THE BOTTOM LINE:ASIDE FROM the social benefits of helping people stuck in the wrong type of home, offering an escape from the negative equity trap has wider benefits for the moribund mortgage market, the dysfunctional banks and the economy.
But, much like the remedies sought for those swamped in mortgage arrears, it is hard to see a one-size-fits-all solution.
Negative equity – where a mortgage is worth more than the value of the home – stops people moving home unless they want to crystallise a loss. This creates a dilemma for borrowers taking jobs in other parts of the State or abroad.
The number of new mover-purchase home loans has plummeted, falling from a peak of €11 billion in 2006 to €900 million last year, according to statistics from the Irish Banking Federation and PricewaterhouseCoopers. This is a big segment of the market, representing 37 per cent of new mortgages last year.
Central Bank deputy governor Matthew Elderfield said last week that he wanted to make it easier for borrowers in negative equity to move house. The problem is the stocks versus flows or wealth versus income argument – a borrower might not be able to afford the big loss on selling a property but can meet the higher mortgage repayments on a more suitable home.
Elderfield said that 40 per cent of home owners are in negative equity but just 7 per cent are in arrears. This is based on a 48 per cent fall in house prices.
Matters will only get worse with further house price falls. Moody’s said last month that, based on its expected 60 per cent peak-to-trough fall in prices, about 75 per cent of all Irish mortgages could end up in negative equity. Without some kind of negative equity mortgage, this could suck yet more life (if that was possible) out of the property market.
Such a home loan is effectively a high loan-to-value mortgage and, in some cases, could be greater than 100 per cent of the value of the property. It seems odd that a banking regulator should promote such loans as a solution to a problem when 100 per cent loans have caused such hardship.
Negative equity mortgages have been on offer from two lenders since last year but on a limited scale – the number written by Permanent TSB is in single digits and Bank of Ireland’s number is similar. In some cases, the mortgages have been provided to borrowers downsizing to a smaller house so they are carrying the old negative equity debt onto a smaller loan.
Given that most banks are still recognising losses on high loan-to-value mortgages from the boom years, it is difficult to see how they would be willing to dole out further high loan-to-value mortgages to solve the negative equity problem without pricing them at hefty interest rates to reflect the risk.
The Central Bank’s willingness to help people out of the negative equity trap is welcome but the escape route might only be open to a few and is littered with mines.
FF apology falls short of lethal bank guarantee
It’s hard to accept the apology of Fianna Fáil leader Micheál Martin as fulsome if he is not contrite over the disaster – the worst ever made by an Irish government – that was the bank guarantee.
Even Fianna Fáil’s claims that they believed they were facing just a liquidity crisis, and not an insolvency crisis as well, in September 2008 are difficult to accept. It was glaringly obvious from a cursory scan of the crane-strewn city skylines and road-side building sites across the State that banks were heavily engaged in high-risk property lending and that the market had turned.
There is no doubt that some guarantee was required. But, as Central Bank governor Patrick Honohan and the OECD have said, the scope of the guarantee given complicated resolution options and increased the cost for taxpayers.
Justifying the decision by saying that it was the right one based on the information available at the time also fails to explain why the Fianna Fáil-led government did not use the two-year window the guarantee opened to repair the banks in a major and radical overhaul. As a result, the run on deposits continued and pushed the last government, which was struggling to deal with the deteriorating public finances, over the steep bank refinancing cliff in September 2010 created by the guarantee and into the troika’s safety net weeks later.
The guarantee tied the State to the banks. The biggest challenge facing the current Government is to untie that knot. This is the motivation behind the restructuring of the costly promissory notes covering the bailout of Anglo Irish Bank and Irish Nationwide.
Saying sorry will do nothing for that exercise but it would at least acknowledge the damage caused by that extraordinary gamble taken with the public purse. It would also put future politicians on notice to give a bit more thought to a request to approve such a decision when they get a call in the middle of the night.
