Debt group offers a lifeline — of sorts — to homeowners

THE ARRIVAL of the IMF last week overshadowed another piece of important news that involves ordinary people, for once. Hard-pressed, private mortgage holders, who are in payment arrears or who are now stuck in negative equity to the detriment of their job prospects in another city, for example, may have hope for some resolution of their very pressing financial difficulties. The publication of the long awaited report of the Mortgage Arrears and Personal Debt Group, set up by the Central Financial Regulator earlier this year, includes recommendations that allow for the following, if accepted by government: Mortgage holders in arrears, who can pay at least 66% or two thirds of the existing interest on their mortgage, can defer payment of both the remaining interest and the capital for a period of up to five years, without additional interest or penalties. The amount the person will pay will be determined, after a full investigation of their financial circumstances, through a Mortgage Arrears Reconciliation Process. An 'Arrears Review Unit' will monitor how the mortgage holder is managing on the scheme. If after five years, or 18 months of interest is accumulated, the mortgage holder cannot start repaying their full mortgage, the mortgage will be deemed to be unsustainable. Once that happens, the property will be sold, any outstanding debt will have to be settled between the lender and the borrower, but the local authority will be obliged to re-house the defaulting mortgage holder. The key to the success of this proposed new mortgage arrears process, will be the reform of our bankruptcy laws with the discharge of the bankrupt occurring much sooner than the existing 12 years. One to three years is expected to be the recommended discharge period. Another important proposal in its report, which you can read at http://www.finance.gov.ie/documents/publications/reports/2010/Mortgagearrearsrep.pdf, is that mortgage holders who are meeting their mortgage payments, but are in negative equity, should be able to trade down to a more affordable property, but will continue to carry their negative equity with them, ideally, negotiated at more favourable, affordable terms than they may have at the moment. Already, lenders are facilitating easier repayment terms, such as switching a capital and interest payment mortgage to an interest-only payment. The group also recommended that lenders cooperate with an 'assisted' sale, where possible, rather than undertake a formal repossession process, with agreed repayment terms for any shortfall amount. Also, that the lender accept a voluntary form of tenancy, once repossession is in train, which would allow the former owner to remain as a tenant in their home, for an agreed maximum period, until they can be satisfactorily housed by the local authority. What is not included in the proposal is debt forgiveness, which so many people believe should happen. Is it morally correct, they ask, that insolvent, private banking institutions be kept open at a mind-blowing cost of €200 billion to the Irish taxpayer, while individual Irish citizens in trouble get no debt forgiveness whatsoever? The expert debt group believes the 'moral hazard' risk â€â€ that many people who are paying their loans, with difficulty, but paying them nevertheless, would stop paying their mortgages and other debts if an official debt forgiveness policy was put in place. The logic continues, that should this happen, the volume of debt could not be absorbed by the state/banks (even with their massive capitalization), and no amount of outside support from the ECB and IMF would be sufficient to stop an all-out default of our country. It will be a number of months before this report is enacted, if at all,  since the approval of the IMF may be needed. Until then, if you are in trouble, but are determined to keep your home, contact your lender (and other creditors) as well as the Money Advice and Budget Service, and, with the help of MABS, prepare a debt and budget statement of your finances. Start keeping a record of every action you take. When you meet your creditors with your budget statement, offer them whatever you can realistically afford to pay. Do not do this if it is not credible since, under the existing bank arrears protocol, no legal action can be taken against you for at least one year, if you are cooperating in the arrears resolution process. This new report is a fragile enough lifeline, but it could provide some hope for the increasingly large number of struggling mortgage holders. However, no amount of helpful debt relief schemes can solve the problem of unsustainable debt. Consider the young couple with falling income and rising interest costs, living in a starter home in a distant suburb. The property, which they now bitterly resent buying, is worth half of what it originally cost, yet the €350,000 or €450,000 mortgage bill is crushing, not just their wallets, but their spirits.  They cannot pay their other bills, they cannot start a family or seek work elsewhere. Assuming there is no debt forgiveness for them by the EU/IMF, it may be in their best interests to voluntarily default on this debt, sooner rather than later. Assuming we properly reform our bankruptcy laws, defaulting through bankruptcy means they will be able to rebuild their credit records within a few short years and get on with their lives, unburdened by what was always going to be an unbearable load of debt.