Here come the bad house debts - Irish family with mortgage debts left in nightmare situations

In the last few weeks we have been listening to lots of positive noises being made about Ireland.  For the first six months of this year Ireland holds the EU presidency, so there are important people visiting here all the time for important EU meetings and they tend to say nice things about us when they're here.

Recently it was European Commission President Jose Manuel Barroso who hailed our economic recovery, saying the country is "turning the corner" and well on the road to recovery.

"Confidence is returning to Ireland and to Europe," he said at a meting of business leaders in Dublin.
As if we were not glowing enough already from that, he added that Ireland was a "shining" example of how a country can recover after it has been bailed out.

Last week it was the turn of the IMF's managing director Christine Lagarde.   In Dublin for meetings, s Lagarde poured on the charm.   She heaped praise on the government for the way we have faced up to the painful restructuring necessary to deal with the economic crisis.

"What has been done (in Ireland) is huge by any standards," she said.    The way in which we have implemented the bailout program (of spending cuts and tax hikes) has been "extraordinary."

She was so effusive in her praise that she managed to make our Minister for Finance Michael Noonan blush, according to the papers. Although that may have had more to do with something she said about how understanding of women he is (it was International Women's Day).

In return he took her for a glass of Guinness in a pub near the government offices when the day's work was over.  And she wore her lovely green scarf for all the press pictures when she was here to prove she knew what country she was in.

All of which is supposed to make us all feel much better.   It's always nice to hear people saying nice things about you.

On top of that, of course, there are three significant developments which have added to an emerging feeling here of hope, even confidence, about the  future.

There was some slight growth in the Irish economy at the end of last year.   The markets have been so impressed by the difficult steps we have taken towards fiscal sustainability that they have indicated a willingness to start buying our bonds again on a big scale and thus enable us to exit the EU/IMF program on schedule.  

And we have secured a long-term restructuring deal on about half of our bank debt (the Anglo promissory notes part) with an expectation that a deal on the other half may yet be achievable with the EU and the IMF.

So is everything in the garden as rosy as Lagarde suggests in public?   Not at all. Lagarde is a lawyer, not an economist.  

That's worrying enough, but there is another reason why we need not be too impressed by her sweet talk (and I'll come back to that at the end of this column).

There was, however, one aspect of her visit here which made few headlines because it happened behind closed doors.  Seemingly she laid it on the line to the Irish ministers and officials that something has to be done quickly to prepare for the tsunami of bad mortgage debt that is gathering in the Irish banking system.

You don't have to be an economist to see how serious it is.  Even a lawyer can see that it's bad.  

So far it's a crisis that has been largely ignored in the faint hope that the market might improve enough to sort the problem out.  For that reason, the scale of the developing mortgage crisis has not been as widely understood as it should be.

But the fact is that the crisis in domestic mortgages here is worse than anything that the speculators and developers managed to do to us.

The property crisis did not just hit developers and construction companies here.   There are tens of thousands of people here who bought houses and apartments during the boom that they can no longer pay the mortgage on.  

In many cases the properties are in negative equity, meaning they are worth far less than what they cost.  In the worst cases, the mortgage debt owing on them can be twice as much as the property is now worth.  And because of the downturn the owners may have reduced earnings or may have lost their jobs altogether.

The scale of this is staggering.   In the middle of last year, about 10 percent of ALL domestic mortgages in Ireland were in trouble, either behind in payments, making reduced payments or not paying anything.  By the end of 2012 and the start of this year, that had climbed to over 12 percent.

To put an actual number on this, it means that 186,000 mortgages here are now in some form of arrears or have had to have repayments lowered with the permission of the bank.  

About half of these, close to 95,000 according to the Central Bank, are at least three months or more behind in payments.   Half of those are at least nine months behind.  And  close to 25,000 are two years or more behind on payments.

If those 25,000 worst cases are beyond saving, that's an awful lot of houses to repossess and a lot of families to be putting out on the road.

Apart from the human anguish involved, what would that do to the "recovering" property market when the banks put all these repossessed houses up for sale again?   It would collapse the property values to a new low, and banks would either collapse or require another rescue. It's economic Armageddon, and it has to be avoided somehow.  

In total the domestic mortgages in arrears add up to somewhere between €15 billion and €20 billion. If we assume that at least half of that value is already eroded by the property collapse to date and a fire sale could make it even worse, the banks are looking at needing maybe €10 billion or €15 billion to plug the hole.  

All you bright students in the class will now be going Hey! Hang on a minute! Wasn't about €10 billion of the 2010 bailout money specifically allocated to us to deal with the potential mortgage debt problem, and haven't we pumped all that and a whole lot more into the banks?

And of course you're right.   The problem is that the banks have hung on to that money to improve their capital reserves and they don't really want to use any of it to enable debt forgiveness for ordinary householders who find themselves facing an impossible situation on their mortgages.  

All kinds of schemes are being suggested by the government to avoid both putting people on the road and collapsing the banks.  They vary from the banks retaining ownership and people being switched from buying their homes into renting them, to joint ownership with banks, to various restructuring packages, most of which push out the repayment term into the distance.

For the past year, apart from urging the banks to begin to deal with the problem on an individual basis, the government has not actually forced them to do anything, even though we own the biggest bank and most of the second biggest.

Now in the past week the government -- prodded by Lagarde and the IMF -- has told the banks, rather than asked them, to get on with it.  It's still unclear exactly what will emerge and how it will work in practice, but we will be watching it from here.

It's a disastrous situation for many young families who stretched to start buying a home over the last five or six years and now find themselves in a nightmare of debt from which there is no escape.

They can't just throw the keys back at the bank, like you can in the U.S.  Here you still owe the mortgage debt, even if you hand over possession.  And for the individual buyer there is no Nama (the new national bad bank where the loans that speculators and developers can't pay were shifted).  

The main banks are still pursuing individuals for full repayment even in cases where the property has halved in value and the buyer's income has collapsed.  All of this, of course, is doubly unfortunate because it is coming at the very time when our new property tax is about to kick in.  

The demand letters from the Revenue will be dropping in letterboxes here all over the country in the next week or two.  We will be returning to this in detail here, but for the moment, an observation -- how are people who cannot now pay their mortgage going to find hundreds of euro to pay the new property tax?  Answers on a postcard to Enda Kenny, please, not to me.

One final word about Lagarde, whose Gallic poise and slightly melting froideur charmed everybody here last week.  She's a lawyer, not an economist, as we pointed out.  But that's not the only reason to treat her pronouncements on our economy with some restraint, especially if they have anything to do with tax.

You do remember, don't you, that this is the woman who told the Greeks (with a good deal of froideur) that they would be doing a lot better if they paid their taxes.  And then it emerged that because her position of IMF head has some kind of semi-diplomatic status, she does not pay tax on her roughly $500,000 a year paycheck.

It's the little people etc ...