A DEBT forgiveness scheme to relieve homeowners in mortgage distress would cost “in the region of €5-€6 billion”, UCD professor of economics Morgan Kelly has said.
In a keynote address to the Irish Society of New Economists in Dublin yesterday, Prof Kelly delivered what he described as some “good news”.
“We are talking sums in the region of €5 billion to €6 billion which would be necessary to spend on mortgage forgiveness, which by our standards are not very large,” he said.
“This sum to sort out tens of thousands of people with big problems does not seem enormous.”
Prof Kelly, who has been praised for forecasting the property crash, has also provoked sharp criticism from some commentators for his analysis of the recession.
“The good news is that if you leave investment mortgages out [of total mortgages owed], which are largely the banks’ problem, and look at mortgages people have on their own houses, there are about €55 billion of these out there,” he said.
“A lot of people can’t repay these mortgages and this is causing people terrible agony,” he said.
Prof Kelly made his estimations based on 20 per cent of people having difficulty paying their mortgages. This was the default figure in Florida where there was a similar housing bubble, he said. He estimated that mortgages would need to be halved on average.
“ I would reckon that the ultimate cost of this very useful social programme is something in the region of €5 billion to €6 billion.”
In such a scheme mortgages would be reduced to a level “deemed affordable” while others would be allowed to leave their properties “without being pursued for outstanding debts”, he said.
Prof Kelly outlined factors which could make it difficult for banks to recover mortgages including resistance from articulate middle class homeowners and Irelands “paramiliary tradition of agrarian violence”.
He described as “ridiculous” the situation in which banks “have amounts set aside in their accounts for their mortgage losses but are not forgiving mortgages”. This was “something that needs to change”.
Prof Kelly said any debt forgiveness scheme would have to take account of adverse selection and moral hazard.
Debt forgiveness has been rejected as a solution to the problem by some experts. Financial Regulator Matthew Elderfield said last year there was “no silver bullet solution” for mortgage arrears due to “moral hazard” and we “must be careful that any approach doesn’t provide financial incentives for the arrears problem to get worse”.
