January 19, 2011
Once we create a system that allows the person to start again, we facilitate the return of hope.
On Monday night I went for a pint with an old friend who was distressed. His wife had just lost her job and that meant there was now no way they could pay the mortgage. There wasn’t enough money to go around and he explained it was now a case of “the bank or the family”. So he is going to stop paying the mortgage and try to negotiate with the bank to see whether he can reduce the monthly payment.
He is, like hundreds of thousands of others, juggling bills around to try to make ends meet. He said he can do this for a while longer, but he needs to see what the bank might offer to work out his next move. He hopes his wife will get another job soon, but the prospects are dim, at best, right now.
He is trying to keep the spirits up but what is freaking him out, as a 30-something man, is the prospect that the debt on the house — not a flash gaff — bought in 2005, might follow him around for the rest of his days.
Like me, he emigrated in the 1990s and, like me, came back in 2000 to an Ireland which looked full of opportunity for us to raise our families. There were over 200,000 of us who came back.
In fact, he was the subject of the final chapter of my 2005 book ‘The Pope’s Children’. He was the returned emigrant marvelling at the new Croke Park during the Dublin versus Meath game. And his story is particularly poignant for me because back then when we both went to Croker with our four-year-old children, he was filled with so much optimism.
For him and thousands of people like him, Ireland has become a large debtors’ prison with no payroll. There is no NAMA for him, no bailout.
In contrast, the delinquent banks have NAMA, the reckless bondholders have the IMF, but this guy has nobody.
No one is speaking up for him and, with the recovery in Germany in full swing, how long will it be before interest rates rise and he is tipped over the cliff?
That is what an economy is: it is only the numerical agglomeration of thousands of individual stories. Economics renders these stories sterile. It reduces them to numbers and when the weight of numbers gets too big, the financial system buckles, but until that point the default position for the establishment is that everything is “manageable”.
But at the end of September last, the number of mortgages in arrears or rescheduled stood at 70,000 out of a total of 788,000 mortgages in the country. So that is one in 11 mortgages.
Of this 70,000, some 40,500 were in arrears. For a mortgage to count as ‘in arrears’, there must have been no payment made on it in three months. These amounted to â‚¬7.9bn outstanding mortgages and the mounting arrears on these mortgages totalled â‚¬630m.
The general picture is that today there are over 200,000 mortgages in negative equity. Each one has a story.
In total, the figure is about â‚¬12bn and is the result of the 42pc fall in house prices, from the peak, which we have seen over the past three years.
If prices fall further, let’s say by 55pc from peak, the negative equity picture darkens to over 330,000 families — or about half of all properties bought since 2000. And this will get worse, if house prices fall yet further. So are they likely to fall further?
Yes. This is what typically happens when a bubble bursts. This is called “deleveraging” in economics. The people who have debts try to pay what they can and the banks try to pay back what they have borrowed.
The people who have money save and the leveraging or borrowing that fuelled the boom goes into reverse gear.
This means that the prices of all assets in the country keep falling as both the demand for, and supply of, credit dries up and the greater the original leverage, the greater the subsequent deleveraging.
And in Ireland the leverage was pretty outrageous. The loan to deposit ratio of the banking system was 160pc at the top of the boom, meaning that there was 60pc more loans out in the country than there were deposits in the banking system.
These loans are either now being repaid or defaulted on.
So what do we do about the hundreds of thousands of our friends, family, and work colleagues who are in negative equity now or will be in the future?
Any political party that is truly serious about tackling not just present but prospective problems in our society needs to address the ticking time bomb of negative equity and the certainty of mass default. Remember each one of these statistics masks a story — a story of dented hope, dashed ambitions and chilly insecurity. These are the people who need to be reassured.
A political party that changes the language of the campaign, the party that shows itself to be generous, forgiving and capable of empathy will make significant gains — and should do. Because this party will be putting the interests of the people first and the people need a break. We need hope.
On the issue of negative equity, a way forward would be to adopt the American system of non-recourse loans. This means that the loan is fixed to the house and not the person. So the person can hand back the keys and the loan doesn’t follow her around for the rest of her life. This means that the principle of co-responsibility is instated whereby the lender, as well as the borrower, is responsible.
If the bank made the mistake of lending too much to an individual, the bank pays. It gets the property and the individual is free to rent down the road or somewhere else. In this way, we do not penalise the person for his mistake indefinitely.
The person doesn’t get off scot-free either as they will not be allowed to stay in the house because it is the property of the bank and the bank will have to sell it.
But the person can start again and starting again is the essence. Once we create a system that allows the person, or the family, to start again we facilitate the return of hope. It is hope — the idea that tomorrow will be better than today — that gets us out of bed in the morning.
It is essential that we see economics through this prism. Economics and statistics are only the numerical aggregation of our stories and it’s the stories, not the numbers, that make our society.