Budget 2016 – A resolution to mortgage crisis

For the past six years banks have not trusted those in arrears and have used the unproven propaganda that large numbers of borrowers are not engaging with banks and that many can pay but won’t. It’s clear that with 37,778 in mortgage arrears over two years and a further 19.317 in areas over one year that there is a complex housing and debt crisis at our door step.

Government introduced Insolvency Legislation which along with the Central Banks mortgage arrears targets were going to stop mass repossessions. This has failed spectacularly.

Over recent weeks the topic of a one year bankruptcy has re-emerged having been cast aside when many of us suggested at the time of the insolvency act being launched. A one year bankruptcy will help some in dealing with banks but will not resolve the housing crisis facing those in arrears. Fear of homelessness has overtaken fear of debt. Respectfully arm chair observers don’t understand the actual challenge.

So after all the propaganda and accusations and counter accusations have been made what can be done to provide a fair solution to the 25,000 who could lose their homes through repossession. These are people who are living in suitable family homes that the local authority would have to provide or fund the rental of in the event of homes being repossessed.

Within the long term arrears are real families, many scared and currently faced with a less than attractive solutions put forward by banks which is to either surrender their home or face repossession. Due to blatant spin, fully accepted by the Government, by banks of many being strategic defaulters and many being able to pay and choosing not to. It is now clear we are facing a major housing crisis and debtors are now more scared of being homeless than of their debt.

Within this group of those in long term arrears there are some who can pay in full, some who can pay something but not enough for a bank to do a restructure and others who can pay little or nothing. I nor any advocate will defend those who have chosen not to pay when we have so many who can’t pay and need our assistance and who have been abandoned by the system.

I believe that there is a fair solution to prevent unnecessary repossessions that’s fair to the mortgage holder, the Bank and the State. A fair solution is to look at a mortgage supplement to those who can’t pay. This could work via the court system where someone is in the legal process or pre legal process by directing Mary and Joe get an Affordability Certificate through the insolvency service (this could also me the IMHO or Mabs). This would demonstrate what they can contribute to their mortgage.

By way of an example Mary & Joe, married with 2 kids, €200k mortgage, property valued at €120k and €1,100 due per month in payments. The mortgage has been extended to the maximum possible term. They live in Kildare and their council will pay them up to €750pm in rent supplement.

We are proposing a Government sponsored scheme which would allow the family to remain in their home. It works as follows:

Mary & Joe are determined to have affordability of €300 per month as per the Affordability Certificate.

The mortgage is then split into two tranches:
Tranche A: €140,000 – attracting capital and interest repayments of €770 per month.

Tranche B: €60,000 – parked at 0% interest for the lifetime of the loan.

The €750 is funded by Mary & Joe’s €300 plus €470 from Kildare County Council. This is less than what the council would have to pay if they were liable for rent supplement. The repayments are subject to interest rate variations and reviewed every 2 years for a new Certificate of Affordability. When renewed the payment by the borrower increases or decreases in line with review, as does the council payment – up to the max rent supplement the county pays.

In addition we are proposing that the council would receive a 2nd charge on the property for the value of Tranche B. This is an incentive for the council to make the payments. The Bank will receive over the lifetime of the loan a greater return than if they repossessed the property now.

We are further proposing that the bank would receive the €425 directly from the council, thereby giving them certainly of cash flows.

It’s unlikely the O’Donnell’s would be suitable for this scheme as is aimed at people who are in suitable homes.

Given the scale of the crisis some will lose their homes, this is sadly unavoidable.

This scheme has many advantages, this is a major issue that is not easy to resolve. A fair society should want to help those who need help. This scheme has a built in affordability /engagement process. This way saves the State money on rent allowance, administration involved in processing the numbers in line to lose their homes. The cost in mental health terms is immense, the sleepless nights, family breakup. People are afraid, and with good reason as in the absence of a coherent workable solution such as this they face losing their home and possibly having to move from their community and having to locate children into different schools. The numbers involved in entering the private rental market could significantly increase rents forcing some to leave the area they are living and possible working and risking employment due to distance from work.

Another scheme muted is mortgage to lease. This could work for a cohort of people whose mortgages even with a mortgage supplement as outlined above still shows the mortgage as unsustainable. It is, however, fraught with challenges none more so than the funding model. Any fund contributing will want a clear means of funding from the state to ensure their participation and ensure consistency of payments. They will, not unreasonably,want their cut. Such a model could be seen as preyingon those in distress depending on how it is structured, who manages it, who funds it and under what regulatory regime it operates. Change of ownership to any fund also has issues within banking and this has been borne out in the abject failure of the Mortgage to Rent scheme.

Given the failure to address this over the last six years we are now at crunch time. This is the time to show leadership and implement a workable plan that is fair to the mortgage holder, the lenders and the state. This is such a plan. We own two of the major players. Let’s set an example. Let’s try keep people in suitable homes. In parallel changes to the insolvency act and mortgage to rent are also needed.

Johnny Fallon