Madam – The article carried in The Irish Timessigned by several well-respected and well-informed economists, along with the analysis of Prof Morgan Kelly previously, brings the impending home mortgage crisis into the public spotlight (Opinion Analysis, November 8th and 11th). By focusing policymakers' attention on this issue they do us all a great service. However, I think the solutions proposed by the 10 economists threaten to do more harm than good.
I agree with the authors on the scale of the problem posed by mortgage arrears. Individual homeowners, not just those who have become unemployed or underemployed, are under mounting pressure to service mortgages. Many of these mortgages are also greater than the value of the home on which they are charged. In many cases the prospect of repayment of these mortgages in the lifetime of the borrower is slight.
The authors suggest a partial debt forgiveness programme. They recognise the problem of moral hazard this would involve but are, in my opinion, too blasé as to the impact of this. While we must expect that our neighbours in distress need our help, I would expect a lot of anger from homeowners who, despite their own financial pressures, have managed to maintain payments on their mortgages. There are significantly more homes in negative equity than there are mortgages in arrears. A partial debt forgiveness plan would incentivise homeowners in negative equity to stop making mortgage payments. Such a plan would amount to “free money”.
To devise an alternative solution it is necessary to disentangle two separate phenomena in the Irish housing market. The first is negative equity and the second is mortgage arrears. Both pose difficulties for individuals, society and the economy, though each have different implications.
Negative equity crystallises as a loss for a homeowner when they come to sell their home. In the meantime, there is no impact on an individual homeowner’s spending power from negative equity.
If someone was willing (and able) to pay a certain amount for their home, then they should still be willing (and able) to pay that amount for their home, irrespective of its new value. That is not to say that people may feel worse off because of negative equity and this could affect their consumption. But it is far from clear whether the Government should intervene to remedy the problem of negative equity.
The far more significant problem is mortgage arrears. This may arise where a homeowner loses their job or has their hours or pay reduced. Mortgage arrears are a critical and growing problem for our banking system, government and society. There is a clear need for a solution but one which does not create a disincentive for other borrowers to pay off their debts.
Such a solution could be to introduce a widespread interest-only mortgage scheme, whereby borrowers in arrears could switch to interest-only payments for a period of up to, say, 10 years. The length of the interest-only period is not important since borrowers could go back to paying principal at any time, if their circumstances improved. This would provide breathing space for those in arrears, and others who are not in arrears who could also avail of the scheme.
Such a solution would also protect banks’ balance sheets as the mortgages would remain on their books without a writedown. Of course, even such a scheme would not be sufficient for everybody, since some would still default. However, the scale of the problem would be significantly eased.
There are some who recently took out mortgages of 35 or 40 years who will struggle over the course of their lifetimes to pay this principal following a period of interest-only payments. It is possible this could result in multi-generational mortgages, where property is not the only thing passed on to the next generation.
This is the type of previously unthinkable outcome that Irish policymakers and Irish voters need to face up to in the current crisis. – Yours, etc,