Honohan needs to go further to clear up mortgage confusionFriday 27 September 2013 16.40 By David Murphy
By Business Editor David Murphy
Slowly the mist is lifting.
The strategy of Central Bank Governor Patrick Honohan for cajoling banks to deal with mortgage arrears is becoming clearer.
Professor Honohan is seen as a Wyatt Earp of financial regulation after the disastrous regime of Patrick Neary and John Hurley.
But the Professor’s most recent appearance at the Oireachtas Finance Committee became bogged down in controversy over the Anglo Tapes.
His cerebral explanation regarding why the Central Bank had not given gardaí a report about the tapes left politicians entirely confused.
That row overshadowed the main reason for his appearance, which was the 98,000 owner-occupier mortgages which are in arrears of 90 days or more.
Professor Honohan made a number of important points on that issue.
He clarified the Central Bank’s definition of a sustainable mortgage.
It is one which is “affordable for the borrower in both the short and the long term, and provides sufficient clarity on what happens to the collateral at maturity.”
The issue of clarity is a big one.
Banks have been deliberately muddying the waters regarding the overhang of debt left following a repossession, voluntary surrender or split mortgage where part of the debt is parked.
Professor Honohan said banks believe that “uncertainty about how these elements will be treated could help ensure the bank recovers as much as possible.”
But the Central Bank doesn’t buy that argument. He said this confusion could be making things worse.
Professor Honohan said the uncertainty runs the risk of eroding the willingness of distressed borrowers to repay debts.
What he said made a lot of sense – but he should have gone further.
What should happen this debt? Professor Honohan didn’t say.
Banks want to leave their options open. None of them want to write off €100,000 of mortgage debt only to discover that in later years a customer’s situation has significantly improved and the borrower may now be able repay some or all of the money.
From the point of view of the customer who is in trouble now, that strategy won’t work.
Anecdotal evidence indicates the number of customers who are taking up the offer of split mortgages is very low. This isn’t surprising.
Many borrowers are reluctant to enter an arrangement where it is unclear how much they will ultimately owe.
The same applies if they are asked to trade down to a smaller house or surrender a home.
This all boils down to the same point: How much money will be written off?
The Central Bank doesn’t want to run the banks and it is trying not to be prescriptive. Instead it wants to cattle-prod lenders and hope they go in the right direction.
But Professor Hohohan can hardly accuse the banks of muddying the waters when he himself is not clear about what should happen to the remaining debt.
For most people on the brink, this is the biggest issue of all.