August 8, 2013
The idea that the economy is a morality play seems to be taking hold in some quarters. This is particularly the case when it comes to this term “strategic defaulter”. The strategic defaulter is someone who can pay his debts but decides not to. The central bank suggests that these defaulting characters lurk everywhere, sticking their two big delinquent fingers up at the banks.
Some people have suggested these new villains – the so-called strategic defaulters – may constitute as many as 30pc of mortgage arrears.
It is very convenient – particularly for banks – to paint the picture that there are good and bad borrowers, and bad borrowers are those that take the mickey while the good ones struggle with their responsibilities and go without to pay back debts.
It makes for good radio and can provide all sorts of fodder for the ham indignation fraternity that sometimes replaces economic analysis here. The truth is we have no evidence at all about this devious character, the strategic defaulter. We have no data on how many people in mortgage arrears are willfully not paying their debt. There are obviously some people like this, but the notion that the average person is a willful defaulter is mendacious.
What we do know is that arrears are rising and rising.
Many years ago, those of us who suggested that the housing boom was nothing more than a bubble and the collapse in house prices would leave a generation in negative equity unable to pay their massive mortgages were laughed at.
In fact, the few of us who publicly forecast this sorry predicament were ridiculed by the very bankers and the central bankers who are now suggesting the country is full of cunning strategic defaulters.
Our mortgage arrears crisis has deteriorated over the past year. Of those who own their houses and live in them, 13pc are now in arrears. If you take the 42,235 mortgage loans already restructured and not in arrears, the total ‘problem loans’ is close to 18pc of all Irish mortgages.
“In arrears” means people who haven’t paid the mortgage for more than 90 days – missing three consecutive months’ payments. There are an enormous amount of people and families in this position.
The amount of loans that are beginning to default but haven’t yet crossed the three-month threshold is another 6pc of total mortgages. Assuming that these people, having missed one or two months’ payments, are likely to miss three, the total arrears is set to increase.
The question is whether a significant proportion of these families are choosing not to pay because they couldn’t be bothered and they are not worried because the chance of getting thrown out of their houses is almost zero?
Despite what the central bank governor stated recently, there is no evidence that the number of people willfully defaulting is rising. It is a supposition, but nothing that we have any hard facts on.
In the US, where there is a more relaxed attitude to walking away from homes and mortgages, the estimates about the number of strategic defaulters range from 15pc to 25pc. It is hardly likely that this number could be higher in Ireland.
So what’s happening?
Rising arrears are much more likely to be the delayed effect of rising unemployment. People who lost their jobs initially tried to pay what they could in the expectation that they might pick up work in the future. It is only after this hope has been extinguished by a long period on the dole and dozens of rejection letters that the person stops paying – not because they want to default but because they don’t have any money.
So rather than the central bank pointing the finger at delinquent defaulters who are sitting on cash, it would seem more constructive for it to articulate a coherent economic strategy that might increase employment and reduce arrears.
Failing that, the central bank could push the banks to write down mortgages more quickly. This would reduce arrears because the monthly mortgage would fall for the debtor.
If our central bank doesn’t want to do this for fear the banks will not have the capital to absorb such writedowns, it might be better for it to go to the ECB and tell the troika that Irish banks need more capital and taxpayers and depositors don’t have any left to give.
Rather than doing that and having both the courage to stand up for taxpayers and display clarity of purpose, our central bank is taking the adolescently sneaky way out by suggesting that the debtors – rather than the lenders – are the problem.
In the real world, when a bank is faced with mounting arrears, the solution is called co-responsibility, where the debtor and lender sit down, negotiate, and both take a hit. For the creditor (the bank), that means accepting there will not be full payment, and for the debtor (the mortgage holder), that means sticking to the new terms. For the person that has a huge mortgage and has lost their job, it must be more attractive to give the keys back to the bank and both the bank and the person accept that there is no way of paying. In such a case, the mortgage needs to be cancelled and the house put on the market, leaving the bank to claw back what it can. This has to happen in extreme cases.
For the others, debt writedowns are essential. In the US, they typically reduce monthly mortgages by one-third, and the evidence shows that few default again. Defaults after a significant write-down fell from 42pc in 2009 to just 15pc in 2012.
The implication of rising arrears, falling income and a stagnant labour market means that rather than inflaming a nasty debate about the “character” of debtors, our central bank should be looking for solutions to an evident problem. If this means going to the ECB and the troika and looking for a new deal, well so be it.
It is not sustainable that defaults keep rising because hundreds of thousands of people will be locked out of the economy wallowing in a financial limbo. Hope and a belief in the future is what gets most of us out of bed. If the negative equity generation loses hope, the political ramifications could be incalculable.