May 19, 2013
Who can blame people in debt for walking away when it’s still all about saving the banks
by JAMES FITZSIMONS (*)
THE ducks are lining up but the banks are holding the guns. If the Government, the Central Bank and the Financial Regulator had done their jobs, bankers would have been in the firing line, but it’s the other way round. The legislation is on the way to let banks engage in wide-scale repossessions should they so choose.
In the EU, new mortgage laws are on the horizon. They claim it will make the mortgage process more transparent, but it will make the borrower a target should anything go wrong. And it could remove the one-year freeze on banks moving in on distressed homeowners. Instead, they could act within 30 days.
It was always about saving the banks. The borrowers don’t matter. There’s nothing to help them other than a long personal insolvency process that will punish them because the banks got it wrong. There were 35 bankruptcy cases in Ireland in 2012. But the system is gearing up to handle more than 3,000 cases a year. It could be as many as 7,000.
There were 2,300 bankruptcies in Northern Ireland in 2010, and our population is nearly three times what theirs is. Is it any wonder that ordinary people are heading for Britain to declare themselves bankrupt? They can leave their responsibilities at home and whoever is left will foot the bill. But we will have no control over what happens.
By the end of June, the first Personal Insolvency Practitioners (PIPs) will be rolled out, having undergone a week of training to become experts in sorting out the mortgage crisis. It’s a pity we didn’t think of it sooner. The loopholes holding banks back from repossessions will be plugged, too.
And the Central Bank’s latest pilot scheme for restructuring impaired mortgages of homeowners with multiple debts might even be under way. That’s what’s available for the rest, who are in trouble but not insolvent. They might as well be. Those who are insulated from the recession are doing nothing for them.
Even the pilot scheme has encountered its first obstacle. The Irish League of Credit Unions voted unanimously to reject the Central Bank’s proposals for the pilot scheme. It’s a pity it didn’t get a chance. Maybe it didn’t deserve one. Who better to fire this shot across their bow, than the credit unions? They are seen as a community bank, with their customers’ interests at heart. But they are a thorn in the side for mainstream banking.
Kieron Brennan, speaking for the credit unions last week, exposed the pilot scheme as something that will make things worse for many borrowers. The banks are unwilling to write off debts, and at the end of the process the borrowers will be no better off and credit unions might be the biggest losers.
There is no target for banks to write down the value of impaired mortgages, even though we gave them the money to do it. The Central Bank has the power to make sure it works, but even they only want to save the banks. Like the Government, they are being led by the nose by their peers in the EU.
Mr Brennan’s revulsion at the attitude of mainstream bankers confirms that the proposals are seriously flawed. He is one of them, but not afraid to stand apart. Why would he reject what the Central Bank came up with, if it is in the best interests of their customers?
He points out that the mortgage lenders have no wish to write down their debts. So customers and the unsecured lenders will suffer the most. This is about letting big banks keep what they have and eliminating any resistance before it starts.
The credit unions are having none of it, but what about the rest? Credit card companies are closely affiliated to the main banks, so they are more likely to go along with whatever the banks come up with. Mortgages might have property to secure what is owed, but when negative equity clicks in, all the financial institutions are left the same. They should face the consequences and take the write-down. That’s how it works everywhere else. Given that financial regulation failed, why don’t they accept the consequences so that we can all move on? The system is creating the moral hazard that is forcing reasonable people to leave others to pay for their mistakes.
The credit unions are willing to take a hit, but the banks are not, even if it means making the borrower insolvent. The Central Bank went off half-cocked on this one. It is doing the bidding of those holding the purse strings in Brussels and Frankfurt, when it should be helping people who had this forced on them when the system broke down. Maybe it’s wrong for those in trouble to walk away, but what choice do they have?
The ESRI’s latest figures suggest that we have turned a corner and global recovery is in sight. It’s not the first time we heard that. If you look behind the facade, recovery is still dependent on export-led growth, because there is no consumer confidence. And we know how sustainable that is. They predict the level of unemployment will fall, but only if 50,000 people emigrate. Many of those at work are underemployed, or making ends meet without their training and qualifications being put to good use.
The Central Bank has fallen on its own sword. It should take the hint and revise the objectives for the pilot scheme to work. Had it been introduced four years ago, it might have had a chance, but even then it would have needed to change.
This is about saving-impaired borrowers, not the rotten banks. We can’t afford to fail again. So the only solution is to fix it before it begins.
It needs three things if it is to have any chance of acceptance and success. First, it should focus on working with all customers who it can help. Nothing would work faster at restoring consumer confidence and spending than restructuring finances to sustainable levels. So let’s start the process now whatever it takes.
The second thing is to simplify the Central Bank’s restructuring waterfall. There are too many options in it that try to bleed customers dry. If someone is in trouble, cut out interest payments altogether and focus on paying back capital. Why should a credit card company be paid nine per cent, let alone 19 per cent, or 29 per cent, when it fuelled the spending bubble that created the problem?
Finally, force the financial companies to come up with structured and predetermined debt writedowns for those who cannot afford to pay. The Government is allowed to borrow ridiculous amounts to fund public spending that it can’t control, and it expects everyone else to live in poverty while they pay for this madness while burdened with higher taxes. It would be a pity to let the only plan for impaired homeowners fail. So fix it and make it work.
(*)James Fitzsimons is an independent financial adviser specialising in tax and financial planning
Source: Irish Independent
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