; somebody inevitably leaves the deal.
There, I said it. Our politicians and bankers know that the best solution for many people would be to walk away, but they are loath to admit it.
Think about it objectively. Do you stay potentially snowed under for decades to honour a deal that is clearly not in your favour? How far are you willing to go to keep paying the banks instead of being able to afford things for your family?
However, in Ireland, walking away is so punitive that you forsake almost a third of your working life (if you are in the key home-buying demographic age) to being financially ‘on the run’ if you take this option. That is an error: the lack of sensible personal bankruptcy laws in this country is a drag on any hope of economic growth.
The US economy is the world’s largest and Americans succeed not because they never fail, but because of how they fail. They fail in a way that lets them get up and try again. In Ireland, you fall hard and permanently.
Repricing your mortgage
Lenders don’t want people on tracker mortgages, and there are people who would be willing to give up their tracker or reprice it (ECB+2.3% instead of 1% for instance) if they got a capital reduction or a cheque in the post.
In many indebted households the mortgage is only part of the problem. It is the overall weight of debt that is breaking them. A lump sum with a slightly more expensive mortgage as a result could perhaps solve many of these ills while helping the bank solve their tracker margin dilemma.
This is where you sell your mortgage. Banks do it in bundles all the time (or ‘used to’ I should say) in ‘securitisations’.
If you are trying to sell a house, selling the actual mortgage with it might be a great idea; the new buyer takes on the seller’s mortgage. At least this way the seller gets a buyer faster and the lender gets a performing mortgage again.
Would a bank be willing to let a new buyer have the mortgage if they took on a portion of the arrears and/or negative equity? Would a buyer be willing to purchase that?
Short sale refinance
This is finance that could be used to refinance performing subprime loans on high interest rates over to prime lenders at regular rates, if it can be seen that it is the rate rather than the willingness and ability to pay that is the problem for the borrower.
Now that we partly own the banks, the state could demand that prime lenders at least consider these applicants rather than rejecting them outright, which they do now.
This is where a person sells the property for less than the value of the mortgage. With the balance there is a choice: either the person carries out the difference as an unsecured loan or the bank takes the loss, or they share the pain somehow.
In the USA this is relatively common but in Ireland no bank has put forward a suggestion to engage in this, preferring the idea of forbearance. Believing that somehow, by not addressing the problem, it will eventually get better works the same way for people with gangrene as it does in banking. And time will reveal that.
Individual voluntary agreements are used in Britain for unsecured debt below £15,000. The person gets all of the creditors around a table and agrees a restructuring plan. If 75% of them agree it becomes a contract, and any that don’t agree may have to forgo their right to the debt depending on how it was worked out.
This is progressive and addresses the actual problem without any politics involved. We could easily adapt such a system here in the morning via regulated debt counsellors – except that we haven’t regulated the debt counselling industry and we are about a century behind the curve when it comes to sensible debt law.
One thing people need to realise is that they are not merely passengers on a banking ship if they get into financial difficulty. The regulator has outlined its position: it wants a process whereby people are put onto an arrears assembly line. That’s a stock government approach and solution, creative individual answers having never been a strong point.
I would advise that people in arrears make their own suggestions. The worst thing that can happen is the bank says no. And don’t be afraid to disagree with the bank’s ideas either, it has to remain a two-way relationship.
Struggling mortgage-holders need to get creative. The banks can’t suggest you give up your tracker, but you can see what they’d offer you if you did. They may or may not agree to let you sell your house for less than the value of the mortgage on it; they might even agree to selling your mortgage but they don’t have the legal aspects worked out. You won’t know until you ask.
Two thousand years ago the evangelist Matthew stated ‘ask and you shall receive’ not ‘don’t say a word and maybe things will work out’.
Whatever you do, don’t sit and hope the bank or state will come to the rescue any time soon. You’d be better off waiting for Godot.
In the US it’s different, looking at this video, There are different possibilities for you . We do need to send a message to the banks and the government .A bailout for the banks is good enough for them but for the ordinary Joe nothing? This is not good enough the banks are supposed to be partners in a risk venture and so they must be prepared to take their part of the risk. We need something other than the current system in Ireland otherwise we will see a lot of the young just take off and then the Sh** will really hit the fan. Why is it ok for Banks to default on their debts and expect me and the Irish taxpayers to pay their private debts? Yet hound homeowners and in some cases cause people to kill themselves .This must not be allowed to continue .Where is the help for the homeowners?