I must admit that I was deeply sceptical when Minister Noonan announced out of nowhere at the end of August 2011 that there was an inter-departmental group under the tutelage of a seconded KPMG consultant, Declan Keane, looking at the mortgage arrears crisis. The announcement came just days after the 18th August, 2011 when Professor Morgan Kelly had drawn attention to the crisis and at the time when MP Mac Domhnaill from Kerry wrote his heart-breaking letter to the Irish Times.
When the group was announced in the last week of August, I asked Joan Burton’s Department for Social Protection on 30th August for details of the group and its workings, the names and qualifications of its members, its terms of reference, its deliverables, the resources that would be made available to it. There was no response.
And last weekend, at the Dublin Castle, Irish Diaspora Get-together or the Global Irish Economic Forum as it was grandly called, the star speaker, former US president Bill Clinton said, after an hour-long meeting with Taoiseach Kenny, that the mortgage crisis was the biggest challenge facing Ireland; not a euro break-up, not a sovereign debt crisis, not global economic downturn, not our 14.3% unemployment rate, not the return of Irish emigration but the mortgage crisis. And the former US president indicated that today’s report, about which he had obviously been briefed, would contain 15 recommendations for dealing with the crisis. For his part at the gathering last Saturday, Taoiseach Kenny elevated the status of the mortgage expert group to that of “specialist commission”, and indeed he is still referring to the group off-and-on as a “commission”.
The report published this morning by the Department of Finance provides some answers to the scepticism. There were 15 items that comprised the terms of reference, maybe that’s where Bill Clinton got his “15”. The group says it has been at work “formally” since 29th July 2011. So apparently it wasn’t some hastily cobbled-together knee-jerk response to an issue which had caught the nation’s attention. The group comprised 22 members whose names are shown in an appendix to the report. There is no information on their qualifications or background other than the ministry for which they now work. There were two members from outside government departments, one from AIB and one from EBS (which of course was recently merged with AIB). There is no information on the resources available to the group, or anything on deliverables other than the terms of reference.
It is a dreadful report.
Remembering that 56,000 households were in arrears to the end of June 2011 and that is likely to be over 60,000 today. And there are an estimated 40,000 households, in addition, which have had their mortgage “re-structured” which can mean anything from going to interest-only to a complete moratorium on any payment. There are about 19,000 households in receipt of a mortgage interest supplement welfare payment though some of those might be restructured mortgages. So conservatively, that means 100,000 households, which will represent about 270,000 people on average, are in difficulty. Some people are being forcibly evicted from their homes, though overall repossessions are tiny. Considering the three most important factors influencing arrears, the housing market is moribund and prices are down 43% on average and seem to be continuing on a downward slope, unemployment is 14.3% representing just over 300,000 people and is projected to remain elevated for the next two years and incomes are being squeezed as a result of interest rate rises/taxes/reduced gross pay. And remember the mortgage crisis doesn’t just affect borrowers, it is a drag on the rest of the economy which is spooked into conserving income.
Although it was surprising to hear Bill Clinton say it, perhaps he is right that the mortgage crisis is the most serious challenge facing the country.
So then, what does today’s report do to tackle the urgent crisis? With little evidence of any in-depth research the report produces a number of generalised recommendations which will be debated in the Oireachtas next week. All of the solutions require someone, somewhere to pick up a tab, and I can say right here that sorting out the funding is not even touched upon. Remembering the country is the recipient of one of the biggest bailouts anywhere ever and is still running a large annual deficit that will be €15-18bn this year depending on how you count it, the report doesn’t say who is going to fund the new quango – the independent mortgage advice service – who is going to fund the purchase of homes from distressed borrowers, even if we could force our covered banks to play ball who will force local units of foreign banks to take hits on their loans, who will fund the additional cost of housing those who the report says will inevitably lose their homes?
And because we have been kicking the can down the road for so long, how will any new quango cope with the tsunami of distressed mortgage cases, how will new bankruptcy legislation cope with an estimated 5-10,000 cases in its first year, how will non-judicial bankruptcy processes (seem to be modelled on the UK’s Individual Voluntary Arrangement) cope with the colossal scale of problems.
There is practically nothing in this report that we didn’t know already. The recommendations seem take the scatter-gun approach and cover everything; although there is a rejection of “blanket debt forgiveness” there is no indication of how far-reaching the measures will be. Will they just deal with those presently in arrears, what about those suffering dreadfully just about making their mortgage payments, at the expense of other basic necessities?
