OPINION:RECENT WEEKS have seen a resurgence in debate about resolving the problem of unsustainable mortgage debt. Interest in this important issue is, of course, welcome but the tenor of the debate is problematic in a number of respects.
First, it is based on inadequate evidence – little information is available on the effectiveness of the supports already available for households in mortgage arrears and the Central Bank data includes no details of the characteristics of these households or their borrowings. This lack of evidence means it is difficult to estimate the necessary scale and costs of potential solutions – estimates of the costs of debt forgiveness vary from € 5 billion to € 15 billion. In addition, the debate on this problem is often based on stereotypes – “struggling families” versus “people who went mad in the boom”.
Second, analyses of the costs of addressing over-indebtedness focus solely on the direct costs and rarely consider the significant costs of failing to act. There are costs for the individuals involved who currently can be pursued indefinitely by lenders for any debt left following the sale of their repossessed home – which acts as a deterrent to taking up employment. There are also costs for the State as most households would be eligible for rent supplement or social housing following repossession.
Third, the debate is confused. Commentators conflate the problems of households in mortgage arrears and those in negative equity. Although there is significant overlap between these two categories – those in arrears cannot sell to clear their mortgage – the mortgage arrears problem is more serious and immediate and therefore should be the priority for Government action. Discussion of forgiving the debts of those who can currently afford to service them should wait until the arrears problem is resolved.
We have recently completed a research study on mortgage arrears which sheds some light on potential solutions. It was commissioned by the Money Advice and Budgeting Service (Waterford office and national development office) and the Citizens’ Information Board. The research examined just 50 Mabs clients (43 households) across the Republic who were experiencing mortgage repayment problems. But they were interviewed in very significant depth to identify their pathways into, through and out of mortgage arrears. Interviewees fell broadly into three groups:
- People experiencing short-term repayment difficulties, due to illness, difficulties with other debts, or short-term unemployment.
- People needing medium-term help (five to seven years) because they have to retrain in order to gain employment, but have a good prospect of paying their mortgage if they do so. Unsurprisingly we met many former construction workers in this category.
- People whose mortgages are non-viable. That is, they are unlikely to ever pay off their mortgage: because they shouldn’t have been given a mortgage in the first place; because their employment prospects are poor due to age or illness; or because they have many large additional debts.
Most arrangements for people with mortgage difficulties address the first category. They include forbearance, for example restructuring their debt by lengthening the period of the loan or paying the interest only, and mortgage interest supplement, a social welfare payment that contributes to interest payments. For such households these arrangements are reasonably satisfactory. Interviewees told us the banks and social welfare authorities have become more efficient in dealing with their cases in recent months.
A more serious problem is that existing arrangements do not meet the needs of people who need medium-term support or have non-viable mortgages.
Indeed in the case of the latter, forbearance can worsen their situation by increasing the debts they owe on dwellings that are likely to be repossessed ultimately. Our research identifies a number of potential solutions to the problems of these households.
For people who need help for the medium term, mortgage interest supplement, which is available for only two years, should be extended to subsidise half of the interest payable for a further five years. Lenders would forgo the remainder of the interest for this period. Although this would mean an extension to the scheme, public expenditure would in fact reduce, because if people in this situation were forced to leave their homes, the great majority would move into private rented accommodation where they would be eligible for rent supplement, at a greater cost than the partial mortgage interest supplement we propose. The State could consider recouping some, or all, of the expenditure on this partial supplement by taking an equity stake in the dwelling or through a future reduction in tax credits applied when the household can afford this.
For people whose mortgages are non-viable, who have a home that meets their needs (but not excessive for their needs) and who wish to remain there, we propose that a mortgage-to-rent scheme would be introduced. It would work like this:
- The lender would sell the dwelling at market value to a housing association (sometimes called the voluntary housing sector), financed by a loan from the State via the Housing Finance Agency or another commercial lender. Housing associations that are not-for-profit organisations provide social housing for more than 20,000 households across the State.
- All or most of the remaining debt would be written off by the original lender. The former home owner would become a housing association tenant, and as well as the tenant’s rent the association would receive the standard Government subsidy for social housing provision.
- When the dwelling is sold, any increase in market value would go to the State.
This innovative scheme would help people to remain in their homes, as long-term tenants rather than owner-occupiers, and allow them to make a fresh start. The cost to the State would be equal or less than the normal cost of providing social housing. For larger households and those without big mortgages, this scheme is likely to cost the taxpayer much less than providing rent supplement for private rented accommodation.
Many interviewees with non-viable mortgages told us they wanted to leave their home because it was a constant reminder of their financial problems and associated stresses. In addition there are some distressed borrowers who own properties that are excessively large or expensive for their needs for which it would be unreasonable to expect a public subsidy. They could be helped by introducing the non-judicial debt settlement arrangements recently recommended by the Law Reform Commission.
This would enable the debt remaining after the voluntary surrender and sale of dwellings to be written off without recourse to the courts. This is a form of debt forgiveness but only for those who have suffered the loss of their assets and home.
Implementing these proposals will necessitate putting in place measures to ensure that neither borrowers nor lenders abuse the process. An independent and cost-effective assessment of the assets, debts, incomes and necessary expenditure of distressed borrowers will determine whether their mortgage is in short-term difficulty, viable in the medium-term, or non-viable; and would identify an appropriate solution.
This could be done by appointing licensed personal insolvency trustees, as recommended by the Law Reform Commission or by extending Mabs into a personal debt management agency as recommended by the programme for government of the Fine Gael/Labour Government.
Blanket debt forgiveness would mean simply writing off a large proportion of the mortgage debts of people in arrears, without any conditions. If this were done, the overwhelming majority of mortgage-holders, many of them struggling to keep up payments, would find this unacceptable. We believe that our research and recommendations point to fairer solutions for all.
Simon Brooke is an independent housing and social policy consultant. Dr Michelle Norris is a lecturer at the school of applied social science, UCD