The Irish Times carried an article that stated that AIB would write down some mortgage debt. What does this mean though and who will be the beneficiary?
To begin with, the write-downs should be no surprise, that is what the provisions AIB have been putting aside for several years are for, in fact, to date it’s almost like they weren’t playing fairly because they were booking provisions but not actually using them for what they were for.
Secondly, there are 33,000 AIB mortgages with problems, of these about 10,000 are ‘unsustainable’ and for those mortgages there will be losses booked – that is the ‘writedowns’ they are talking about in the main, but on the end of whatever solution comes out of if the person may not be the owner of the home.
Several solutions are things like ‘split mortgages’ which require no writedown, others will be ‘mortgage to rent’ which will, because in that process the ownership will change and that means crystallizing the loss. How many of the 10,000 will come out with a write down and ownership of the property is really the question that needs answering, and that is an unknown.
Writedowns are merely an expression of a provision being actioned upon, the provision is set up as per IAS37 and the loss incurred as per regular accounting standards. The asset will be ‘written down’ the loss at that point becomes a ‘write off’.
The idea of ‘forgiveness’ means the bank don’t chase that written off loss that occurred during the writedown. For that reason, thinking that people will keep their home and become a beneficiary of some kind of banker magnanimity is mistaken.
Far from being some societal welfare (bearing in mind we gave AIB over €20,000,000,000) it is a way of describing the accounting treatment of loans in a very PR minded manner.