(this article appeared in the Sunday Business Post on the 23rd of March)
The banks are starting to write down debt. Should we be surprised? Recent news of large write downs on home loans by AIB has left out some of the necessary detail to add context to the story. The lender has equally shied away from confirmation of what happened, making it all a bit opaque.
Why would a bank choose to offer a capital reduction by writing off part of a mortgage? An alternative is to split the loan into a part which the customer can afford to pay and another part which is ”warehoused. If zero interest is charged on the warehoused part, then the affordability for the customer can be the same as if this part is written down, even if the psychological impact is different.
It is likely that there are peculiarities in the cases where debt has been written down, which means this will only happen in the minority of cases. For example, if a loan was on a one off house with a contested right of way, it would make the property virtually impossible to resell and that might be a justification for writing of part of the loan.
So could several other property specific considerations. This does not mean, however, that a wholesale move to write off mortgages is on the way, although it is the case that there are now circumstances where it suits all sides – borrower and lender – to strike a deal, for example to avoid the borrower going bankrupt.
Many debt advisers are thus obtaining reductions and write-offs for clients, although many relate to business related borrowings and often in family home cases the houses are repossessed.
The write downs reported in the headlines are also not special. Many debt advisers are obtaining such debt reductions, but most of them don’t run to the press with particulars. Just because something is fed out to the press doesn’t mean it is unique – and the danger now is that the headlines are creating false expectations among other borrowers.
Virtually every bank other than AIB demands non-disclosure agreements when offering such write offs – that AIB has side stepped this industry standard and remained silent is of itself peculiar.
The success of informal arrangements to deal with debts are perhaps the best evidence that insolvency and bankruptcy actually do work. It is the avoidance of having to deal with those avenues that has the banks suddenly making these deals which were absent for the last six years. The timing is far from coincidental.
One cannot credibly think this just started to occur out of some new found sense of altruism by the lenders – it is happening specifically to avoid going down alternative avenues.
Equally, we regularly see people look under the hood of a personal insolvency arrangement then turn from it due to the necessity of adherence to a set plan. Having gotten through five or six years on the back of your wits is a powerful disincentive to formalising a solution.
It is also an unknown danger, because using your wits to get another period of interest only on a loan is far different than signing up to an informal resolution which has contingent liabilities and conditions baked into it.
Similar debt write down deals also occur through regulated mediators and in the regulated insolvency channels, so it isn’t confined to the informal unregulated negotiation route.
In fact, I believe many critics of insolvency will eventually move into the personal insolvency space because it’s the only robust and durable solution for dealing with shortfalls.
Why? Because in an informal deal you are agreeing to bank-controlled parameters which if challenged will rely upon case law that is yet to be formed in some instances, whereas with insolvency you are reliant upon a regulated independent arbitrators parameters, which is now enshrined in primary legislation.
It’s only natural banks are starting to show a preference for playing a game they control rather than having to sit in on regulated, entire debt, court backed solutions.
So are the AIB deals some kind of ”new reality or just PR spin?
Most worrying is perhaps the lack of any comment from AIB, leaving us all wondering what does and doesn’t work in terms of obtaining a write down.
AIB is 99.8 per cent owned by the state. Some transparency and guidance would be welcome. And what do such deals mean for mortgage holders? Accepting an informal arrangement is like taking a job offer with no contract – it may work out fine, but it lacks the formal elements which may become pivotal points.
For instance, to sort out mortgage problems, banks are suggesting voluntary surrenders of homes in many cases. The examples where people lose their property far outweigh the write downs where people are left in their homes.
In time, the Financial Services Ombudsman may have a busy office if property prices recover more, as rightfully aggrieved debtors will be asking why they had to crystallise a loss when obvious market forces could have reduced the damage.
This risk is underestimated by the banks. In time debtors will have a strong case against lenders on this basis and the banks. This is why the regulated aspect of solutions is so vital.
One of the cases highlighted was also a multi-creditor situation and the headache of dealing with the others is not resolved by striking a deal with only AIB. There was also nothing in any of these deals – as reported – that couldn’t be matched in a personal insolvency procedure, which by its nature would deal with all debts not just a single bank, and would also provide guaranteed outcomes that aren’t down to bank-controlled reviews.
When people obtain professional advice they should ask the provider who their regulator is for the specific service they are receiving, because if it doesn’t work out you might be without a valid and cost effective route for dealing with your future problems.