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July 1, 2012 5:06 pm
John Herdman bought the council house in which he was born during Ireland’s property boom when credit was free flowing and 100 per cent mortgages were handed out like sweets by banks. But when the economic crash came in 2008, and he and his wife Susan lost their jobs, his dream of owning his home turned into a nightmare.
“I owe €250,000, which works out at monthly payments of €2,000. We have cut back on food, we never go out and get some help from the state for the loan but with our welfare payments only worth about €400 we fell into arrears,” Mr Herdman told the Financial Times.
Mr and Mrs Herdman are the human faces of a deepening mortgage crisis in Ireland, which is threatening to derail the country’s fragile economic recovery and raising fresh questions about the health of its banks.
Stubbornly high unemployment and lower wages, caused by a four-year economic crisis, have pushed many mortgage holders to the brink. At the same time plummeting property prices, which have halved in four years, mean hundreds of thousands of borrowers are stuck in negative equity and cannot simply sell their homes to escape debts.
Figures published in May by the Central Bank of Ireland show one in 10 residential mortgages, or 77,630 mortgage accounts, are in arrears of 90 days or more. A further 79,712 mortgages have already been restructured by lenders, who were contacted by borrowers facing difficulties with their monthly repayments.
“There is probably no time, since the Land War [the 19th century unrest that pitted Irish tenant farmers against landlords], when the Irish people have felt so stressed, so anxious about their home and their family’s future security,” Enda Kenny, Ireland’s prime minister, said last week as he pledged action to tackle the problem.
Despite the rapid growth in arrears, the government has been hesitant to introduce measures to tackle the problem, fearing it could undermine Ireland’s bailed-out banks. But on Friday, after more than a year of debate, Dublin proposed a radical overhaul of its archaic insolvency laws to try to get to grips with mortgage arrears.
It would see the introduction of a debt-settlement scheme through which distressed mortgage customers can restructure some of the unsustainable debt associated with their home loans. Banks will retain a veto over the process but are being encouraged by Dublin to provide solutions to enable customers to remain in their homes.
The government also plans to cut the time it takes to be discharged from bankruptcy in Ireland to three years, down from 12 years.
The proposed legislation is prompting analysts to question whether it could lead to a rise in strategic defaults by customers in negative equity and therefore increase mortgage losses for Ireland’s banks.
Last month, credit rating agency Moody’s downgraded Irish mortgage-backed bonds, citing the proposed personal insolvency legislation as one reason for the move. Deutsche Bank has also warned the new law creates “risks” of widespread debt forgiveness. It estimated Ireland’s bailed-out banks may need €4bn extra capital as a result.
“We fear the size of negative equity balances for some mortgage holders may greatly reduce their incentive to co-operate, pushing them towards default,” said Deutsche analysts.
Michael Noonan, Ireland’s finance minister, said on Friday the banks would not require additional capital from taxpayers. He cited the results of stress tests carried out by the European Banking Authority last year, which show the main Irish lenders easily passed EU capital requirements following their recapitalisation in summer 2011.
Alan McQuaid, economist with Dublin-based financial services firm Merrion Capital, said the bill had the potential to be problematic for banks. “There is clear concern regarding the banks capital needs but as things currently stand I’d say they have enough money for the moment.”
But for the tens of thousands of people living in mortgage arrears the reforms may provide some hope of a way out of their debts.
“I was born in the front room of this house and don’t want to have to sell up and go back into a rented home,” Mr Herdman says. “I hope we can find work and that these reforms can somehow help us.”
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