Homeowners struggling to pay their mortgages should not hand back their house-keys in a desperate attempt to bring a short-term end to their financial woes.
That’s according to Threshold, the national housing organisation, which today (01.10.10) outlined a number of measures it believes must be taken in response to growing numbers of mortgage arrears and home repossession cases.
“The temptation for those struggling to meet their mortgage repayments is to just hand back their keys to their lending institution,” said Aideen Hayden, Chairperson of Threshold. “Unfortunately, people are acting under the misguided belief that this will bring an end to their financial troubles.
“In the United States, non-recourse lending is the norm, which means the lender’s recovery is limited to the property purchased. However, people don’t seem to realise this is not the case in Ireland: here, the lender’s recovery extends to the borrower’s personal assets as well. So if, for example, your mortgage was €300,000 and you handed your keys back to the lender, who then sold the property for €100,000, you would still personally be liable for the shortfall.
“Handing back your keys is also ill-advised because it means you are effectively handing over your bargaining power. Rather than going down this route, we would urge anyone struggling to pay their mortgage to meet with their lending institution and try to negotiate alternative payment arrangements.”
According to Threshold, there is an urgent need for the Government to introduce structural reforms in response to the growing problem of mortgage arrears. A statutory Code of Conduct on Mortgage Arrears, introduced by the Financial Regulator in February 2009, established a six-month moratorium on repossession of a primary
residence from the time arrears first arise, and this was extended to 12 months in February 2010.
However, Threshold believes the Government must now go beyond protocols and invest in structural measures like those introduced in other jurisdictions.
“Short-term moratoriums only kick the immediate problem into the near future,” said Aideen Hayden. “The repossessions we are seeing before the courts mainly involve people who have been under pressure for some time, but the reality of their situation was delayed because of the mortgage repayment moratorium. With the
moratorium now extended from six to 12 months, we can now expect the problem to continue indefinitely unless structural reforms are made.
“Places like the UK and Portugal have introduced measures aimed at really helping people to stay in their own homes, and we are urging the Irish Government to do likewise. Measures that could be introduced include programmes under which a third party purchases the dwelling and rents it back to the former owner, who can
later re-purchase the dwelling if their financial circumstances improve, or where the State acquires an equity stake in the dwelling.
“Debt forgiveness for unsustainable mortgages must also be considered by the Government. For people with sub-prime mortgages, Threshold suggests the State buy these out and the mortgage-holders then pay back the State under an agreed process.”
According to Threshold, there are a number of financial and ethical justifications for strong government interventions.
“Repossessions contribute to the overflow of dwellings coming onto the market and depress house prices further,” said Ms. Hayden. “In addition, the cost of maintaining households in owner-occupation is oftentimes lower than that of re-housing them. So taking action now to curb the growing number of repossessions makes
“Ultimately, a family or individual without a home will quickly fall into a cycle of helplessness and disadvantage,and will encounter multiple problems around accommodation, school attendance and even health issues. The net cost to society in solving these problems – which could become intergenerational if young children are involved – could be far greater than the cost of measures to help people remain in their homes.
“Furthermore, in the interests of fairness, most people believe that because the Government has spent vast sums of money on bailing out financial institutions, it should also provide some direct assistance to borrowers themselves. ‘Moral hazard’ – or bailing out people who engaged in risky behaviour – has been raised as an argument against assistance. However, State failure to regulate financial institutions and the availability of flawed financial products, especially sub-prime mortgages, contributed to the current crisis, so the Government must take some responsibility now for finding solutions.”
Threshold’s recommendations on how the Government should respond to the growing problem of mortgage arrears and home repossessions were contained in a pre-Budget submission, presented by the organisation to the Department of the Environment today. In addition to advising on measures to be introduced to help struggling home-owners, the submission showed that:
Household debt increased from 70 to 150 per cent of personal disposable income from 2000 to 2007. The current economic and employment crisis has meant that many of these households are now struggling to meet mortgage payments. The percentage of first-time buyers taking out a mortgage of over 30 years’ duration increased from 29 to 75 per cent between 2004 and 2007. A total of 32,321 mortgages – or four per cent of outstanding residential mortgages – were in arrears for over 90 days at the end of the first quarter of 2010.
Threshold’s pre-Budget submission to the Department of the Environment is available to download.
Threshold was founded in 1978 and is a not-for-profit organisation whose aim is to secure a right to housing, particularly for households experiencing the problems of poverty and exclusion. Its main concentration of work is within the rented sector. The organisation operates a national office, based in Dublin, and three regional offices.
Further information is available at www.threshold.ie.