A second post crisis legacy (see article dated 02/08/2017 for first legacy) is the long-term arrears issue and the 37,000 people involved. I say 37,000 but I presume the indirect number is closer to 100,000 of our fellow citizens in misery. And even if some are trying to game the system, as some parts of our society believes, they are still in abject misery. It’s also a large part of our society not spending, living in the past and feeling excluded from the recovery.
There is a solution and it needs a strange beast to see it and implement it. To understand the solution one must first recognise the players or stakeholders as the management consultants have us say. The main players are (1) the borrowers (2) the banks and (3) Society. The bit players are (4) the legal system and (5) the markets.
Society wants fairness shown to the borrowers and have them integrated back into normal life. Society also has an obligation to rehouse some of them if and when they are dispossessed of their homes. Society also does not want to be made a fool of with chancers. Banks want as much as possible of their depositors’ money back. The borrowers want – well that’s the problem, we don’t know who the borrowers are – are they cute hoors gaming the system or individuals down on their luck and doing what a lot of us do when faced with a problem – bury our heads.
We need to create a mediator who can bring fairness to all parties. The mediator finds the balanced solution between the borrower and the bank while taking account of the needs and obligations of our society. The mediator buys the loan from the bank and settles with the borrower. Settlement can result in either (1) repossession of the house and sale or transfer to social housing stock or (2) conversion of the borrower to that of lessee. No 2 must be achieved without giving the borrower an unfair advantage while incentivising them with some form of vested interest in the property. The bank must sell the loan to the mediator at a price that reflects the value of the property now. That’s not a problem as the bank has already marked the loan to that value thereby already taken their loss. The bank can now get on with its life without having to face a lot of repossessions where there are no winners. The borrowers, if genuine, now have an assured tenancy in their family home while losing a substantial amount of the future economics of the property (the moral hazard issue addressed).
The Cute Hoors established
Any borrower that was gaming the system is identified and the property repossessed. When the mediator comes to court for repossession, our Society now knows that it has done its best and the repossession is necessary. The court actions should reflect that knowledge. All genuine borrowers who convert to leasing the property will have need for some form of social supplement and the mediator will migrate into a Social Housing Fund. Families in homes they can no longer afford but need assistance can be relocated to cheaper homes that the mediator has repossessed from the gamers.
Now I hear the bankers scream! we need more money than the house value!!! Well tough, you can’t get blood out of a stone and if the mediator extracts any additional value from rogue borrowers then you will get that but as regards parking mortgages and restructuring residual mortgages to Loan to Value (LTV) levels greater than 100%, no more. Why would you restructure a mortgage at those LTV’s when your regulator is now restricting you to 80% LTV on new loans? Parking part of the mortgage is placing people in penury so they will never (unless we have another property crisis and they sell out) see their home paid off – great way to deal with retirement!
Who will fund the mediator?
Good question and it certainly cannot be any of our current agencies that have too many restrictions placed on them. So initially, funding for the mediator will be provided by the very banks that loaned the cash to the arrears customer in the first place. The banks in question will lend to the mediator an amount to cover the cost of buying the loans from that very same bank. The mediator will service that debt and when the mediators’ pool of properties and cash flow arising is of sufficient size, they will look to refinance from the capital markets. Securitisation and other international funding techniques can be used so the banks in question receive their cash back and maybe even more if the mediator has structured the operation efficiently and in line with rating agencies requirements. It is the latter point that prevents any of our current agencies from carrying out this project. The mediator will generate its income from rents that are funded wholly or partially from the Department of Social Protection and that cash flow is very valuable to the market. And will ultimately be reflected in the cost of refinancing.
There are many more details behind the proposal but to date I have yet to hear a question that could not be answered. The best response I’ve had is silence!
Who can provide this solution?
Not the current agencies as reasoned above and certainly not private money, private equity, vulture funds, etc. etc. The returns required by these parties are too high and they would never be seen as impartial and fair.
This solution does not require truckloads of cash to set up – as the funding is provided by the banks so it’s just the setting up of the mediator. Most of the work can be outsourced – legal, property management, etc.