Longer mortgages can save the economy – John Clark
The mortgages-arrears problem has had a long gestation due to irresponsible lending practices, a lack of prudent oversight by the Central Bank and the ill-advised actions of some borrowers. It will be even longer in the fixing.
But what is missing is a far-reaching collective action on the part of all who participated in creating the problem in the first place.
From a bank’s point of view it’s what’s called a “workout”. The solution to maintaining a performing loan is to hold the bank accountable for the problem that it helped create and for it to work with the borrower to restructure the loan in such a way that it becomes serviceable.
The Central Bank’s new role is to do the job they should have done in the first place.
For the borrower under legitimate distress it’s a matter of thinking ahead, assuming the property is handed down, and agreeing to make sacrifices for the children or even grandchildren who some day will derive the benefits.
Banks are offering on a “case-by-case-basis” various schemes such as Mortgage to Rent, Trade Down Mortgages and Split Mortgages. However, the enormity of the problem requires a bolder and wider approach. A “case-by-case” approach is simply insufficient to solve a problem that, if not addressed, will become uncontrollable and massive in scale, causing unnecessary hardships for borrowers, and further weaken the banking sector.
Even with these ‘remedies’ in place, however, in little less than a year the number of mortgage-holders more than 90 days plus in arrears, has grown roughly, from 45,000 to 83,000. The problem is not going away. In fact it’s getting larger.
Figures from the Central Bank show that only 13% of mortgages have had their term extended. Therein is the main reason arrears are increasing.
The key to stemming the rising tide of mortgages is the term of the loan: the longer the term, the lower the payment. However, Irish banks generally determine the length of the loan by the age of the borrower. They don’t allow the term to exceed the borrower’s retirement age. It’s as if the collateral for the mortgage is the borrower rather than the property.
What is missing is the will to act based on a new reality: it’s the property that is crucial and not the age of the borrower.
Up to now the burden has been mostly put on the borrowers; and they, by themselves, are in no position to solve this problem. The Government needs to force the banks by legislation to offer terms as long as fifty years.
For example, a €300,000 mortgage with a 20-year term at 3.75% has fully-amortised monthly payments of principal and interest of 1,778 euro, while the same mortgage with a 50-year term would have payments of 1,107 euro. The difference, multiplied by tens of thousands of mortgages, represents cash that could be spent on goods and services to stimulate a recovery and in the process prevent losses of home ownership.
These longer-term mortgages are in essence legacy loans to be handed down with the property and eventually paid off by future generations. In this fashion the home would at least stay in the family through inheritance. This is perhaps not unlike the American pioneers in the 19th century who sacrificed for the benefit of their children and grandchildren.
n April 2012 the International Monetary Fund (IMF) in its biannual assessment of the health of the global economy, noted: “bold household debt-restructuring can help prevent recessions becoming deeper and more protracted”. The report went on to state that such action “can significantly reduce debt repayment burdens and the number of household defaults and foreclosures”.
The argument of banks and government officials is that there are borrowers who take a “strategic” position not to make payments with the idea they will be given some preferential treatment. However, this holds no water. It is hard to imagine that any borrower who had a 20-year term and could afford to make the payments would ever want to opt for a term twice as long. It would appear that banks may be using this as a diversion to resist any meaningful long-term restructuring program.
Banks, including those under control and management by the State, are no longer just in the lending business; they’re also in the real-estate business. And the State is no longer just in the “governance business”; it’s also now in the banking business.
For the banks and the current government to continue to act as they are now doing will very likely result in a wholesale ‘write-off’ of tens of thousands of mortgages by way of unnecessary foreclosures. Inaction will further depress the property market and cause even deeper despair for thousands of borrowers and further impair the balance sheets of the banks.
Bold action is required. A return to responsible banking that protects shareholders—whether they are the government or private investors—and borrowers alike will restore trust, the foundation of society.
It was said at the outset of the economic collapse that “we are in unchartered waters”. So…new charts must be drawn up. This means new accounting rules, legislation and changed practices.
John Farrell Clark was President and Vice-President of banks in California between 1983 and 2004