Ireland needs a modern equitable system to save homeowners

If we are to come out of this crisis, it is not just banks that need a bailout, we also need a NAMA for homeowners, writes Bill Hobbs

21st December 2009

Never before in this states history, have so many owned so much and yet earned so little. Tens of thousands of households face a bleak New Year uncertain and fearful for their financial security. Though scant, publicly available data illustrates how unaffordable indebtedness is rapidly reaching crisis proportions for far too many households. Will 2010 see the development of a homeowner mortgage resolution system – a “Homeowners Nama”?

Over a quarter of a million households representing nearly three quarters of a million adults are struggling with debt. Next year household financial circumstances will deteriorate further as the costs of financing the dark side of a bust economic model hits home. Mortgage affordability once aggressively promoted by bankers, real estate agents, mortgage brokers and property cheerleaders has inevitably and dramatically collapsed.

When and if finally told the story of what went wrong with Irish banking will record a time when small influential groups of senior banking executives dominated their organisations and wilfully manipulated banking resources for personal gain. Had senior bankers acted out traditional banking core values there would have been no market for overpriced houses and property.

For almost a decade, Irish banks have been captive of senior executives whose values and behaviours differed radically from traditional banking values. The vast majority of bank employees are ordinary decent professionals whose shared values are rooted in prudent banking and its wise creation of credit. But they were led, managed and manipulated by a breed of executives who eschewed traditional values for differing values – those of greed, avarice and self-enrichment. Emboldened by illusions of omnipotence, they wilfully and recklessly took risks they should never have been permitted to take. Regulators and central bankers failed to appreciate a fundamental shift in values, as bank executives dangerously expanded bank lending. Political leadership, similarly emboldened by illusions of omnipotence, actively promoted a credit fuelled consumption boom and did nothing to stave off its inevitable bust.

Most people have experienced a permanent reduction in household income, some are facing long term joblessness, and all face a permanent reduction in the value of their homes. Through no fault of their own, many have boom time loans they can no longer afford. Homeowners are struggling to finance repayments on debt on overpriced homes they were encouraged to buy. They risk losing their homes as they can no longer afford to make repayments.

There is a dire need for a homeowner mortgage resolution scheme – a “Homeowners NAMA”. Existing distressed home mortgage arrangements merely offer a temporary bank friendly solution. Insisting banks forestall on repossessions, reflects outdated social, legal and economic thinking that demands financially distressed borrowers make good their obligations no matter how long it takes and unduly favours the legal rights of creditors. And favouring banking solutions that essentially force people live long term at near poverty levels, so that they can make repayments on mortgages they can no longer afford, is neither socially acceptable nor economically viable. Advanced societies have long recognised the need for debt resolution systems that equitably adjust the balance of powers and rights between creditors and debtors.

Currently some commentators are promoting notions of shared equity, where banks or the state might take an equity share in homes rather than expect loans to be repaid in full. Whilst attractive, such solutions do not deal with the span or continuum of options required. Any legislative approach to debt resolution should appreciate the scale of the problem, identify solutions and establish a process through which people arrange to manage their debt.

A regulated homeowner debt management system should identify solutions based on what people can afford to repay and schedule their debt accordingly. It is eminently possible to identify a range of options which would be made available depending on the homeowners’ financial circumstances and disposable income. For example debt resolution systems found elsewhere propose one method of managing unaffordable debt. Typically homeowners budget for living expenses and identify what’s left over to make loan repayments. They then enter agreements to pay a fixed amount, usually monthly, to their creditors who agree to freeze interest and accept the lower amounts. The process works as both lenders and borrowers stick to the agreement.

The starting point is of course a co-ordinated Government response. It could establish a task group to create a mortgage debt resolution system and empower it to take whatever action is required. This group should reflect the interests of those owed money and those who owe money. And it should deploy the principle that ordinary people cannot be expected to repay what they cannot afford, nor should they be forced to live a life in financial stress from debt, they have no hope of paying within a reasonable period of time.

The responsibility for causing the negative equity trap and billions owed on overpriced homes has to be borne by those who wilfully and negligently made credit available and ignored the risks they were running. Banks and their senior executives had the wherewithal to understand the risks taken but chose instead to engage in reckless lending.

Redressing the dominant supplier power of banks is an accepted principle in all debt resolution systems. The principle of shared costs is also present- where borrowers pay what they can and lenders are forced to accept lower repayments – and are forced to write off debt should borrowers stick to their agreement. It is a principle not yet recognised by Government although the Law Report Commission proposals on personal insolvency may result in an equitable system based on sharing economic costs and addressing the unequal power relationship between bankers and homeowners in trouble.

© Thomas Crosbie Media 2009.