As the consumer debt crisis escalates, unless it acts to
protect consumers soon Government is acutely exposed to a very real threat of a
borrower’s run on the banks.
During twelve weeks of this summer, another 5,630
householders technically defaulted on their mortgages. With about 63,000 troubled
loans - allowing for secondary top up loans - according to Central Bank
estimates, close 55,000 households are in technical default. It says the
problem is not confined to those in negative equity, as many distressed homeowners
have some equity remaining.
By including restructured “performing” loans together with
those yet to reach the critical 90-day default threshold, the number of distressed
householders increases to over 115,000. The bank says it’s trying to work out how
many more households are vulnerable. But as its published data only covers home
mortgages, no one has any idea how bad other consumer loans, buy- to-let loans
and personally guaranteed business loans are.
Once again worsening mortgage arrears news was positively
spun. Politicians and bankers said that 90% of loans are performing. Imagine responding
to news that road deaths trebled in two years, by saying that it’s okay as
everyone else is still alive. Their positive spin on “low” repossessions is like
saying its okay to keep clinically dead accident victims on life support systems
to keep the numbers of deaths down.
By insisting on keeping dead loans alive on
banks’ balance sheets, thousands of people are needlessly suffering. In a
properly working debt resolution system, repossessions would number over 9,000
a year. What we are seeing in the data is the outcome of a surreal, fabricated
scenario as we all know banking won’t work again until unsustainable loans have
been written off.
Yet some banking commentary implies arrears are worsening because
people are deliberately defaulting on their mortgages in anticipation of a debt
settlement deal. What’s called strategic default happens when people who can’t
pay, lose their willingness to repay once they realise their situation is
hopeless.
With German parliamentarians better informed on our taxation
policy then we are, it seems that Government is no more fiscally empowered than
a local county council. But is it powerless to direct banks get down to the
business of debt settlement and control their oligopolistic loan pricing behaviour?
Apart from those struggling with distressed debt, tens of thousands more are paying
through the nose for variable mortgages. They are captive of their lenders price gouging as the mortgage market is
no longer functioning.
In the third quarter of 2006 lenders made 54,603 loans
totalling €10.9bn. In same quarter this year they made only 3,607 new loans
totalling €623m. In normal times, this level of mortgage lending would just
about keep one medium sized mortgage bank ticking over. As competitive market
forces that should cause a fair market for mortgage rates are non-existent and
will be for some time to come, banks are free to charge what they can get away
with.
Politician’s excuses for non-intervention in what is a
broken market don’t cut the mustard and hinting at passing the buck to the
competition authority is a cop out as is the banking regulator’s position on
not wanting to control prices. Should a banking regulator not want powers to
set prices, surely some other body should be empowered to ensure fair prices
are set.
Given the numbers struggling with declining incomes,
negative equity, joblessness and increasing taxes, a highly educated and
increasingly vocal cohort of concerned citizens realise how disenfranchised they
have become. They know banks have been pump primed with billions to get them
working again. They know that these funds are not being used to either generate
new loans or write down unsustainable ones. They know the money is being invested
in Government bonds whose yields give a better return than loans. Yet while banks
are profiting from a massive infusion of tax-payer funds, they are unwilling to
pass through ECB rate reductions.
Under its "twin pillar bank" strategy, Government
policy has consigned competition and consumer protection to third rate status. Disillusioned
and angry, reform-driven leaders are beginning to emerge. Using real life
stories, theirs is a powerful narrative evidencing the undignified treatment of
people who through no fault of their own cannot pay what they owe. They are
demanding laws that allow people earn a fresh start and force bankers to treat
people fairly.
While they may not be able to influence the political
process, they know that collectively people have the power to reform banking’s
relationship with society. Should they get enough people to threaten to take a
loan payment holiday, then banking behaviour would have to be rapidly altered. Such
a national loan “blue flu” would strike at the heart of the EU/ECB/IMF
programme and could threaten to become a European wide phenomenon.
Will over a quarter of a million beleaguered mortgage
holders remain silent? Unless Government comes up with meaningful response it
risks spawning a grass roots movement that could succeed where it is currently seen
to be failing.
A version of this article appeared in the Irish Examiner, Business Section, Monday 21st November 2011
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