Penny drops on debt management

A national debt management scheme with quasi-judicial powers is welcome, says Bill Hobbs

It’s taken a long time for the penny to drop but it seems that the Government is finally responding to those of us who have been advocating for a national debt management system to deal with the enormity of the consumer debt crisis.  

It appears that it’s to consider re-organising MABS (the Money Advice and Budgeting Service) into a personal debt management agency with quasi-judicial powers. If so, then the state’s response may finally mature to match the scale of the problem faced by tens of thousands of financially fragile people and their families.   

How big is the consumer debt problem? No one knows. The only consumer indebtedness data published is the Central Bank’s mortgage arrears report. Its latest edition yesterday shows a worsening trend in both seriously troubled homeowner mortgages and performing restructured loans. If the second half of this year is anything like the first half, by next January there will be close to 70,000 serious cases and 45,000 restructured loans, mostly on interest only terms.

In its stress case scenario used to recapitalise Bank of Ireland, AIB, PermanentTSB and EBS, the central bank pencilled in €8.3bn in consumer home mortgage and other personal loan losses earlier this year. Since then billions in taxpayers funds have been pumped into the banks to enable them write off uncollectible consumer loans, along with €3.3bn in buy-to-let mortgages and €4.5bn in small business owner loans. All told the four state-backed banks have been funded up to realise €16.1bn in direct and indirect consumer loan losses. Other banks are likely to be expecting similar relative loss experiences. While such losses may not occur, the numbers illustrate the magnitude of response required by Government.

As many people have debts with multiple-lenders, it’s been abundantly clear for some time that an organised system would be needed through which thousands of individual multi-lender debt settlement arrangements could be managed. Many of these will have to include for property repossessions and balance write-offs.

Agitated over moral hazard and fearing a debt default epidemic, some commentators are busy scaremongering about debt forgiveness. No one is suggesting a blanket debt forgiveness programme. Rather what’s been suggested, for some time, is a transparent, independently objective, legal process which allows indebted consumers to pay what they can afford to repay and allows lenders to write off any residual balance. The Law Reform Commission’s recent recommendations included a high level design for a debt settlement system derived from its consideration of systems elsewhere.

In these other advanced countries, people who can’t pay in full enter into binding legal agreements where they agree to pay what they can over a period of time – typically between 3 and 5 years. Their lenders agree to accept these repayments and providing people stick to their part of the bargain, they write-off whatever residual balance is left at the end of the agreement. Called “earned debt forgiveness”, those that “won’t pay” but can pay are excluded through rigorous assessment processes.   

While the design of these schemes differs from country to country, the underlying objective is to arrange for legally binding debt settlement and forgiveness. In many cases the service is state owned or backed, free to borrowers and funded by the taxpayer or lenders.

In this country there’s no mechanism through which a person can arrange a debt settlement repayment plan with their lenders. MABS’ voluntary arrangements with the Irish Banking Federations’ member banks are non-binding. The recent emergence of unregulated and unlicensed commercial debt management companies, many of which use abusive marketing tactics to sell unregulated, dangerous financial products called “debt management plans”, demonstrates the yawning gap in the state’s consumer protection and social financial safety net provisions. For this reason alone Government’s intention to re-organise MABS as a central component part of a national debt management scheme is a welcome development. I am not convinced that the MABS operational model is capable of morphing into a national debt manager capable of dealing with the scope and magnitude of the problem. A new model will have to be designed and built integrating MABS where and if appropriate.

What would a well designed system look like? Such a debt management scheme should be open to anyone to participate. It should be free to borrowers and could be funded by lenders/creditors and not the taxpayer. It should deal with all personal debts including mortgages and it should be independent of both borrower and lender. Accountable and responsible to Government and open to Oireachtas oversight, it should be run on a not-for-profit basis, commercially operated as a professional service provider and be fully staffed with the expertise required. It should also deploy modern technologies to administer and monitor debt settlement agreements. It might also act as payment intermediary between borrowers and their lenders. Many of its requirements or services could be delivered by commercial joint-venture partners.

Right now even though banks have been funded to write-off loans they are procrastinating as there are no clear ground rules. An independent debt manager operating along the lines of the above model would set the ground rules and provide the means to deliver on them.  

A version of this article appeared in the Irish Examiner, Analysis Section, Tuesday 30th August 2011.

