The situation in Ireland is getting worse. While we hope that ECRC partner FLAC is able to influence outcomes of parliamentary committees that are as helpful to Irish consumers and debtors as possible, as recognised by Paul Joyce at the ECRC/CfRC London Conference last month, the fight against mass mortgage default is unfortunately very much dependent on house prices.
As a speaker at the Responsible Credit London conference on 19-20 October 2010, ECRC partner Paul Joyce Senior Policy Researcher at Ireland’s Free Legal Advice Centres (FLAC) promoting access to justice, gave some details on the situation in Ireland summarised below:
- In reaction to the catastrophic fall in living standards that Ireland will experience as a result of the government, regulatory, policy, banking laxity and mistakes, the key issue is to prevent something similar happening again. Responsible lending rules need to be adhered to in the future and this should also include liability of providers who act irresponsibly to face criminal sanctions.
- Unemployment in Ireland stands at 13% but the forecasted recovery is likely to be jobless. Residential home prices have fallen 35% on average (which means that some regions have seen 50% falls in prices) and have led to substantial situations of negative equity, with litigation numbers in 2010 having boomed (+415% in Q1).
- The Irish debt advice sector, represented by the state-run MABS set up in the early 90’s is not able to meet the demand for debt advice and a growth in advice provision is coming from the for-profit sector.
- A positive element is that the Law Reform Commission has a good track record in responding appropriately to problems and 2011 is likely to see introduction of legislative changes.
- The Banking industry IBF protocol is a good thing but Credit Unions, finance houses and utilities are excluded at present.
- Social housing is an important issue. The current system is uneven and housing associations are very weak especially compared to the ones in the UK.
- A group of experts was established in February 2010 to work with the Government on its response to the issue of indebtedness. An Interim report was published by this Expert Group on Mortgage Arrears and Personal Debt in July 2010. The group makes a number of recommendations, including that: all lenders should put in place a Mortgage Arrears Resolution Process (MARP); a Standard Financial Statement (SFS) should be developed for use by all lenders and by the Money Advice and Budgeting Service (MABS) to assess a borrower's financial position; lenders should not apply penalty interest or arrears charges to borrowers who take part in the MARP; lenders should have a dedicated section of their website for borrowers in financial difficulty, and keepingyourhome.ie should serve as the main information portal on arrears; the system of credit reporting in Ireland should be revised, as should the way the Financial Regulator reports mortgage arrears; the Mortgage Interest Supplement (MIS) scheme should be revised. The Group's recommendations will be incorporated into the Financial Regulator's Code of Conduct on Mortgage Arrears very soon (following the consultation document on the proposed requirements published on 13 August 2010).
- One positive observation so far is that cases of bank repossessions have remained low. This is due to both provider forbearance but also due to the great difficulty in selling properties at the current time. Loan modification is preferred to forbearance and lessons have been taken from the US experience. 12 month moratorium s on debt repayment will give temporary help but the future will be more difficult when the ECB raises its base rates in 2011 and 2012 – when repossessions are likely to rise.
- The media interest on the subject of over-indebtedness etc… has seen a complete reversal from years ago. It gives the opportunity to build up public consciousness on this phenomenon and how the financial system needs appropriate regulation.
See also his contribution to the ECRC Hamburg conference in June 2010
Extract from an article from the Irish Times:
House prices are driven by the size of mortgages that banks give out. That is why, even though Irish banks face long-run funding costs of at least 8 per cent (if they could find anyone to lend to them), they are still giving out mortgages at 5 per cent, to maintain an artificial floor on house prices. Without this trickle of new mortgages, prices would collapse and mass defaults ensue. However, once Irish banks pass under direct ECB control next year, they will be forced to stop lending in order to shrink their balance sheets back to a level that can be funded from customer deposits. With no new mortgage lending, the housing market will be driven by cash transactions, and prices will collapse accordingly. While the current priority of Irish banks is to conceal their mortgage losses, which requires them to go easy on borrowers, their new priority will be to get the ECB’s money back by whatever means necessary. The resulting wave of foreclosures will cause prices to collapse further.
Debt Collection on Help Loans Stopped:
New Beginning, a representative group of lawyers, business people and concerned citizens which was launched today, plans to represent and defend residential mortgage holders in the State. The body intends to mount test cases which will establish whether lending institutions had a duty of care to borrowers and if this duty was breached by excessive lending.
Some notes on the crisis in Irish public finances from the marginal revolutions blog:
The increase in spending, which is part of Ireland’s present problem, is quite recent. From 2000 to 2006, the number of people employed in the Irish health sector increased 20 percent, in education by 27 percent, in the justice sector by 22 percent, and in the civil service by 27 percent. In the past decade, Irish health spending has doubled, in real terms. In 2000, about 22 million items were prescribed; 10 years later, 52 million items were. People aren’t twice as healthy as a result.
As far as taxes on income are concerned, Irish people now pay about half as much as an equivalent family does on the same income in Germany. There is currently no recurring tax on property, no charge for water supplies, and modest fees for a college education. Welfare payments compare favorably with those in Northern Ireland.
Here is more. Currently there is talk of a "buyer's strike" in the market for Irish bonds. When the Irish accept the full extent of the standard of living "reset" implied in all of this, how big a step back will be required? Ten years? More? If you take away pre-war, war, and post-war examples, is there any precedent for such a large reset in the history of wealthy countries? Apart from contemporary Iceland, that is.