No easy answers to monumental debt

While the Government delays in introducing legislation on debt-relief, some worry the Bill will go too far, while others fear a raft of half-measures

THE COMPLEX task of finding a way to ease the country’s heavy mortgage debt hangover was made clear yesterday when the Government said it was postponing publication of the new personal insolvency legislation until June.

Originally due to be published by the end of this month, the debt-relief measures in this crucial piece of legislation are now unlikely to be available until late this year or even next year.

The legislation will be published before the Dáil summer recess, Brendan Howlin, Minister for Public Expenditure, said at a press conference marking the end of the troika’s sixth review of the bailout programme.

In the meantime, the debt problem continues to grow. Bank of Ireland said earlier this week that arrears were continuing to increase.

Some 70,911 mortgages of a stock of 768,917 worth €113 billion in the country – or 9.2 per cent of the total mortgages – were in arrears of 90 days or more at the end of last year – 26,383 more loan cases than 12 months previously.

In addition, 36,797 mortgages had been restructured to allow the borrowers make their repayments and were not in arrears.

All told, some 107,708 mortgages were in arrears or had been restructured, amounting to 14 per cent of the Irish mortgage book.

There is, however, an anomaly between the number of mortgages in trouble and the number of legal actions taken by lenders to repossess properties. Just 133 properties were repossessed in the final three months of 2011.

This points to either a remarkable level of forbearance being shown by lenders or proof that it makes greater commercial sense for them to allow people stay in their homes and pay something off their mortgages, although this may be putting off a tougher decision.

If the increase in loan arrears continues at the same rate, the new personal insolvency tools should only become available at a time when well over 20,000 additional mortgages have ended up in arrears of 90 days or more.

Mr Howlin said the insolvency Bill was “a very complex piece of legislation” requiring “careful steering” through constitutional and legal issues. The delay in its publication was due to “some difficulties” that had now been overcome, he said. The troika was concerned about getting the legislation “absolutely right”.

It’s understood that the difficulties related to how the constitutional rights of creditors might be affected where debt is written off.

The Bill reduces the term of bankruptcy from 12 to three years and introduces three voluntary out-of-court debt settlements, including a personal insolvency arrangement where the most complex issue – writing down unsustainable mortgage debt – is agreed on a voluntary basis ahead of any court-imposed solution.

Borrowers with debts of between €20,000 and €3 million, including home loans and not excluding buy-to-let mortgages, can be written off. However, 75 per cent of the secured creditors (mortgage lenders) must agree to a deal.

Prof Jason Kilborn of John Marshall Law School in Chicago told a Free Legal Aid Centres (Flac) conference last week that the legislation contained a series of “half-measures”.

Given that most debtors’ secured mortgage debt was held by one lender, this effectively gave them a veto to block a voluntary deal.

“Effectively the banks have a complete veto given that there is usually only one secured creditor,” said Ross Maguire, a senior counsel and founder of New Beginnings, the group which helps those in arrears to deal with debt.

The Government is hoping that the alternative to settlements – filing for bankruptcy – will be far more expensive to the lender over time so that it incentivises them to agree to a voluntary deal where borrowers can repay a small amount every year over a period of six years.

“The banks need the proper incentives to agree to these kind of writedowns,” said Prof Kilborn. These include disclosure of information on a borrower’s debts and being able to monitor and oversee deals they agree, he said.

The changes being introduced undoubtedly pose major risks. If they are too lenient on debtors, this may encourage those who can afford to repay mortgages to refuse to pay in the hope of having some of their debt written off. This could exacerbate losses for the banks and increase the bailout costs for the State.

If the measures don’t go far enough to resolve unsustainable mortgage debt, then debtors will be stuck trying to pay debt they can never afford to clear and the banks will not address fundamental structural problems.

Egil Rokhaug, a senior adviser to the government in Norway, where a similar system was introduced after the country’s property crash in the early 1990s, said debt settlements were not designed to create new problems.

“The debt settlement is a clean-up of a mess that is already there,” he said.

Eimer O’Rourke, retail director of the Irish Banking Federation, told last week’s conference that the Government was taking “such a big step for the economy” in including secured debt in voluntary debt settlement and that the authorities must ensure that the new reliefs “target the people who need it”.

The banks have lobbied Government to say the €3 million cap on debt settlements is too high as it will bring in too much buy-to-let debt. This may reduce the value of secured loans as a result, thereby affecting how banks raise funding and this in turn could increase the cost of credit, the industry has argued.

Accountant Jim Stafford of Friel Stafford Corporate Recovery, who advises debtors, said that the cap wasn’t high enough and that some debtors could not afford to wait for the new legislation. They may chose to take action on their debts in the UK, where bankruptcy is more lenient than even the new measures in Ireland and where 50,000 out-of-court individual voluntary arrangements are agreed every year at a considerably lower cost than a court debt solution in a tried-and-tested system.

“It might not be for another 12 months before the legislation is effective and that is too long for some people to wait,” he said. “There is a formula that works in the UK – they can go into bankruptcy and exit within 12 months.”

The Money Advice and Budgeting Service (Mabs) said the personal insolvency changes would not offer straightforward solutions. “I don’t think people have seen the small print,” said Mabs spokesman Michael Culloty. “You can be tied into a straitjacket for years. It’s not going to be an easy write-off of debt. When people see they can be made bankrupt, they may not be willing to go there. It depends on how the whole insolvency scheme will work.”