Sunday Business Post: Opinion piece ‘Banks must learn to forgive and forget’ 25th April 2011

(Link to original piece is here)

When a bank holds a loan worth €200,000 it is an asset valued at that figure. Even if the security for the loan is a property that has fallen in value to €100,000.

So it is no surprise that banks will do whatever it takes in order to avoid turning their asset into a 50 per cent loss. In fact, even if the loan getting into trouble it doesn’t get written down to €100,000 -that only happens after the asset value has been realised.

This is in part why we have three repossessions per 100,000 mortgages, while Britain has 65 times more, at about 200 per 100,000. At the same time, there has been huge political pressure via politicians and the Central Bank (formerly the Financial Regulator), via the thrice reworked Code of Conduct on Mortgage Arrears to ensure that we don’t allow people to get their homes repossessed as long as they engage’ with the lender.

In finance it’s referred to as ‘forbearance’. In the Barrons Dictionary of Banking terms ‘forbearance’ has two definitions, one is a bank not enforcing a legal right (usually repossession) upon a borrower in exchange for certain actions (usually repayments).

The other is where a regulator doesn’t close down a bank when it breaches capital requirement thresholds. We have seen both of these occur in Ireland over the last year.
In late 2010, Irish banks were under-capitalised and the state knew about it, while 45,000 plus distressed loans are not being actively foreclosed upon.

The players involved are on the same side -the home-owner stays put and the bank doesn’t have to realise an asset valuation that will cripple them. Hence, every time there is a moratorium on repossessions the banks don’t jump up and down complaining: it suits their agenda.

There is nothing new in this, just ask anybody who has studied Japan. Banks are often happy to become zombies if they are convinced that in enough time they will become healthy again. The message is clear, continued forbearance is cheap to implement and many of the players want it.

Another option is to address the issue, provide arbitration solutions where they work and debt relief (forgiveness) where appropriate, but where would it fit in?

Firstly, a disclosure. I think debt forgiveness is generally a terrible idea, and have only become an advocate as I watched a system evolve whereby investors have been insulated from taking loss at the expense of largely innocent bystanders [taxpayers]. In chasing the crisis down this rabbit hole we have perhaps avoided creating zombie banks, but we are creating zombie households in their wake.

Sadly, write downs will have to come eventually. It is, and will be, a commercial reality.

A ‘debt forgiveness’ is actually a settlement where the full asset value is not obtained or pursued. Banks often provision for this -n on-Nama provisions in AIB were €4.5 billion and whether you agree with the opinion in this article or not, certain people will have their loans written down and they will not be chased for the deficit.

The idea that this is a ‘punishment to the prudent’ is a mistake. If so, then where is the ‘prudent rage’ against people receiving taxpayer-funded Mortgage Interest Supplement, which is paid to more than 18,000 households, while on the same street another person slaves to make their payments?

Or the ‘prudent backlash’ by people who stayed out of the market entirely, against taxpayer money spent on rent supplement, which allows a person around the corner to enjoy a similar property for free?

Perhaps the best solution would be to take the most distressed borrowers and put their loans in a box and present them to the distressed bank debt holders and say ‘here you go folks, work out a deal between you’.

The bond holders obtain a greater than current market return while reducing the loan owed by the borrower and simultaneously de-leveraging the banks.

However, what is most likely is that we will have to hold a legislative gun to the heads of banks to get them to the table. Currently, when you are working out a debt settlement you cannot compel every creditor to come to one meeting, the worst offenders are the secured lenders (the ones who own the mortgage debt).

For this reason more comprehensive schemes than exists in Britain or Australia are vital, and also required before the end of March next year under our EU/IMF bailout.

The absence of a prescriptive debt mediation system is galling in a developed economy, and despite calls for regulation from within industry, the Central Bank is loathe to commit to a regulatory structure for the people trying to work out schemes for people in trouble.

Quite literally anybody could put a sign over a door in the morning and legally call themselves a debt mediator – will it be any surprise if the snake oil salesmen find their way into this market?

For our part, we have faith in our lawmakers, but faith and time available are not always compatible ingredients.

Karl Deeter heads up client advice at, a firm of accountants and financial planners. He is also operations manager at Irish Mortgage Brokers

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