Banks are unlikely to grant debt forgiveness on a large scale, writes FRANK CONWAY

THE recent story about a mortgage lenderwho had shaved €200,000 off the amount a couple owed on their mortgage must have rung loudly in the ears of mortgage holders everywhere. For once, the story appeared to give legs to a smouldering belief that lenders “would have to do something” for struggling mortgage holders. The story was widely reported in the media, and why not? After all, who wouldn’t want €200,000 shaved off the balance on their mortgage.

The latest statistics from the Central Bank of Ireland reveal that a growing number of mortgage holders have a severe problem making their monthly repayments. Roughly 50,000 are now in arrears.

For most, selling up and moving on is not an option. A 2010 paper published by the ESRI suggests that anywhere up to 350,000 mortgage holders could be in negative equity. Of course, one has to remember there are varying degrees of negative equity, but someone who purchased their first home in 2006, for example, could be underwater by a significant amount.

But what happens in the case of a property where a lender has foreclosed and there is significant negative equity? Is this debt written off or does the lender pursue the former homeowner for the balance?

The mortgage market continues to be in crisis. 2011 is on course to be the worst year for mortgage origination in almost 40 years. Units originated this year may only reach the 11,000 mark, a figure not seen since 1971. By comparison, 111,253 mortgages were originated in 2006.

The banking sector continues to focus on improving bank capital, which can only be done by bringing money in, not lending it out and certainly not by writing it down through large-scale debt settlement.

In terms of debt settlement, there have been various signals from several bank bosses regarding their own individual thought processes. However, reality dictates and it is unlikely that banks will have the means or the mindset to embrace any form of debt forgiveness on a large scale.

Anecdotally, individual cases may be approved but this is not for the masses, especially not for those who are in negative equity or those who now regret their investment decisions. Besides, debt forgiveness on mortgages for the masses, would have a detrimental affect on the capacity of banks to return to lending any time soon.

In recent months, weeks and days, there have been some anecdotal suggestions that various lenders may be exploring the idea of ending mortgage contracts with clients. One bank is reputed to have agreed to the repayment of capital only while forgiving the interest portion of the loan.

Other mortgage lenders are reported to have written off capital and interest. All the mortgage lenders associated with such schemes are either non-banks or lenders that are no longer operating in the market. But there is little hard evidence that banks are following this route, or have the capacity to do so.

Debt settlement, as a working concept and on a large scale is ever only likely to be introduced under the revision of the current personal debt laws here. In other words, a modern bankruptcy code. Under such a system, the likely result would mean indebtedness being processed on a holistic and hierarchical basis, unsecured debt being the most exposed to write-off, mortgage debt being the most secure and least prone to write off.

At last December’s annual conference, the Law Reform Commission issued its recommendations, but these still require legislative action before becoming law. Under revised personal debt laws and protocols, individuals who become indebted would be “processed” in an orderly manner and eventually allowed to return to the credit system.

Without reform, the vacuum that currently exists in this growing space is at risk of being filled with hyperbole and rhetoric that will only serve to further undermine the entire banking system.

In the meantime, mortgage holders, especially those who have seen large reductions in wages and net take-home pay, need to remember that they are not alone.

They must also ensure that they prioritise their debts and pay those that serve the basic human needs: housing, heating, health (including food). Equally, those who are currently in arrears or at risk in falling into arrears are required to engage with their lender (under the terms of the Code of Conduct on Mortgage Arrears for residential mortgage holders), to which lenders must reciprocate.

For banking in general, we are still in wait-and-see mode.

Frank Conway is a director of Moneycoach.ie. He can be contacted at info@moneycoach.ie