The position on here is that personal bankruptcy legislation be introduced without delay, that a template from elsewhere – probably theUKwhose legislation is generally similar to ours – be imported so as to expedite the enacting of reforms and reduce problems with interfacing with our own legal system. And our legal system needs to be resourced to deal with the temporary tsunami of urgent cases that our can-kicking has created. Because of the unique aspects of the Irish property and credit bubble, it is likely that additional measures will be needed, but without a basic bankruptcy process, we will end up creating some convoluted Irish innovation which may cost colossal sums and have unintended financial and societal consequences. The two-day debate next week should be abandoned and be replaced by a two-day debate on new bankruptcy legislation. We need action, not reports and certainly not reports that don’t tell us anything we didn’t know already.
“The report furnished to the Government is not the repository of all wisdom,” Inda has got that right at least
@NWL
Your initial suspicions and concerns were well founded. Please keep up the great work.
@nwl sorry the link to the report is blocked
HTTP Error 404.0 – Not Found-do i need Irish ip address to access it ?
@John, thanks for that. The Dept of Finance moved the report so I am now hosting it on the NWL blog. Click on the link now and it should be fine.
[…] That was a bone? […]
@nwl many thanks working fine should be interesting read.
[…] Namawinelake: "It is a dreadful report". https://namawinelake.wordpress.com/2011/10/12/the-keane-mortgage-expert-report-published/ I've yet to read the report but unless Namawinelake is completely wrong on his facts, the report […]
The Government is in a tailspin over this issue. They have no idea how big the problem is or what to do about it. The only advice they’re getting from the banks, who advocate a “squeeze the pips dry” approach to getting their ill-deserved money back. The Taoiseach was reduced to asking for contributions from FF on how to deal with the mortgage catastrophe, in the middle of the Dail chamber.
In the absence of any government leadership, special interest groups like the banks and New Beginnings will dominate the debate. These two in particular are about to lock horns and things could get very heated–politically and economically–around this issue.
Of note here is the general weakness of the government on law and order issues, as evidenced by the state’s backdown in the recent Teresa Treacy case. As a result of its failure to prosecute those who have wrecked, gambled, and defrauded the state in the banking, finance and development spheres, the state has lost considerable moral authority and will find it politically difficult if not impossible to deal with organised civil unrest/non-payments from mortgage holders groups. Constantine Gurdiev did allude to such problems on Monday’s Frontline program.
Anyway, I stand by my own recommendations that I made on The Irish Economy last month. To restate these with some slight ammendments:
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I foresee three categories of distressed borrower, and three optimal methods of dealing with them
1. The subprime buyers: Given loans by predatory and fraudulent lenders, they have no hope of paying back their colossal debts, even with write-downs. The long term unemployed may also slip into this category. In these cases, the solution is “jingle-mail”; Non-recourse default where the borrower would lose the home, but would be free of any further debt. The reckless bank would cope with the monetary loss.
2. Average, boomtime buyer: Forced to pay an inflated price by the banking-property complex. In serious trouble, but would still have the capacity for paying if the loan was reasonable. Here, the solution is a debt for equity swap. The state writes down a percentage of the debt in exchange for some or all of the property, to be redeemed on any future sale, or the death of the owner. The borrower may end up paying rent instead of mortgage payments if the state takes full ownership. The imprudent bank takes a partial hit on its partially fraudulent loan.
The New Beginnings plan of splitting the loan principle into a non interest accruing part is also a good idea for this category. The most important point with both schemes is a) the borrower is still paying a reasonable amount, b) they can continue to live in their home(and invest in it) without social and economic disruption that mass eviction would bring and c) there is no wave is distressed house auctions, so house prices do not collapse further and there is no domino effect.
And now the final category:
3. The buy-to-letters, speculators: These are the clerical professionals, civil servants, and other petty-magnates who bought 3-10 houses and who should never have gotten into the property game in the first place. These are the people who gambled in the property casino and lost.
The solution here is a bankruptcy term of no more than three years. These people would lose their investment properties, but not their residential homes–no matter how nice those homes might be. They would be forced to sell any significant personal assets they might have, cars, paintings, etc, but would be allowed to return to their days jobs, work off debt for a 2-3 years, and then go back to their lives, a lesson well learned. The bank takes a substantial hit for giving out such ridiculous loans.
There should also be amendments to bankruptcy legislation to view their children as special interest creditors, whose education cost must be taken into account, otherwise this group will sour and–many being members of the mandarin class–will end up scupperring the entire restructuring plan for everyone else. (Remember, this is the group whose debts are as we speak being written off entirely by the banks under the current status quo)
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Those are my two cents on how this crisis should be tackled. And it won’t cost anyone so much as that if they want to take it on board. But regardless of what advice they have been given or are accepting, the government must gain control of this issue very soon, or I suspect events will begin to control the government.
