This is a version of a column which appeared in the Irish Examiner 14 September 2013
Since the appearance of the banks before the oireachtas committees last week we have seen a lot of discussion on the mortgage issue. Like the poor, speculation about mortgages will always be with us it seems.
A vexed element of the mortgage story is that we still know little about what the extent is of “wont pay” versus “cant pay”. This debate has been raging now for months and we still are no further along than we were at the start. The very term “strategic default” itself is fuzzy and incoherent. It implies a degree of deliberate decision making that is absent from all studies (outside Ireland) where the evidence is that the overwhelming determination of default is an emotional not a rational decision.
Underlying this and running through other issues related to debt is one common denominator- we have no definition of what is and what is not affordable. Take the discussions on the insolvency regimes. Anyone who has read the guidelines for what is and what is not acceptable expenditure will note a massively intrusive approach into peoples spending. While people who are in mortgage default or those who worse end up in insolvency clearly need some assistance with their spending habits, the bottom up approach imposes significant compliance costs and significant monitoring costs. Whose business it is , apart from those spending it, what money is spent on sticking plasters?
A much simpler approach could, if there was regulatory will, be imposed which harks back to the past. This is to determine what is an acceptable percentage of after tax salary to spend on the servicing of debt. Typically this was seen as being in the region of 35%. What is interesting is that in the United States the percentage of household income devoted to debt service has hovered around the 10-15% for decades. The closest we can get in this country from the quarterly financial accounts suggests that as an economy as a whole we are around the same rate. But in Ireland we have a situation where the household sector is, financially, fractured. First we have more households without than with a mortgage. While non mortgage households will have other debts they will of necessity have much lower percentages of disposable income taken by debt service than those that have mortgages. Second, within the mortgaged households we have those in arrears (some 18%) and those without. Again, we do not have up to date information on how financially stressed these two elements are. The proponents of massive strategic default (or fraud as they are seemingly reluctant to call it) would have one believe that there is little, and that the 18% are for a large part simply keeping up a (non housing related) lifestyle that they cannot afford. It is perhaps more likely that these are more financially stressed and that they devote a larger part of after tax income to debt repayment than those who are not in default.
So what about mortgage debt? It might be simpler for the incoming regulator to state that 35%, with wiggle room of 5% either way, would represent an acceptable level of repayment for a principal private residence . The difficulty is that in doing so we would probably cause a significant hole to appear in the banks balance sheets. A very large number of mortgages would be reclassified as non-repayable were we to do this. This would cause the banks to have to engage in real terms with the mortgage holders. And that would result in write-offs which would erode the capital of the banks. But they have already been granted capital to do this. In the last round of bank capitalization they were required to put aside nearly 10b for losses on mortgages alone. They have not written off this amount, and will not. The taxpayer however has a right to expect the funds injected to be used for the purposes stated and thus significant write-offs of debts as irrecoverable is inevitable.
Setting a public level of affordability would also allow us to get clarity on the extent of strategic default. If someone is paying 50% of aftertax income on a mortgage and still falling into default, it is doubtful if anyone would call that a strategic default. Unaffordable yes, strategic no. On the other hand, someone paying 20% who is in default might well be required to get engaged with the realities of life.
There are good economic reasons why we might want to keep opaque the details of settlements between banks and defaulters. Banks like all lenders need to be able to get as much as possible from loans and thus, unpalatable as it may be to some, they need to hold the upper hand in negotiations. But there is no reason why we should keep opaque the level of any non commercially sensitive data. In this context we could reasonably ask that the banks be required to return to the central bank and that they publish on a monthly basis the amount of repayments made on mortgages, broken as between interest and capital. Indeed this could usefully be further broken down by those in and those not in arrears.