Mortgages and Morality in Irelandby
The only number you need to understand Ireland, says David Hall, is the only one that has been increasing without fail, quarter by quarter, since the end of 2009. “It’s the mortgage arrears,” he says. “It’s staring us in the face.” Last year Hall, who made his fortune in the 1990s with a private ambulance company, founded the Irish Mortgage Holders Organisation, a fee-based service that helps homeowners negotiate with banks. He’s become a public face in Ireland for those under water and in arrears. Since its banking crisis, he points out, Ireland has earned a reputation in European capitals as the good son, consistently meeting its fiscal targets for the IMF and successfully renegotiating some of the terms of its bailout agreement. But at home, says Hall, “we’re on our way to Detroit.”
According to Ireland’s central bank, almost 13 percent of the mortgages on the country’s principal homes in June of this year had not been paid in more than 90 days (pdf). After its banking crisis, Ireland took a three-year pause on mortgages for private homes. There was no jingle mail in Ireland. The country’s punitive bankruptcy laws discouraged homeowners from walking away, and a quirk in a 2009 law prevented banks from foreclosing on primary residences.
Even had it been legal, any foreclosure in a tough real estate market is also a writedown. Home prices in Ireland are still around 50 percent off their highs; banks are reluctant to book any more losses. The banks “sat around the Ouija board saying, ‘property prices will increase, property prices will increase,’” says Hall. “Now they’re sitting around saying, ‘[what you say when you realize you have lost half the value of your assets]!’” The pause is over. Some Irish people are about to stop owning their homes.
In July, the country fixed its 2009 law to allow repossession of homes bought before the crisis. A law easing the consequences for personal bankruptcy passed this year as well; on Sept. 9, Ireland’s new insolvency service began accepting applications. In March, the Central Bank of Ireland set targets for banks to start offering what it calls “sustainable long-term solutions” to mortgage holders in arrears. On Sept. 17, it got serious. In a short statement, it announced that it expected banks to have “concluded arrangements” with 15 percent of their nonpaying customers by the end of the year. By March of 2014, the bank expects the number of “concluded solutions” to reach 25 percent.
These are specific targets for vague goals. A conclusion could mean a refinancing. It could also mean a foreclosure. To a dispassionate economist, either would be fine. Ireland can’t know for certain whether its consumer banks are stable until it knows how many mortgages are going to fail. And people won’t start buying houses in earnest until they’re certain house prices have gotten as low as they’re going to get; the number of foreclosures is a factor in that price. A rash of either refinancings or foreclosures would offer certainty, something banks and investors love.
But Ireland is not peopled with dispassionate economists. To keep people in their houses, Hall is encouraging the country’s auctioneers to refuse to sell bank foreclosures of private homes. On Sept. 15, he secured a public commitment from Allsop, an auction house, not to sell foreclosed private family homes that haven’t first been offered some kind of restructuring. Hall says to expect more agreements next week. “We as a firm don’t have any interest in getting involved in those kind of sales,” a representative from Allsop told the Irish Independent. “We’re very sensitive about it.” In Ireland, market clearing looks like dirty business.
“In the same way the Germans have a fear of hyperinflation, in Ireland the fear of being turfed out and having your house set on fire is deeply ingrained,” says Karl Deeter. He’s an analyst with Irish Mortgage Brokers in Dublin. Though friendly with Hall, Deeter is fed up with Hall’s activism and with the Irish reluctance to accept a loss and move on. “What point is there in repossessing houses if you can’t sell them,” he asks. “You’re not going to have a healthy credit environment or investment.” Deeter recognizes the social cost of clearing the market, but the proxy for a repossessed home is not homelessness, he says. It’s renting a house. He agrees with Hall that the banks, too, are at fault. Banks would rather provision for a potential loss, holding aside capital, than actually realize the loss. “Everything we do,” he says, “is about drawing out the pain.”
A deep historical distaste of evictions has turned what should be a relatively straightforward question—how many people will default—into a moral argument. Banks in Ireland are maintaining that a percentage of their nonpaying customers are simply strategic defaulters. (Deeter has a rundown here.) In theory, this shouldn’t matter. A default is a default, strategic or not. But in Ireland, banks, activists, and politicians are arguing over whether defaults are morally defensible. Here two Irish traditions collide: pity for the tenant, and distrust of the sinner who fails to meet an obligation.
The mortgage market in the U.S. was dramatically different. By the time of the crisis, the originating banks no longer owned their mortgages. Even with a will to provide pressure to attempt a restructure before foreclosing, it would have been hard to figure out whom, exactly, to pressure. But the virtue of jingle mail and robo-signing—of simply walking away from an obligation, whether strategically or not, and of kicking people out of their homes without regard to moral decency—was that the market for houses has cleared. Painfully, massively, and with the copper pipe ripped out of the walls on departure—but cleared. In Ireland, five years after the fall of Lehman, they’re just getting started.