@OMF
“the state has lost considerable moral authority”.
Agreed. It has applied moral hazard with big pensions, nice payoffs and debt forgiveness for the big boys, and has singularly failed to conduct an independent public enquiry to get at the truth. No wonder it is lost.
OMF, I think your ideas are a good starting point.
@OMF
Excellent contribution.
Definitely leagues ahead of the consultant from KPMG and his 21 strong panel.
I
Well predicted NWL…
what did we expect with an expert from KPMG no less, the folks who told us that AIB was a well run bank for 7 years.
“Between the end of 2002 to the end of 2009, AIB paid its auditor KPMG €49.9m in fees. “. http://www.independent.ie/business/irish/were-the-bank-auditors-conflicted-2151671.html
It’s a great racket….. you partake in creating the mess and then you consult on how to clean it up.
How the big accountancy firms are making millions from the mess they helped create is one of the great scandals that our government keep ignoring.
How can the government justify hiring these buffoons.
I wonder has AIB asked for a full refund!
Let Them Read Keane!
I am delighted with the recommendations of this report
(available here: http://www.fiscalcouncil.ie/ )
Essentially the report recommends doing nothing. We already have plenty of housing supports: mortgage interest relief, mortgage interest supplement, rent supplement. We have a code of practice for banks that guides them into allowing for interest only periods, reduced payments, longer terms and, if all else fails, voluntary surrender.
As a result we have mortgage debt falling by around 5bn a year and a tiny number of repossessions. Remind me again how this is a problem.
Allocative efficiency is the engine of capitalism. It is what gives us the great goods and services that the commies could never match. The allocation is efficient because people are allocating their own resources that they have worked for or will have to work for.
@Kirsten
It almost seems as if you take pleasure dancing on the dreams of less well off.
I don’t recall your indignation when bond holders were thieving the State to penury.
“The buy-to-letters, speculators: These are the clerical professionals, civil servants, and other petty-magnates who bought 3-10 houses and who should never have gotten into the property game in the first place. These are the people who gambled in the property casino and lost… These people would lose their investment properties, but not their residential homes–no matter how nice those homes might be.”
@OMF – are you serious? An exception where the people who gambled and lost get to keep their trophy properties? What possible justification is there for this?
As I said, if you push this group too hard, they will sink the entire ship. It’s simply a question of realpolitik.
@Paddy19.
Indeed KPMG were complicit as were Ernst & Young as auditors to Anglo Irish Bank.
The auditors defence is that they can only audit what they’re presented with.
Given them a large enough cheque and they’ll say Mass if need be.
re : gerhard dengler.
“Given them a large enough cheque and they’ll say Mass if need be.”
I agree Gerhard, more than a hint of high priests about them. Let’s get them to burn some chicken entrails to bless of condemn the banksters. It would be about as effective as the annual audit.
Still hard to justify 49 million without a lot of momb jumbo, balance sheets and fancy reports signifying nothing.
My issue is that our Government continues to trot out these yahoos as if they had any credibility. Of course our lackie media doesn’t question the Minister as to why he is still using these high priests to propose policy.
This reminds me so much of the Greek debt situation – the EU in denial, everybody knowing that it is inevitable that they will default, but reports are produced, commissions appointed, IMF consulted and agreements made. All to no avail.
This is just more of the same political rubbish. Think ostriches, heads and sand. Debt forgiveness, or whatever politically acceptable phrase they find to describe it, is inevitable. End of.
What really p*sses me off, is that the politicians do not realise that most of the populace know that the answer is produced before the report is ever written and that the nameless consultants that produce it are just puppets and lackeys picked to give it credibility for the masses.
@wstt on earlier posts you had some ideas/thoughts regarding debt/equity swap of merit in memory serves me.
Firstly, this is a 100% civil servant based report not an ‘expert group report’ so one can’t be surprised that it is rubbish and offers no real solutions.
Secondly, this report is geared at minimising the risk to banks not the home owners. The government buying homes for social housing borrowing funds from the orginal borrowing institution!! OMG
Thirdly, banks will plague you about ensuring their interest in your property is listed for insurance purposes but when it comes to the property losing over 50% of its value and it’s your problem not theirs.
When we bought our house they insisted that it be valued for insurance purposes for €100k more than what we paid for it! Then this year 3 years on when we changed our home insurance provider they asked to see the new policy with their interest on the policy and that the original over-valuation figure be maintained.
BANKS WILL NOT HELP YOU AND IT NOW APPEARS THE GOVERNMENT WILL NOT EITHER.