Tinkering with the property market

Talk is cheap.

Talk is cheap.

And never more so than during our endless discussions about the moribund residential property market.

You’d like to think that some consensus could be reached, not just about what is causing the endless downward price spiral, but what can be done about arrears and negative equity; the difficulty that potential buyers are having in securing loans; and perhaps most contentiously of all, how a property tax can be fairly and equitably applied from next year. (Not a chance.)

Last Friday, Central Bank data on mortgage arrears (to the end of December 2011) showed a huge jump to 9.2% of all mortgages on last September’s figures (8.1%).

Of the 768,917 known mortgages worth €113.5 billion, 70,911 of them were officially in 90 days arrears to the end of last year, compared to 62,970 at the end of September 2011.

A total of 74,379 mortgages had been restructured to December 31, that is, the mortgage holders are now only paying interest, have had their repayment terms extended, or have been granted a short-term mortgage payment holiday. This figure is up 6.7% on the 69,745 restructurings up to last September.

If 90-day arrears continue at this pace (assuming mortgage numbers stay the same) there will be 100,833 of them by the end of this year, or just over 13% of all mortgages. Restructurings will rise to 96,406. Combine the two and nearly 200,000 mortgages, or nearly 26% of all mortgages will either in arrears of 90 days and/or restructured.

(In the US, the last available figures from the New York Federal Reserve Bank to September 2011 shows that just over 7% of all mortgages were in 90-day default.)

So what can be done about arrears?

Very little, except to join the queue at your bank and come under the highly intrusive Central Bank-agreed Mortgage Arrears Resolution Process (MARP) in which you will either be offered forbearance measures until you can resume paying your full mortgage every month, or find yourself at the end of one of the 9,300 final bank demands that lenders have issued so far with 3,000 cases so far ending up in legal proceedings. (Only 187 court proceedings were concluded  during the past quarter and only 109 orders granted for possession or sale.)

It is likely to be at least a year before the new insolvency and bankruptcy legislation comes on stream that will hopefully bring real closure.

However, at last week’s public hearing into the draft Bill, the Irish Bankers Federation insisted that their members were abiding by the new codes of conduct and doing everything possible to restructure mortgages and avoid repossession. The Free Legal Aid Centre, MABS and New Beginning, the consumer advocacy groups disagree. For them, this bill, as proposed, will result in a risk of higher than necessary bankruptcies, and unnecessarily long period before the insolvency/bankruptcy is discharged that may not save the family home after all.

Meanwhile, if you have difficulty in dealing with your mortgage lender, the IBF says that you should go to the Financial Ombudsman; FLAC, MABS and New Beginning advocates say you should come to them AND the Ombudsman. Finally, the government thinks that more tax relief and tinkering by NAMA will help the property market.

It has slightly increased (to 30%) and extended (to 2017) mortgage interest relief for first-time buyers in 2012 and to those who bought between 2004 and 2008. It is permitting NAMA (in a pilot project) to flog off 150 of its inventory of mainly residential apartments.

Can this help resurrect the market? Unlikely.

What has to happen first is for prices to stop contracting, perhaps to the 70%-80% fall from peak prices that academics show is typical of great property/banking collapses. Furthermore, the huge inventory of unsold and empty properties will have to largely cleared (or bulldozed) and employment growth and bank lending will have to be restored.

So what can be done for someone in negative equity who wants to take up a new job or trade up but can’t sell their home? The government thinks a negative-equity loan may be a “solution,” even if there isn’t much support for the idea given how Bank of Ireland and PTSB, the two banks mentioned, are likely to want applicants with valuable tracker loans to surrender them.

Anyway, how can it be all right for anyone to be encouraged to take on a 125% mortgage (in this market) when it is now accepted that 100% mortgages were a very bad idea during the boom?

Perhaps this is where the government think NAMA comes in, with its offer to absorb 20% of any future negative equity on residential properties they sell.

Even if the market does bottom out after another 20% fall in prices, NAMA apartments will be very difficult to fund (unless NAMA also provides the finance) and this being Ireland, will still be harder to sell in the future than houses. Finally, this NAMA deal undermines every ordinary sellers who can’t cover future shortfalls.

There is no credible government intervention that will resurrect the Irish property market. It will rise again when the wider economy does.

Anyone dead set on buying a new home or trading in an old one in 2012 needs to have five things on their side: an exemplary credit record; low to nil other debt; a strong income; a substantial (perhaps as high as 20%) down payment; and the ability to keep repaying your loan if interest rates rise (and they will).

If you can’t meet those criteria, keep renting.