2014 - THE YEAR TO SORT YOUR DEBT PROBLEM

There is no doubt that the Irish banks have been in a terrible mess for a number of years. They have all been slow to deal with the large number of mortgage arrears that have been at unprecedented levels, they all have different methods of dealing with the arrears but very slowly they are all stepping up their game. A number of foreign banks have exited these shores and handed their loan books to third parties who will run them down. The Irish banks have been under strict supervision from the Central Bank, IMF and Troika to ensure that the matter is given proper attention. Some are trying harder than others, some are just trying.

I wrote many years ago in my book 'Back from the Brink', published in 2005 about the problems with credit card debt. The fact that a certain amount of default is written into every credit transaction and it is only, when that default becomes widespread that the banks become worried. The same is true with mortgage arrears, a certain amount of default is priced into each and every loan transaction and as long as it falls within certain parameters, it is business as usual. So with the mortgage arrears at record levels, the problem being endemic across the country, there remains a window of opportunity to improve your debt profile. The window is wide open at some banks, slightly ajar at others but there is most definitely an opportunity. The banks have targets to meet and unusual times call for unusual measures.

Banks are making proposals to re-base loans like never before. This is a proposal that I have seen recently from one of the pillar banks (not one of our clients).

Mr Smith has crystallised losses of €550,000 through a number of buy to lets that have been sold. His family home (wife and three children) is in an affluent part of town, valued at €500,000 with a mortgage of €300,000. His work conditions have deteriorated somewhat over the years.

The banks solution is to add a principal sum of €70,000 to the existing mortgage, the maximum that is allowed based on his reasonable living expenses. €100,000 is placed on a zero coupon bond for ten years which if repaid within the time line will result in the contingent sum of €380,000 (550k -70k-100k) being written off. The offer comes with the usual 20 day acceptance requirement and the threat of legal action if not accepted.

On the face of it, it looks a very good deal. You remain in the family home, the mortgage repayment is achievable and the amount of write down at the end is significant. For the bank, it ticks all the right boxes, a sustainable (?) solution right now within the guidelines. From a risk perspective, the bank are giving nothing away – they retain the security of the house in an affluent part of town which will likely increase in value, achievable payments are being made throughout the period and the option remains to either repossess or take judgement for the full amount in ten years if the 100,000 is not repaid.

Whilst this proposal settles the banks requirements of sustainability, for me its sustainable with a ten year hangover. It requires that general economic conditions improve and that your personal situation improves somewhat for you to be able to repay the €100,000 in year ten. None are guaranteed, employment health and the family situation must at least maintain a status quo. More worrying interest rates must remain constant. I don't have a crystal ball but there is not a chance of this happening for the next ten years so whatever strain you are under now, this is only likely to increase over the period. This proposal looks good and will see most people looking to sign on the dotted line, there are still better options out there. I wouldn't be able to recommend this proposal to anyone as it currently stands, I'd be looking for something that is sustainable right now and into the future.

There are two things that I can safely predict.

Firstly that property prices will rally from current levels in the future - (they may fall before they rally, could oscillate over time but ultimately push positive) due to the severity of the crash as prices fell in some areas more than 50%. Secondly, interest rates will rise from these historically low levels that we currently experience. Both put the best cards in the hands of the banks.

The time to solve your debt issues is now. The window of opportunity is open right now but as the banks slowly get their affairs in order, that window is slowly closing. All of the banks are being pushed to get their mortgage arrears under control, there will come a time in the future when someone will consider that they are back within an acceptable level. The external pressure on the banks to present solutions will dissipate and it will be back to business as usual. In the future, business as usual will see far more repossessions than ever experienced in the past. The advice is simple, get your affairs in order before the window of opportunity closes. That time is now!

Nick Leeson