You must question the morality of ‘keeping people in the home’ when doing so will push them deeper into debt they already can’t afford. The misery of a repossession is not the day you are told you have to move house, rather it is the stress on the way down, the calls, letters, meetings, the apprehension merged with repeated requests to fill in budget forms, and all the time knowing that you are unable to walk away because of our draconian debt laws.
We have 36,500 households in arrears, the greatest attrition is moving from 90-180 days into the 180 days or more unpaid, meaning that the people who go into arrears are not coming back, they remain unable to pay; the figures are hardening in the worst possible sector of the statistics.
Oddly, an increase in the 3-6 month bracket (if the total sum was stagnant) would be a sign of recovery as people paid their way back down the chain towards having a clear account, but the direction, acceleration and forward trajectory are all pointing upwards; with a growth rate of c.11% per quarter, which on an annualised basis would be growth of 50% p.a.
The stock of repossessed properties held by banks is increasing while actual repossessions are going down every quarter. That would generally imply health, so how can that relationship exist when people are not paying their loans? Simply put, the Financial Regulator is incrementally stripping away our lenders ability to enforce a mortgage contract in a meaningful time frame.
By having properties with arrears continuously occupied, that should (in a normal economy) be on the market we prevent price discovery and price adjustment, so a person buying a different house on the same street as a household in arrears will likely wind up paying more because the distressed debt sale that should have occurred in the past never happened, in this way our policy damages both the existing borrower and the future borrowers.
When you strip out sites, there are about 80,000 properties currently for sale in Ireland, 45% of that sum are currently living in a property they are not paying for and which is not being put up for sale, there should be closer to 105,000 properties for sale.
This prevents potentially willing buyers from being confident in a purchase because they know that prices will drop further, in particular when we finally start to deal in an adult manner with our looming wave of foreclosures.
One result of people not paying their loans will be a ‘beggar thy neighbour’ situation in which everybody will bear part of the cost via increased rates on credit and transaction fees for other financial services. In the same way that insurance fraud creates an extra cost to all people who purchase insurance, there will be an embedded cost to financial services due to arrears.
‘Keep people in the home’ is an autopilot response to a tough question, the question is ‘what is the fairest way of dealing with a debt problem’, and frankly, much like cancer, ‘delaying & praying’ is a poor approach. A rapid response and cutting people free from a millstone of finance they cannot carry is the most humane and civic minded way to do it.
The reason people say ‘I want to stay in the home’ is because they are asked with no alternative option, the obvious implication being ‘stay in the home’ or ‘be homeless’, it doesn’t have to be this way.
Financial misery cannot be prevented in a recession; however, unnecessary suffering is a different matter. The increase in suicides of 24% last year is probably a good proxy for the mental health effects of financial misery, both MABS and private debt councillors are both in agreement that the level of calls on mortgage debt issues they are dealing with are rocketing skyward.
It’s like a perversion of the Hank Williams song, except we shovel 16 (billion) tonnes of debt and owe our souls to the banks while individuals are going under left and right. We are told our banks are of systemic importance, so too are our taxpayers! We are tacitly mortgaging future generations to prevent the rise of zombie banks only to leave zombie households in their wake.
Research by O’Rourke, Bentrix & Eichengreen shows that recovery from a property slump only occurs once you hit rock bottom, much like an addict, recovery can only begin after that point, a paper by the US based National Bureau of Economic Research even argues that the ‘Housing Cycle is the Business Cycle’, we have to deal with the property market to make a comeback.
What to do? Reach market clearing prices. Let people move out and away from debt in a manner which doesn’t crush them for over a decade. The most sincere market response would be for people to walk away, when a deal goes bad somebody normally leaves, would you ask a person to stay with an abusive spouse in favour of divorce?
If we are terrified about moral hazard then ensure there is a loss sharing process, that neither the consumer nor bank can go through the process in a pain free manner. It’s an adult way of addressing an adult problem, it will be difficult to discuss when you have advocacy groups screaming to the contrary and lobbyists who will say that doing so could bring down the whole system.
But just how far will borrowers in arrears go before realising they are committing more and more of their household income toward a bad asset instead of spending it on their family? It’s time to wake up.