Tens of thousands of homeowners struggling to pay their mortgages will not be given a bailout, Minister for Finance Brian Lenihan declared today.
Ruling out a debt forgiveness scheme similar to those in the US, Mr Lenihan has instead backed a ‘deferred interest scheme’ to combat an arrears crisis.
Under the plans, lenders will be asked to allow hard-pressed homeowners repay two thirds, or 66 per cent, of their mortgage interest and defer the rest for up to five years.
So far, more than half of financial institutions have agreed to the proposals drawn up by the Government’s mortgage and personal debt group.
Mr Lenihan suggested pressure would be put on others to row in behind them.
Mortgages would be declared “unsustainable” when deferred repayments amounted to a year and half’s interest or when borrowers were still on the scheme for five years.
Those with “unsustainable” mortgages would then be eligible for social housing and their home would not be repossessed before they were allocated a new home.
The group has also called on lenders to help allow homeowners in negative equity to “trade down” to a more affordable home to cut their monthly repayments.
Mr Lenihan said: “We are committed to solutions that are fair and appropriate to the current circumstances of Irish homeowners. The Government accepts the group’s recommendations and wants to see them implemented without delay.”
Almost 40,500 homeowners have now fallen behind on their repayments by three months or more, according to latest Central Bank figures.
This accounts for just more than 5 per cent of all mortgages loaned out in the state with around 28,000 of those gathering arrears for more than six months.
The Government’s mortgage and personal debt group has warned the arrears problem is likely to get worse before it gets better.
Jim Power, chief economist with Friends First, claimed mortgage defaults were fast becoming the biggest threat to the economy and there was no easy answer to the growing problem.
But he insisted the Government could no longer stand by as the economic consequences of allowing the arrears continue to mount could be catastrophic.
“The problem of mortgage arrears cannot be allowed to persist,” he said.
“It is quickly becoming the next biggest challenge facing the economy, the banking system and ultimately the public finances.”
The number of mortgages in arrears for three months or more has jumped 11% since the end of June, the Central Bank said.
There was also a 23.5 per cent hike in the number of lenders taking court cases against homeowners in arrears between July and September.
The Central Bank said lenders currently hold 522 repossessed properties, 81 of which were seized during the same summer months.
Most were repossessed voluntarily or through abandonment, but just over a quarter were on foot of court orders.
Mr Power said the housing and mortgage market remained weak and was unlikely to get significantly better next year.
House prices look set to fall around 10 per cent by the end of this year with a further 4 per cent drop expected next year, he predicted.
A survey carried out for Friends First confirms Irish people remain extremely worried about their financial positions and pessimistic about the state of the country’s economy.
Three quarters of those polled believe expected cuts in the Budget will impact on their Christmas shopping habits.
More people (84 per cent) in the public sector - compared to 72 per cent in the private sector - believe the cutbacks will hit their spending in the run up to the season, according to the survey.
“The Irish population is fearful for its financial wellbeing,” said Mr Power.
“Consumers are continuing to decrease their spending in much the same way as the Irish Government now needs to.
“Unless the Government takes immediate action the future of the country’s finances are unsustainable.”
PA