Accountable banking is real no-brainer

Should banks, using taxpayers's money, be permitted to write-off billions behind closed doors?

The bankers’ siren-call “It’s a No-brainer” lured trusting customers to borrow €25bn to buy grossly overpriced “buy to let” properties. Flattered by their relationship managers’ soft sell, many parked their brain outside the door and borrowed without a seconds’ thought for risk.  

Not only did they flog developer client property deals to their customers, but bankers and their family members bought as well.

Convinced by the possibility of illusory profits, the probability of losses was consigned to Pandora’s box. Once opened it, sprayed red ink all over personal balance sheets. No one knows how many vacant houses, apartments and retail outlets are owned by insolvent amateur landlords or syndicates who bought into their banker’s, accountant’s and lawyer’s “no brainer” sales pitch.

As we can’t buy property unless our bank agrees to lend us the money, it’s probably the case that cheap abundant bank credit drove property prices during the boom. The more bankers cranked over their credit engines, the higher prices went.

Between 2005 and 2008, they fed €25bn in loans to frenzied investors, stoked up by vested interests’ marketing hype. Many loan proposals just didn’t stack up as their repayment depended on unsustainable rents and rising property values. Naïve investors believed they could limit risk by flipping properties - selling them on to realise a quick buck. No doubt they now think they were flipping mad to have invested in the first place. They should be, as they will have to repay every cent borrowed.

The vast majority of loans leveraged off small equity stakes, frequently derived from properties already mortgaged. Many people borrowed on interest only terms. Their loans may have performed as rents initially funded interest repayments. But with capital repayment holidays ending, investors are realising they were sold a pup. They are beginning to understand how bankers and developers drove a chaotic ponzi scheme to its ultimate destination – one of the worlds’ most toxic, credit fuelled property asset bubbles.

Today buy-to-let investors/landlords owe about €7bn each to Bank of Ireland, AIB and PTSB. The EBS is owed close to €2bn. How badly these banks €24.5bn in loans are performing is unknown. The Central Bank has not published arrears data as it has with homeowner loans. However, its bank recapitalisation loan loss estimates range from an optimistic €2.2bn to a pessimistic €6.0bn. The expected loss rates range from 9.5% to an eye watering 26.2%. This means there’s a whole lot of financial misery to be visited on investor balance sheets before considering foreign owned banks’ profligate lending.  

In the absence of any official numbers, using a sophisticated model, Morgan Kelly recently estimated that there are about 11,000 large mortgage loans over €500,000 and 2000 loans over €1m which are predominantly investor loans. In total he estimates large mortgages total about €10bn with the vast majority being interest-only property investment loans.

At peak issuance, such loans averaged €325,000. With banks inducing people to leverage off other equity on other mortgaged properties and with property values down at least 50%, the average frenzy-time investor is racking up about €127,000 in negative equity losses per loan. With banks increasing their interest rates and capital repayments kicking in and with rents softening, many investors are in quite serious trouble - particularly so if their income earning capacity is shot through by the recession.  

How will defaulting investor’s negative equity be recovered? One concern looms large. Left to their own devices, banks may act as they always have by favouring certain valued customer cohorts over others. For example bank officers and their extended families borrowed heavily to invest in property and are now insolvent. Will they be afforded a lighter touch?

There are other well organised cohorts such as farmers, the professional classes and others with insider influence who will look for soft deals.

With billions of taxpayers funds ploughed into banks to make them whole again who is going to ensure that loan write downs/debt forgiveness deals are fair and equitable? Surely billions cannot be forgiven behind banking’s secretive closed doors. It’s unconscionable to think that taxpayer funds will used by banks to write off property investor loans without any public oversight.

Without oversight by a publically accountable, trusted authority that ensures fair play, the future is likely to one of suspicion, resentment and anger as people will perceive that others are getting away lightly. It’s already happening as NAMA, one of the biggest debt forgiveness agencies ever devised, gets down to the job of doing deals behind a veil of unwarranted secrecy.

What’s required is an open, publically accountable oversight system that monitors and reports on the performance of an equitable and fair personal insolvency regime through which banks and their customers settle un-repayable debt. It must be fair, seen to be fair and believed to be fair. Anything less will amount to the perpetuation of the self-serving behaviours that created the mess we are now in.   

