A week after the government finally, inexorably, committed us to the burden of NAMA, the National Asset Management Agency, it might be a good idea for the rest of us to look at the flip side of this enormous commercial property debt coin: our private residential property debt.

It is estimated that:

* Of the 1.7 million households in this country, just over a third, or 600,000 are owner-occupiers with mortgages

* Of this group, at least 116,000, according to the ESRI are already in negative equity. This figure could rise to nearly 200,000 by the end of 2010

* Last July the Permanent TSB, with 20 per cent of the Irish mortgage market, revealed that 6,000 of its mortgage customers are in 90 day arrears. Nationally, this suggests around 30,000 mortgage holders in arrears

* The typical mortgage value for first time buyers by late 2007, early 2008 was c€250,000, according to the Irish Bankers Federation and c€276,000 for people moving house and €263,000 for re-mortgagers

* According to Daft.ie economist, Ronan Lyons, as many as 725,000 properties bought since 2004 million are worth less than their last purchase price”.

* The total outstanding mortgage debt to the end of August 2009, (based on August ’09 Central Bank stats is €109.6 billion

* Seven years ago, in 2002, total outstanding residential mortgages were worth ‘only’ about €40 billion.

Residential mortgage lending has collapsed this year, and the outstanding mortgage bill has been steadily falling, from a high of nearly €124.4 billion in March 2008 to the August total of just over €109.6 billion.

But this still means that, when spread over all those 600,000 mortgaged properties, the average outstanding property debt per mortgaged household now amounts to €182,696.

This figure doesn’t include other personal loans or credit card debt or these households’ share of the national debt, which now exceeds €70 billion net, and excludes the €77 billion Nama liability.

With half of all the mortgages sold to first time buyers in the two years to early 2008 accounted for by 100 per cent loans, this is a group that is at the greatest risk of losing their homes.

The impact of the December budget on incomes and the fact that a considerable number of the 95,000 people who lost their jobs between October 2008 and January 2009 will be switched from Jobseeker’s Benefit to means-tested Jobseeker’s Allowance, could result in a surge in arrears and mortgage defaults.

If the Government decides not to allow this next wave of the property debt tsunami to take its natural course in the form of rising arrears and defaults, and they intervene instead, NAMA-Lite plan will probably include a combination of options that might include:

1: A new, extended protocol for the banks to deal with arrears that includes interest only payments, extended repayment terms, abolishing arrears-related penalties and that renegotiates fixed rate contracts in order to either reduce, forego or defer the breakage penalties.

2: A facility that allows a mortgage holder with negative equity(NE) to carry the NE with them into another mortgage (say, if they must sell their property in order to take up employment in another Irish location) or have any NE balance, post-sale, refinanced as a special long term, low interest loan.

3: The introduction of a shared equity scheme with the lender and/or government/local authority that allows the mortgage holder who is incapable of repaying their mortgage (due to unemployment and negative equity) to remain in their property as an owner/tenant or as a tenant with the long term aim of full ownership.

This could avoid large-scale foreclosure and like NAMA, Mark I would probably assume a market recovery by 2020.

The preferred solution for indebted mortgage holders, of course, is the writing down by the lender and/or government of a large percentage of their outstanding, unpayable capital debt.

Should this happen – and it is unlikely – it would further increase the national/bank’s debt, possibly our cost of borrowing abroad and raise the risk of ‘moral hazard’ among some struggling mortgage payers who may opt to default on their own loans.

Some commentators suggest that a modest programme of government intervention, like forcing the banks to ease up on the repayment terms for existing mortgage holders, could bring some confidence back and help stabilize market prices.

Others (like me) think it might cause the lenders to raise their fees and charges and maybe even their interest rates (or, on the deposit side, to reduce their rates) to pay for the costs of widespread loan refinancing or capital write downs.

It might also cause many other borrowers who are coping (just about) with their normal repayment schedule, to demand a similar deal, depriving the lender of much needed capital. Higher interest rates mean lower prices – and the danger of higher arrears.

The outcome of this great property bubble collapse was always going to be brutal and costly. Government intervention always has unintended consequences.

What we have to hope is that whatever course is taken does the least amount of harm.


Jill Kerby welcomes reader’s letters. Please write to her via The Munster Express, 37, The Quay, Waterford or via email at jmkerby@indigo.ie