The mood has definitely changed in the markets and across the world in the last year, we have gone from being on the precipice of total destruction to being tentatively optimistic, and in many cases outright bullish. The news is becoming ‘less bad’ (perhaps we are getting immune to bad news too!) across several key metrics in many countries such as the ‘speed of the increase in the rate of unemployment’ – which is a roundabout way of saying ‘lots of people are losing jobs but not as quickly as before and thus its a good thing’.

One of the headline grabbers this year was that of repossessions, they make for poignant reading and often they are naturally heartbreaking stories, but are we seeing the full picture? Today we will consider some of the reasons why we believe that we are not seeing anything like the full picture, and it relates to the implementation of several key policy areas which have essentially delayed the problem for another day.

Before we go into it, I would have one caveat – that [the hope of] some employment recovery is the one factor that could prevent this, however, if we don’t see any employment recovery then the following scenario may we become a reality.

Firstly: There was the recapitalisation of AIB and BOI in February 2009, part of that programme was an agreement that the two largest banks would not repossess anybody for 12 months (expires Feb 2010).

Secondly: The new ‘Code of Conduct for Mortgage Arrears‘ was brought out by the Financial Regulator (also in February 2009) and this gave people in arrears certain rights and protection as long as they engaged with the lender regarding any missed payments and attempted to settle their debt. What it translates into in practice is an extension of about six months before repossession proceedings are commenced.

Thirdly: The IBF / MABS protocol agreement was brought out in June 2009 and this can buy a person a few more months, partly because MABS have a long waiting list in some parts of the country (Limerick was c. 4 months as of May 2009), and then once the process begins there is a 30 day period (20 for MABS 10 for the IBF lender) in which arrangements can be made etc.

So apply this to mortgage arrears and you’ll see that anybody who became unable to pay their mortgage as far back as November 08′ could be under protection until February 2010. How? If you had become delinquent on your November payment then you would go into the credit control procedure with any lender and a missed December payment – while on the record- wouldn’t throw you into courts (if you were waiting on a welfare claim to start that would be reason enough), January would be filled with negotiation, perhaps a partial payment – other debts would tend to suffer first such as any non-mortgage borrowings- and then you are already in November without any formal demand and thus you have a pass until February 2010.

I won’t doubt for a second that every case of serious arrears is genuine, but I will apply some cynicism for a moment. Imagine a couple live together, they each own a house, one is rented out and they co-habit in the other, the payments are proving just too much and one of them loses their job. If they decided to stop paying their mortgage and instead save any money that came in then they would stand to gain by such behaviour [strip out any ‘right’ or ‘wrong’ from the equation and just consider it].

Then, when push comes to shove they move into the place that is currently rented, only one persons credit is damaged and they make sure that any future credit applications are made in that persons name, they have lived essentially mortgage free and they still have a place to live. Obviously we don’t advise or condone this type of thing but it would be naive to think it isn’t happening. All this example does is set out the ‘moral hazard’ which we have totally ignored in policy making, it doesn’t stop at the individual and goes in particular to how we dealt with our banks, you say ‘too big to fail’? I say ‘too big to bail’.

The true picture of our repossession landscape will only become apparent in Q2/Q3 of 2010 when the new measures cease to provide any protection and the process begins, the push into Q3 will come about due to the natural delay of court appearances.

Of course, the new ruling whereby a property can be repo’d without a formal court appearance will not make the headlines for natural reasons, it won’t make court time and will be done via the circuit courts so it may become a case that even if much of this comes true, we won’t know about some of it because it will be off the radar in lower courts where a hearing may or may not take place, that’s a post for another day though!