A shorter version of this article appeared in the Irish Examiner, Business Section, Monday 29th August 2011

Debt forgiveness is inevitable, accept it.

With his €6bn mortgage debt forgiveness price tag, Morgan Kelly has once again lobbed a hand-grenade onto the refusniks’ patch. Refusniks are those who for the past three years, in denying the scale of the consumer debt crisis, have refused to accept the inevitability of debt forgiveness.

The refusniks’ “deny, pray and wait” strategy was solely designed to temporarily protect banks’ balance sheets from home mortgage losses. As consumer mortgage indebtedness predictably worsened, their classic kick-the-can forbearance response has been about as useful as a foot pump on the Titanic. A blind man with an abacus could reach the same conclusion as Kelly whose debt forgiveness estimate is probably a tad optimistic.

When first reported on in Sept 2009, there were 26,000 seriously troubled housing loans, totalling €4.8bn. By March this year these had grown to 50,000 totalling €9.6bn, of which 26,000 amounting to €4bn had already been restructured. On top of these are another 36,000 “performing” restructured loans of €6bn. Close to 90,000 mortgage loans of €15.6bn are extremely fragile. On average their homeowner borrowers are about €95,000 in negative equity which is by definition unsecured consumer lending. If repossessed, homes bought at peak values with maximum mortgages would result in average bank losses of close to €150,000 per loan.

When extrapolated out to all mortgage lenders, the central bank’s recapitalisation loss estimate scenarios for AIB, Bank of Ireland, EBS and Permanent TSB’s €75bn in housing loans, results in losses of between €5.5bn and €8.8bn over three years. Blackrock’s lifetime loan loss estimates, when extrapolated, yield losses of between €8.9bn and €15.8bn. So the glass half-full version of €5.5bn in losses is close to Professor Kelly’s estimate. The half-empty version could result in losses of €15.8bn.

Will banks recover such vast sums from hopelessly insolvent homeowners? They would need a fairy godmother to magic away significant debt write-offs. With no fairy godmother in sight what do these figures mean? They mean anything between 55,000 and 106,000 mortgage defaults. That’s a whole lot of houses to be repossessed and sold off. Clearing the mountain of troubled mortgages could take upwards of 60,000 repossessions over a three year period. But there are already 250,000 vacant housing units - enough to supply the housing market for some years to come. That is if anyone can raise the money to buy them.

The mortgage provider market so necessary to fund housing transactions is also broken and barring some divine intervention will be broken for some time to some.

In Q3 2006 banks made 24,000 housing loans totalling €5.5bn. Last quarter they made just 2500 loans totalling €488m. With house values already at 2001 levels and still heading south, hopelessly indebted consumer’s negative equity and by extension bank losses continue to worsen.

Billions in mortgage debt will have to be written off as irrecoverable, which of course means debt forgiveness. Kelly’s figure excludes unsecured consumer debt. The central bank has pencilled in €2.2bn in unsecured consumer loan losses which extrapolated out to the full market and including credit unions could add another €4bn or so. All told the household debt forgiveness price tag conservatively amounts to close to €10bn.

So what’s the answer? Well for many it’s an organised system through which money already given to the banks by the taxpayer is focussed on writing down consumer debt and this means an organised national debt forgiveness programme.

Let’s be clear about one thing – no one is talking about a free lunch except the dwindling band of refusniks and some boom-time cheerleaders who continue to talk about moral hazard and accuse Kelly and others of scare-mongering.

Yes, many people are angered at any suggestion of forgiving their profligate neighbour’s debts. But anger is not social or economic policy. Are we not equally angered at funding NAMA’s debt forgiveness programme or promising to repay in full bondholders’ profligate lending to Irish banks?

While we may not all have partied, most of us did enjoy the economic benefits of boom-time credit fuelled consumerism. It has come with a price tag that includes forgiving billions in neighbours’ debts. What is more, the money to do this is already sitting on the banks’ balance sheets having been provided by this state and its taxpayers.   

While Kelly’s figure may be a tad optimistic, he is absolutely right on one thing. The inevitable outcome of a property bubble is debt forgiveness. And for that to happen the Government needs to design and implement an open, transparent, equitable debt forgiveness programme, one that does not rely on one-to-one behind closed door arrangements between powerful bankers and their vulnerable customers. It also has to introduce a proper personal insolvency and bankruptcy regime, one that allows people to pay what they can and have the balance owing written off.

