Debt forgiveness programme must be launched

As the debt crisis worsens for consumers a programme to forgive billions in mortgages and loans will be needed to restore confidence.

CENTRAL Bank numbers on home mortgage arrears continue to worsen. Just short on 50,000 loans amounting to €9.6bn are in considerable distress. Many of these have already been restructured while 37,000 restructured loans of €6bn are “performing”.

These numbers, which grew by 11% this year, illustrate a brutal reality - thousands of homes will have to be repossessed, sold-off and the balance owing written off. Thousands of other consumer loans will also have to be written off.

Clearly an organised programme will be needed to forgive billions in consumer mortgage and other loans. The money to do this has been provided. Last March’s central banks’ recapitalisation programme earmarked over €9bn to fund consumer mortgage and other loan losses in four banks. Its numbers did not include other major consumer lenders such as Ulster Bank and credit unions.

Having identified the scale of expected losses what’s needed is an effective debt forgiveness programme. Leaving the process to lenders and their customers will not work. The Law Reform Commissions recommendations, if implemented, will only work is there is a system to manage the numbers of debt forgiveness agreements required to work out billions in unaffordable debt. Yet reforming our laws and creating supporting systems is falling between the bureaucratic cracks of three Government ministers and their departments.

Any forgiveness programme must be designed to deal with tens of thousands of individual arrangements with multiple creditors. It will have to be a holistic process where people contract with their many lenders to pay what they can over a period of time and their lenders agree to suspend legal collection activity and to writing off the balance owing at the end of the debt settlement contract. And it will have to be designed to deal with unsecured loans and mortgages.

Despite worsening numbers, bankers are citing low numbers of repossessions as evidence of their compassionate social responsibility. But foreclosure forbearance is designed to buy time for banks to rebuild shattered business models and not to protect consumers. As writing down billions in mortgages to “forced sale” recovery values would trigger immediate losses, the game is to keep mortgages ticking over so as not to have to write them down. Yet banks fully realise that they will have to write down loan values yet have no process to do so.

Government policy to artificially suppress repossessions does nothing whatsoever to alleviate this crisis. Instead it amplifies the magnitude of indebtedness, ensnaring people in a virtual debtor’s prison they cannot escape from. Forbearance can only ever be a short term measure to buy time for incomes and a housing market to recover. The brutal fact that no one is prepared to admit to publically is, for banking to be made whole again thousands of homes will have to be repossessed and billions in loans will have to be forgiven.

Is it socially responsible to continue with a policy that consigns people to powerlessly dealing with their creditors as they pursue them through the courts for debts they patently cannot repay? When there is no hope of ever repaying debt, people become depressed and cease being productive members of society. Internationally, studies have long shown the psychological damage people experience when struggling with distressed debt. Draconian legal debt collection processes undermine people’s self-esteem and coping skills, causing despair and hopelessness and heightened risks of suicide particularly amongst men.

Although billions in funding is being provided for banks to write off distressed consumer debt, there’s no sign of a fair and equitable system through which to structure debt forgiveness. Instead it’s being left to ordinary people who have no influence whatsoever to deal individually with their mortgage lender and others they owe money to.

For any debt settlement system to work the effective ban on repossessions will have to cease. Mortgages should be “crammed down”, reduced to a level equating the current value of the home. Where a homeowner can afford lowered mortgage repayments they should keep their home. Where they cannot, then they should hand up possession, move out or stay on as tenants.

Negative equity, which is by definition an unsecured loan, should be managed through a debt forgiveness programme. The programme would see people using an objective, independent intermediary to arrange debt settlement agreements to pay what they can to their lenders. In turn their lenders would agree to suspend legal debt collection, freeze interest and write off whatever balance remains at the end of the agreement.

These agreements could be registered on credit bureau providing a mechanism for people to rebuild their credit rating. Where people are hopelessly insolvent, with no prospect of paying a reasonable amount off their loans, then they should be able to opt for a fast and effective personal bankruptcy programme.

A version of this article appeared in the Irish Examiner, Business Section, Monday 23rd May 2011