No clarity yet on exactly how mortgage forgiveness would work

ANALYSIS:THE MOST recently available figures from the Central Bank note almost 50,000 mortgages were in arrears for more than three months last March. The majority of them were over six months behind in their payments.

Even allowing for no increase in the rate of people falling into arrears, it is likely that by the end of September this number will have exceeded 60,000, and this doesn’t include those people who have agreed some form of restructuring with their lender.

Meanwhile, property prices continue to fall, putting more homeowners into negative equity.

It was against this backdrop that UCD economics professor Morgan Kelly suggested recently there was an urgent need to consider debt forgiveness.

There is nothing new in this. In this paper last November, 10 economists including Brian Lucey, Constantin Gurdgiev, Stephen Kinsella and Valerio Poti argued that given the high personal cost but relatively small total cost, the question of full or partial debt forgiveness must be addressed.

Economics commentator David McWilliams has argued that, without debt renegotiation and forgiveness, we have little prospect of economic recovery.

AIB executive chairman David Hodgkinson has suggested the bank could offer debt forgiveness for its mortgage customers struggling to keep up with their repayments, but only as long as other banks do likewise.

What makes Kelly’s views different is the figures. Kelly said at an economics conference last week that “spending €5 billion to €6 billion on mortgage forgiveness, mortgage principal reduction, and allowing those hopelessly indebted to walk away from mortgages, would probably solve most of the problem”.

That has certainly grabbed the attention of Minister of State for Housing Willie Penrose, who was reported yesterday as saying Kelly’s suggestion merited serious consideration by the Government.

“If the figure is as reasonable as he is saying, then it would be foolhardy for us not to examine it properly,” Mr Penrose said.

Kelly is looking at a twin-track approach – for some, mortgages would be reduced to a level “deemed affordable”; those simply unable to sustain a mortgage loan would be allowed to leave their properties “without being pursued for outstanding debts”.

Kelly and those economists proposing debt forgiveness see it as a means to kick-starting the economy. Households struggling with debt clearly don’t spend. Households worried about future financial uncertainty are also inclined to hoard available cash.

Starved of consumer spending, the economy struggles for the growth that all sides concede is a necessary element, alongside deficit reduction, of any recovery and payback of bailout funds drawn down from our European partners and the International Monetary Fund.

Those wary of debt forgiveness include the expert group on Mortgage Arrears and Personal Debt, which argued other forbearance measures were more appropriate.

Financial services regulator Matthew Elderfield is concerned any approach to restructuring of debt needs to take account of the risk it incentivises borrowers to stop meeting their obligations.

Aside from the validity and fairness of personal debt forgiveness, two key issues are who qualifies and exactly how such a process would work.

The expert group, in preparing its report last year, said it could not identify any arrangements internationally that could be characterised as mortgage debt forgiveness schemes.

In the absence of any concrete proposal, there is no clarity on the mechanics of how a debt- forgiveness arrangement could work, but there is some limited consensus, most clearly on the loans that should be covered. It is expected any debt-forgiveness proposal would apply only to borrowings on “principal private residences”.

Second, to be effective, any proposal will need to operate alongside a fundamental reform of our antiquated bankruptcy laws. One possible template is available just across the Border. In Northern Ireland, people with debts of more than £15,000 to two or more creditors can seek such arrangements as long as they can offer a minimum level of repayment. After generally five years of meeting the monthly payment terms, the debts disappear and, in six years, their existence is excised from the credit record.

A separate arrangement would be to encourage banks to forgive debts when arrears have accrued over a specific time. This could have a provision for the lender to benefit from any eventual sale of the property in the event negative equity is eventually overcome.

An important consideration will be how to ensure those truly in real debt trouble avail of forgiveness. Legislation is likely to be required to force full disclosure of financial details as part of it.