A version of this article appeared in the Irish Examiner, Business Section, Monday 22^nd August 2011

Urgent need for debt managers consumer protection code

The failure of Home Payments Ltd, a bill paying service provider, is a timely warning shot across the bows of government and consumer protection regulatory agencies.

Similar financial service providers are busy taking money from vulnerable consumers who are unaware their money is not protected or the companies they are dealing with are not regulated by the central bank or any other consumer protection agency.

Called commercial debt managers, they are a worrisome development in the consumer financial services marketplace as they are opportunistically exploiting a social and economic consumer debt crisis.

By using abusive marketing and predatory sales tactics, debt managers and their commission driven sales staff and agents are persuading vulnerable people to buy what are recognised elsewhere as quite dangerous financial products called “debt management plans”.

These outfits, using clever tricks, induce people to repay their debts using their plans which they claim will get lenders to back off legal debt collection and agree to debt write-offs. These are of course misleading and blatantly false representations as there are no laws or regulations governing collective debt settlement arrangements in this country. Yet thousands of people are being induced into buying products designed to maximise profits for their producers.

Some of these outfits are using non-transparent websites to market their services directly from Britain. Others are localised shop fronts for British operations or domestic home grown operations offering alluring “free advice” designed to generate leads for their commission driven sales people.  

With no known evidence supporting the business case for debt manager’s business model, their claims of providing economic value by lowering costs of indebtedness for consumers and recovery costs for lenders are spurious.

I recently estimated that a typical debt management plan to repay €35,000 would cost about €7000 in fees. At 20% of the debt owing such exorbitant fees are a red flag for anyone concerned with consumer protection.

Just how many millions are being paid into unregulated debt management companies is unknown. Not one cent is covered under the government’s deposit guarantee scheme. What’s more as these outfits are not required to operate ring fenced client accounts, maintain adequate levels of solvency, abide by prudential standards or comply with codes of conduct and regulations governing financial service and money transmission providers, should they get into trouble consumers are wholly unprotected.

It’s known that close to 100,000 financially fragile households are struggling to make mortgage payments. But this is the only visible part of the distressed debt iceberg. Given the €9.4bn in mortgage losses and €2.6bn in consumer debt losses pencilled in by the central bank in just four banks (Bank of Ireland, AIB, PermanentTSB and EBS) and with other lenders such as Ulster Bank and credit unions continuing to post large losses, the full extent of consumer indebtedness can only be guessed at.

Ireland remains one of the few advanced countries that does not provide its citizens with a humane debt forgiveness system regarded elsewhere as a fundamentally important economic and social safety net requirement.

The safety net concept is quite simple. It’s called “earned debt forgiveness”. People agree to pay what they can for a certain period of time after which their lenders agree to write off whatever balance is owed.

The Law Reform Commission has set out a blue print for a working system including suggesting how residual mortgage debt could be handled.

While largely thanks to IMF/ECB intervention, legislation to enable this concept is said to be in the works, little if anything is being done on organising an appropriately regulated, governed and operated debt mediation system to manage the sheer volume of individual debt settlement agreements required to work out billions in consumer unaffordable debt. Existing state funded arrangements are wholly insufficient.

Falling between the stools of three government ministers and their officials, no-one appears to be taking the lead. Yet it should be eminently possible for Minister for Social Protection Joan Burton and her officials whose remit includes MABS, to take ownership of designing and implementing a national system.

While unlikely to have the competence and resources required, MABS could become an integral component of a wider more efficient and effective system. Operated on the principle of the “polluter pays” it could be funded by banks and other lenders, governed as a not for profit enterprise and run on commercial service lines.

In such a scenario there would be little need for profiteering debt managers unless they can prove a viable business case to operate under any new personal insolvency legislative and regulatory regime. Meanwhile there appears to be nothing preventing the National Consumer Agency publishing guidelines covering debt managers and working with the Central Bank on a consumer protection code to close the yawning gap in consumer protection exposed by the collapse of Home Payments Ltd.

A version of this article appeared in the Irish Examiner, Business Section, Monday 15th August 2011.


