Mistrust is making debt stalemate harder to resolve

THE BOTTOM LINE:WHEN IS debt forgiveness not debt forgiveness? When a bank has done everything it can to recover funds loaned out but accepts a lower amount after exhausting all options in a long process.

That was the view of Bank of Ireland in the legal action it brought against Dublin nurse Laura White, who ultimately could only afford to pay €18,000 over six years towards a €170,000 debt. This means the bank has to write off €152,000 in a deal negotiated by lawyers working through New Beginning, the group that helps borrowers in arrears.

Bank of Ireland’s response to the story after it first appeared in The Irish Times was to get the message out that it did not forgive mortgage debt as a policy. Writing off €152,000 of debt was not forbearance but the conclusion of an exhaustive debt recovery, repossession and court process, the bank said.

This is, of course, spin. Clearly, the bank didn’t want a flood of requests for similar deals after this agreement came to light, or to see borrowers change their behaviour in the hope of securing the same kind of settlement.

Bank of Ireland has stuck steadfastly to a policy of not entertaining talk of debt forgiveness – in contrast, at times, to rival AIB. When debt forgiveness was raised by AIB last year as a possibility, it led to a debate about moral hazard, where risk-taking is rewarded. The debate became relevant again recently with the case of Brendan and Asta Kelly, the Dublin couple who have fought eviction from their upmarket home in Killiney but who own more than 40 rental properties.

Laura White’s case is a good example of how the stalemate between secured creditors and struggling debtors can be broken over mortgages that, in reality, can never be repaid. Like so many others, the 35-year-old single nurse overextended herself by borrowing heavily to buy a home. Changes in her circumstances meant she could no longer afford the loan. She decided to hand over the keys to the bank in the belief the debt would be covered by the sale of the property.

Leaving aside the dispute about when she surrendered the property and how a delay in its sale increased the shortfall to the bank, the settlement is an acceptance by bank and borrower that monthly repayments of €250 for six years is the best outcome for both.

The benefits of being freed of €152,000 in debt is offset by the fact that White must pay €250 a month – all she can afford – for a home she no longer owns. She will be unable to borrow again for years and faces a judgment of €120,000 if she misses a repayment.

She is in a financial straitjacket of sorts for the next six years and this will affect how she lives. She said last week that she drove an unreliable “1997 banger”. Without a loan for another car, she will have to make do.

The action against White could have been dealt with far more quickly, or could have avoided court altogether. The bank sued her in late 2010. It took 18 months and seven listings in the High Court before the settlement was reached, incurring expensive legal costs.

The Central Bank and Government are pressing mortgage lenders to reach such deals through negotiated agreements. Under the new personal insolvency regime, solutions will be proposed by trustees in the new out-of-court settlements (although the banks still hold the power to veto) or, if these are unsuccessful, by the courts in bankruptcies.

As it stands, the banks don’t want to write down mortgages unless they know borrowers have been upfront about their financial position and that the debtors aren’t “gaming” them to get a more favourable deal.

The banks are undoubtedly weakened in the negotiations by their role in creating this crisis. It is hard to deal with institutions that have lost moral authority after being bailed out by taxpayers, while also demanding full repayment from borrowers. But some higher-profile borrowers have not helped their cases by clinging to the trappings of boom-time lifestyles while trying to secure better deals from creditors. When these negotiations get down to how often you replace your car or what supermarket you do your weekly grocery shopping in, finding solutions case-by-case will be tortuous.

As a Norwegian expert on resolving that country’s mortgage debt in the 1990s said, settlements are not designed to create a new mess but to clean up one that already exists. The sooner banks realise this – and the more debtors accept their financial position and the change in lifestyle this demands – the quicker the problem will be resolved. In a climate of mistrust, this will take time.