WHILE IT is understandable that the sovereign debt crisis, both at home and across the eurozone, has dominated the political agenda for many months, the State’s personal debt crisis is also chronic, worsening fast and has yet to be addressed in a serious and considered fashion by the Government.
According to official figures, almost 50,000 residential mortgages, just under 6 per cent of the market, are in arrears of 90 days or more. But that is not the worst of it. Central Bank economists have forecast vast mortgage losses at our banks, with bad debts expected to run as high as €9.5 billion between now and 2013. Over the full term of the loans on their books, losses will reach almost €17 billion, €10 billion of it from owner-occupier loans that will have to be written off.
But just how are they to be written off? There is no clear Government strategy in place at present. In the US, where non-recourse lending is the norm, people with unsustainable mortgages can send their house keys to their lenders and walk away unencumbered by any residual debt. This makes a property crash harder but a recovery faster. Anyone trying this in Ireland is saddled with any shortfall between their mortgage and the selling price, running to hundreds of thousands of euro for even modest properties. So the market stagnates and people who made unwise investments cannot get on with their lives.
Things may be changing, however, and some banks are engaged in a low level of debt forgiveness and seem willing to do deals with borrowers to get bad loans off their books. Such forgiveness is undoubtedly a moral hazard repugnant to the thousands who pay on time, but it can be a practical solution to an intractable problem and could also act as a catalyst for economic recovery.
At least the banks now doing deals are doing something. The best the previous and current administrations have come up with appears to be delaying the inevitable. The last government introduced a 12-month moratorium on legal action against defaulting homeowners (and other measures) while the current one wants to extend it to two years. This may give some borrowers time to resolve financial problems but it will not address the issue of unsustainable mortgages and will only drag out the pain and cost to those with unsustainable loans.
The Law Reform Commission published a report in December on personal debt management and enforcement which contained 200 recommendations for reform, and a draft Personal Insolvency Bill. It was largely ignored. Minister for Justice Alan Shatter has now published proposals aimed at helping people to emerge from bankruptcy, but it will be next year before we get sight of a wide-ranging Personal Insolvency Bill which the State was commanded to produce by the IMF and European Central Bank as part of the bailout deal.
It should serve as a road map for helping people to extricate themselves from a financial morass they have found themselves in through a combination of reckless borrowing and even more reckless lending by the banks. But while we wait the problem worsens.