Concerned over the abusive and exploitative aspects of commercial debt managers business model I wrote to the Minister for Finance in early 2010 urging the regulation of the sector and published a draft code of conduct to kick start the process. As expected I heard nothing back from the then Minister or his officials. Perhaps the consumer protection gap exposed by Home Payments Ltd failure will galvanise the new administration to act before its too late.

Once the herd has turned, it's hard to get it running properly again

The Irish property market is nowhere near recovery, writes Bill Hobbs

If our capacity to make credit based consumerism work is based on our willingness to borrow to spend when does the party stop? 

If globalisation means that states become increasingly dependent on producing goods and services that others value – should others stop valuing those goods or be restricted in buying them what happens next?

Market analysts are worried global growth will not be strong enough to finance repayments on about $150 trillion of debt-based financial assets; many fear a double dip recession is taking hold.

Consequently last week's flight to cash, downgrading of the US sovereign status and demand for higher sovereign bond yields illustrates how markets always act to limit potential losses. Once the herd has turned it’s hard to get it running in the right direction again.

Nearer to home, political leadership failure has been taken to new heights with bickering between euro partners exposing the failure of any co-ordinated policy response to recognising that non-repayable losses will have to be borne by both public (taxpayers) and risk taking private investors (banks and institutional investors). 

One hundred years ago, similar leadership failings caused first a collapse in bond market confidence and then the First World War. Should any state and thus the ordinary person on the street be expected to act as insurers-of-last resort when free-market capitalism fails?

A dogmatic insistence on socialising bank debts to protect privately held wealth is backfiring as investors realise the resultant burden of public debt has undermined all but the strongest of national balance sheets. A sovereign’s balance sheet is now seen as only as strong as its banking systems financial stability or in our case, its continuing fragility.

With the slow motion train wreck of the euro project reaching its predictable crisis laden destination, we have experienced the destruction of about €230bn in household wealth, much of which is tied up in property assets.

Suffering from the same loss aversion that has plagued European policy decision making, we are equally incapable of coming to terms with what the outcome must be. Well understood, loss aversion means we fight doggedly to protect ourselves against losses even when they are absolutely inevitable. How many people are sitting on losses they will never recover and are unwilling to act to sell up now? How many are trying to sell at prices too high to attract buyers?

Our human predilection to prefer avoiding losses about as twice as much as we prefer acquiring gains, means that will forebear; we will refuse to realise losses.

In a recent financial stability report, the Bank of England warned of the dangers of banker’s forbearance, wherein, gambling for resurrection, banks act to hide the true extent of losses by cutting deals with their borrowers. It’s by no means certain that our Central Bank’s short-circuiting of this flaw in forcing banks to overcapitalise will work given two important issues.

The first is that losses were figured after economic assumptions that now appear to be optimistic and the second relates to the risk of a double dip property bubble. 

Today the average sales price of a home is €196,000 down peak price of €366,000. Prices have reached 2001 levels. Predictions are prices having dropped beneath the €200,000 level may drop as low as €150,000. Attended by cash buyers, recent fire-sale auctions achieved prices as low as 60-70% off peak. Commercial and real estate property values are languishing at 1999 levels. With an estimated overhang of about 170,000 residential units and failed credit market it’s a market primed for the extend and pray approach, in others words forbearance. With about 10,000 professional investor loans of upwards of €2m each, the extent of bank and investor loss aversion can only be guessed at.

NAMA is floating a negative equity insurance scheme it intends packaging with the two pillar banks to encourage buying activity. It may provide upwards of €18,000 in negative equity insurance on the price of a house for five years. Its plan to shift its mountain of vacant residential units, including developer incentives, could distort the property market. Some say its actions may be anti-competitive as it offers what amounts to state backed insurance on its portfolio of properties.

Whatever of NAMA’s market power to distort property prices, there’s another marketplace phenomenon raised on the influential irisheconomy.ie blog. It could well be the case that more agile, non-state owned or directed banks may act as “frontrunners” and grab first mover advantage. Should they switch from “extend and pray” forbearance to getting out for what they can get now, they might sell off their controlled properties leaving domestic state controlled banks and NAMA to essentially suck on the hind tit. More so as international market tensions and herding flight-to-cash behaviour could trigger foreign controlled banks to cut losses.

