Debt restructuring rather than debt forgiveness is more likely to be offered to those in difficulty with their mortgage, writes JACK FAGAN
HARDLY a day goes by when a property developer or investor is not before the High Court because of their failure to repay bank loans. These can vary anywhere from €6 million to €600 million. The general assumption is that the biggest defaulters end up in Nama and the smaller ones are pushed into bankruptcy.
One way or another, the taxpayer is paying dearly for the collapse of the property market. The exchequer has already borrowed €18.7 billion to recapitalise the banks yet they are still not functioning as normal.
Credit remains extremely tight and Allied Irish Banks, in particular, is moving swiftly to run down its operation. Last week my local AIB branch in Navan reduced the number of service hatches on the public counter despite the lengthy queues that have become a regular feature in recent years.
For most of the big guys who overborrowed, life goes on as usual. It can be quite a different matter for people who cannot repay their mortgages or who are facing crippling levels of negative equity after losing their jobs or having their pay cut. They are in constant fear of losing their homes.
For that reason many in this situation will have taken some comfort from the separate announcements by Bank of Scotland and AIB that they will consider writing off debts for some people who are unable to repay loans.
With about 40,000 families in mortgage arrears and possibly as many as 200,000 in negative equity, bank critics offer any number of reasons why there should be debt forgiveness of one sort or another.
They remind us that taxpayers have already bailed out the banks and should not be “scorched” a second time. They say banks have already written down the value of many of the loans and that bank staff earned millions in commission when they negotiated loans and are, therefore, partners in the business.
Finally, they ask why a generation should be burdened with court actions and judgments that will not yield any money.
The reality is that a great many creditors are demanding payment from households which are already among the most indebted in the world and where family income is still declining.
Unfortunately, family finances are set to worsen further with mortgage rates moving up again, property tax and water charges on the way and a whole range of services now costing more.
With a substantial number of families now in danger of losing their homes, the State-backed banks will be anxious to show how they plan to come to the aid of hardship cases.
A common strategy is likely to be agreed first between the various banks and then it will go for approval to the Central Bank and the Government.
The odds are that it will be in the form of debt restructuring rather than debt forgiveness. The strategy is also likely to depend on the Government’s willingness to introduce new debt management legislation that is simple and user friendly
The main difficulty with even partial debt forgiveness is that families who have managed to meet their mortgage repayments through difficult times may choose to discontinue repayments if they discover that their neighbour has been exempt because of unemployment or short-time working.
To help sort out the mortgage repayment problems, banks could end up taking a share in a home or allowing borrowers to switch to interest-only payments until their circumstances improve.
They are also likely to consider allowing some owners to pay for the property over a longer period, perhaps even two or even three generations.
Now, wouldn’t it be nice to leave something to to the next generation other than memories.
