DEPUTY TOM BARRY PROPOSES MORTGAGE SOLUTION – PARKED PERCENTAGE MORTGAGE PLAN (PPMP)
CORK EAST TD Tom Barry met recently with Minister for Finance Michael Noonan to propose a solution to the mortgage book crisis.
“We are now in a situation where account holders behind on their payments owe over €8.5bn and some 40,000 homes are in arrears – up from 25,000 in early 2010. Arrears now account for close to 6% of the total market. None of these figures take account of the vast numbers of restructured loans – of which there were 60,000 at the beginning of April 2011. Compounding the problem is the interpretation of the Basel Agreement currently being applied by the Banks. This protocol is being used by banks to issue letters that are absolutely horrendous, threatening to withdraw facilities, etc. as the implementation of the Basel Agreement is left to each bank individually.
“Currently, the mortgage crisis is being dealt with by kicking the can down the road, either delaying or disguising the problem, which will only eventually accentuate it. No action is, in effect, allowing the market to run freewheel, with devastating financial and social consequences. Many Irish people cannot now see any light at the end of the tunnel and many are voting with their feet and emigrating. This emigration is like no other, as these people will not be back because all that awaits them is retribution for monies owed and unpaid. While many commentators evaluate the situation and highlight the problem, not many solutions are forthcoming. However, solutions are required now.
“Set into the Irish psyche is the need to own your own home, a desire probably ingrained from famine times, when the Tenant Right League began to demand the ‘Three Fs’ – Fair Rent, Fixity of Tenure and Free Sale. This rush by a new generation to buy a family home was all-consuming and unfortunately has trapped not only this generation of first-time buyers but also any of those who sold their existing houses to move upwards and onwards. Each group bought according to their disposable income at the time and many are now trapped in a financial nightmare. The solution proposed here – the PPMP – proposes that we use the information from the last Banking evaluation, along with the knowledge of local and regional bank managers, preferably those who were involved in the initial lending of the funds to the distressed mortgage holder. As the banks tried to tidy up their situation in recent years, they often shuffled their bank managers like a deck of cards, thus removing vital local knowledge from branches, breaking the personal link between manager and customer. This needs to be rectified and this knowledge of customers by banks needs to be re-established.
“Each mortgage will need to be analysed separately and individually to ascertain the level of repayment the mortgage holder can realistically bear on a capital and interest repayment basis. As an example, let us take a mortgage holder with a €200,000 mortgage. If it is established through the mechanisms as described above that this mortgage holder could service interest and capital on €100,000, the €100,000 which cannot currently be paid is placed as a charge on the property to be addressed at a later stage – either as a second mortgage or upon the sale of the property. The interest element of the charged amount needs to be financed in the interim. This funding needs to be negotiated centrally by government at a low interest rate with the EU/IMF. It is also a possibility that when the existing banks go back into profit, that they can make a contribution towards this funding.
“This is not a new concept as we have seen inter-generational loans in the past, an example of which would be land annuities, where land repayments were set over 65 years to allow Irish tenants to gradually claim ownership of their farms. Under that system, special courts were set up to establish land valuations and tenants could, at any stage, pay off the land annuity during the term if their circumstances improved.
“The Parked Percentage Mortgage Plan approach has many positive aspects:
- It is individually tailored and allows people to pay for their house with no fear of eviction.
- It allows the mortgage holder to pursue the objective of owning their own home.
- It prevents the mortgage from becoming a bad debt, thus crystallising the loan and adding to our country’s debt crisis.
- It allows the mortgage holder the possibility of some disposable income, which will help to stimulate our domestic economy.
- It will address the huge fear and anxiety in society with regards to this issue.
- It may help to avert the huge societal problems which will result as part of the fallout of this crisis; e.g. depression and suicide. It simply offers light at the end of the tunnel and offers hope to people in financial depression.
- It will keep people in Ireland who can help rebuild our society and work our way out of this problem.
- It prevents the sale of these properties to venture capitalists and other investors who, as the recession starts to recede, would start to raise the rentals on these properties, trapping their tenants in an immovable vice.
- This solution does not abolish the debt by debt forgiveness; therefore moral hazard is not an issue. The mortgage holder who pays off his or her mortgage on time is still rewarded as he or she is debt free earlier.
- This debt solution prevents banks aggressively offloading their distressed mortgages to the State. This would, of course, increase bank bad debt and would only weaken the banks recovery, placing them in a situation where they would be looking to the State for more bailouts. It also prevents the banks from becoming a demanding landlord, which would cripple a sustained recovery. Additionally, it also prevents the transfer of the problem to the County Councils, which would result in local authorities having to bear the cost of re-housing and, of course, the huge cost of maintenance. Within the PPMP, housing maintenance is not an issue; and the PPMP also prevents banks from standing steadfast behind their implementation of the Basel Agreement. They are doing so at present and will continue to do so if allowed, with such detachment that it is terrorising mortgage holders; with letters threatening to revoke facilities, demanding repayments in an unrealistic timeframe, even going so far as to remove Bank debit cards, thus forcing homeowners into near-pauper status. This implementation of the Basel Agreement by the banks infers that people will not even have enough money to feed themselves or their families and this is completely unacceptable.
- PPMP effectively takes negative equity out of the equation as the debt will be serviced, albeit over a longer time frame, and the repayments will not be readjusted to artificially inflate property values.
“Strangely enough, a solution which might have averted the worst excesses of the 1847 famine, the Three Fs, might work here:
- Fair Rent – in this case equates to fair payment, i.e. what the mortgage holder can realistically pay – principal and interest.
- Fixity of Tenure – this is as relevant today as it was 150 years ago. Mortgage holders cannot be evicted as long as they meet the repayment schedule.
- Free Sale – in this instance, this means sale of the repayment schedule. The mortgage holder would be free to sell the repayment schedule without any conveyancing charges. They would not need the bank’s consent to do this once the purchaser is mortgage compliant.
“This proposal is the basis of a comprehensive plan and, while there may be many minor adjustments to be made, the spirit of the proposal needs to remain the same. Interest only mortgages were, as we can now clearly see, one of the key factors in creating the property boom. They were part of the problem and I believe they should not be part of the solution. Banks currently are moving distressed mortgage holders into interest only arrangements, which is not a solution. A large number of these people are still heading down the road to default.
“If successful, this model could also be applied to small businesses with the consequent increase in cashflow allowing small businesses to survive. However, a stipulation would have to be included to disallow any further borrowings until the debt problem is rectified.
“The potential of the PPMP is to see all monies repaid to the banks/State; evictions and societal breakdown reduced; people allowed to enjoy a reasonable standard of living and a slowdown of emigration, thus providing a workforce which will be badly needed for our recovery. To paraphrase Edmund Burke, we need to look to experience rather than to consult with our invention.”