A version of this article appeared in the Irish Examiner, Business Section, Monday 8th August 2011.

A glimmer of hope for BoI as investors return to the pillar bank

It has been a rocky road for Bank of Ireland in recent years. Is that all behind it now, asks Bill Hobbs

Bank of Ireland CEO, Richie Boucher is probably happy that the light at the end of the tunnel is not another onrushing train. Two weeks ago most people thought his bank was a dead ringer for full state nationalisation. Last week, the bank and department for finance officials succeeded in attracting €1.1bn in North American risk capital from what have been termed “long term” investors.

But the deal came at a hefty price. When done and dusted, the state will end up with a 15% shareholding costing €2bn while the canny investors will pay €1.1bn for a 34.5% shareholding. To put it another way, at current share prices, the state agreed to write off about €1.5bn playing its “get out of nationalisation” card. All told Irish taxpayers have stumped up close to €5.4bn to keep the bank’s doors open for business.

Since 2007, Bank of Ireland has eradicated two hundred and twenty five years of prudent capital husbandry during which its shares became a mainstay investment and income generator for generations of trusting retired citizens. Not only did the bank vaporise its accumulated capital, its imploding share price vaporised household balance sheets. Last Friday you could have bought twenty five of its shares for the price of a cappuccino. Four years ago it would have taken the price of seven cappuccinos to buy one share. Will ordinary people ever trust the bank again enough to buy its shares? Probably not for a long time to come.

For now, confidence is limited to a class of specialist investor willing to bet the bank will be able to extract profits using its pillar-bank market power. They are betting on the core strength of its national franchise and dominance in domestic banking. It may be the case that other investors might be attracted to buy into the bank as its debt for equity deal unravels and subordinated bond holders dump their shares on the market later this month. If in reading the tea-leaves they judge the bank a worth a punt, then Boucher will have pulled off a good deal for his bank.  But is it a good deal for the taxpayer?

The consensus is the deal is a good one as it limits the taxpayers’ downside risk. How much taxpayer’s money will ever be returned is of course an unknown.  

Was it planned like this? Last March, the Central Bank’s PCAR loan loss assessment exercise underpinned the €5.4bn recapitalisation target it told Bank of Ireland to raise.  No explanation was given at the time for what appeared to be an apparent favourable treatment of the bank’s loan book when compared to others, particularly its close commercial high street cousin AIB.

Under the Central Bank’s stress scenario, Bank of Ireland was reckoned to incur losses of 3.9% on its €27.9bn residential mortgage book. On the other hand, its close rival AIB’s numbers came out two-and-a-half times higher at 9.9% on the same-sized book.  A similar picture emerged on commercial real estate with estimated losses for Bank of Ireland of 18.8% on its €20.4bn in loans whereas AIB’s numbers were 26.2% on €19bn.

Is it the case that the bank was not as buccaneering as its rival AIB during the latter stages of the boom? Is it the case that it banked a better class of customer? Or is a case of carefully ensuring that one of the two pillar banks remained in private ownership?

Have the new investors in Bank of Ireland been sold on the possibility of extracting super-normal profits from what has become an oligopolistic banking market dominated by two banks whose liabilities are guaranteed by the state?

In the consumer “Tale of Two Pillars”, cartel-like profiteering behaviour has been flagged in the recent moves by both banks. By effectively eradicating free banking late last year, Bank of Ireland quietly squeezed up all important fee revenues. This month, AIB’s executive chairman David Hodgkinson flagged a need to increase lending margins to rebuild profitability.

Reflecting protectionist thinking, which is never far from the surface, he had the apparent temerity to suggest that while his bank should be free to price for credit risk – increase its lending margins - it should not have to pay the going risk rate for ordinary people’s deposits. Should banks enjoy a legal cap on deposit interest rates while rebuilding their shattered businesses?

Without enough retail deposits to fund their deleveraging balance sheets, they are forced to pay up to hold onto the deposits they have. The problem is the pillar banks remain hugely dependent on their ECB lifelines. Weaning off these will take a wee bit more than €1.1bn in fresh investment in Bank of Ireland or trying to manipulate margins by capping deposit rates. The light at the end of the tunnel is a glimmer of hope that maybe one day soon banks will begin to work again.

A version of this article appeared in the Irish Examiner, Business Section, Monday 1st August 2011.