Negative Equity Mortgages
The Irish economy has showed many positive signs this year. News has filtered through of a potential exit strategy from the EU bailout which they were granted in 2010. Furthermore, the Irish manufacturing sector is burgeoning and many technological companies are beginning to open offices and operations in Dublin. All this positive news has been blighted by the instability of the mortgage market, a market on the cusp of implosion as reports suggest that 400,000 homes in Ireland are in negative equity. This is quite a staggering figure for a country which has a population of 6.3 million.
The Central Bank of Ireland is facing testing times and the new regulator Cyril Roux will no doubt have his hands full. Negative equity is a problematic issue because it means that even if the property were to be sold, the owner would remain in debt to the bank and with no physical asset to write it against. House prices have fallen by 50% since the peak prices of 2007 which has left many homeowners struggling to make loan repayments whilst having already watched the value of their property diminish since the market crashed. The UK’s property market has shown some positive growth, but most of this has been concentrated into the southern most parts of England. Ireland’s property market is making headway but economists believe it will be a considerable amount of time before negative equity is eroded by increasing house prices.
What Will Happen Next?
The real question is, how will the government and the banks address this mortgage crisis?
The USA is the most recent example of a country that has been in a similar mortgage crisis. There were many states in the USA (most notably Florida and California) that suffered heavily as a consequence of the property bubble bursting. Ireland may have to assess the way the USA handled that crash and see if some of the practices used can be applied to their own crisis. One of the main concerns will be the high number of mortgages which have been in arrears for 90+ days, with 35,000 mortgages in arrears for 720 days or more.The Central Bank of Ireland will be worried about house prices falling drastically if they begin to repossess homes, yet now is not the time for indecision. The restructuring of loans into lower payments is a realistic option but only if this can be considered a long term goal. In the second quarter of 2013 23,554 people were given restructured short term loans, but this supplements the 34,000 people who were already in such agreements.
Ireland is fortunate in the fact that it doesn’t have to deal with the judicial and non-judicial law regarding property foreclosures which exists in the USA. A non-judicial foreclosure could take one month in a state like Texas and a judicial foreclosure could take up to two years in New York. The Central Bank must intervene and mitigate the tension between borrowers and lenders which is becoming increasingly strained. They may have to consider whether to adopt a similar program to the USA’s Home Affordable Modification Program and implement debt-write downs and other mortgage modifications such as lowered interest rates and term extensions. Despite the banks being in bad favour with the majority of the public, if they can give people reassurances and illustrate why they are taking decisive action then that can only be beneficial in the long-term, as opposed to watching the growing stature of the elephant in the room.