A Clean Slate - Debt, The New Cancer

The Insolvency Service of Ireland started taking applications for its new personal insolvency measures this week. I get the impression that there was nobody beating the door down, nor a long queue forming. That’s no surprise but not for the reasons that you hear many commentators making. Nothing affects people quite like debt, historically it has a dark and sinister undertone that the majority of people keep as far away from as possible. The financial tsunami that we have experienced in Ireland means that it is affecting far more people than it ever has done in the past. Many people will find it easier to talk about a lump that they have found somewhere on their body than be willing to talk about their struggles to pay or not pay their bills. Unfortunately that is the way that it has always been.

There is no doubt that the new legislation has been met with consternation, confusion and a certain amount of resentment because of the limitations that it imposes. Equally so there is no questioning that it has spectacularly under-delivered in relation to the most important aspect – bankruptcy. But it still represents real opportunity for those who use it correctly, whether that is by implementing one of the measures or by using the options that are available as a bargaining tool.

 

Unless you learn about the options available, educate and empower yourself to use them where applicable, it is impossible to make informed decisions about your path forward. Debt brings with it huge social and personal cost. Look around you, you can see it everywhere. We cannot control what the government does with budgets and austerity measures to put the country back on track but you can regain control over your personal situation. Granted it will take a little time and any new insolvency legislation does take time to bed in. Look at the United Kingdom, there was the same consternation, confusion and resentment when the legislation was changed ten years ago but now it is an efficient system that allows people to start again. It has it's critics but it works!

Right now Ireland is at the start of that cycle and it may well take five years to bed in, as it did in the United Kingdom but everyone has the right to avail of the legislation and in my opinion, should.

So whilst most commentators will tell you that the new legislation is an unmitigated disaster, with the exception of the bankruptcy component, I'd say that it can work. But if you don't understand it, don't educate yourselves about the options available, the Insolvency Service of Ireland will sit idle. Please don't allow that to happen.

 

Debt is quite simply an affordability issue

•                     If you can afford to pay, you should

•                     If you can't afford to pay, you simply can't and a solution has to be found.

 

With the education that is required in this area, there also needs to be a fundamental shift in the way that people approach mortgage debt and the family home. In part, this is included in the new legislation. Some simple examples, A couple living in a three bedroom house on their own with no children who cannot afford to pay the mortgage should simply downsize to a property that they can afford to pay for. If you are living beyond your means, for your own financial and healthy well being, you have to make a change. Much is being made of protecting the family home at all costs. In many cases this is ridiculous, split mortgages, warehoused sums and 20 year claw backs are a waste of time. Everybody owes it to themselves to achieve a realistic, sustainable solution. All mortgage debt is secured, banks will expect to receive back all of the money that they have secured on your property. Who can blame them? But they as well as you have never experienced the degree of difficulty that individuals are now facing.

 

Rest assured, there is always a solution, Don't Panic.

Author :: Nick Leeson Principal

The Property Bubble is not Going To Last in Ireland

Piece written by Dan White -- Sunday Independent

 

Don't be lulled by talk of a recovery in the housing market - it's a facade, much like Potemkin's villages.  The 8% rise in average house prices over the past 12 months revealed by the CSO last week needs to be taken with a very large pinch of salt.
With the banks cutting back on mortgage lending yet again and only tiny numbers of properties changing hands, any sustained recovery in the housing market is still a long way off.

Last Tuesday , the CSO published its latest house price index. Not surprisingly, it was the CSO's assertion that average Dublin house prices had risen by 8% in the 12 months to July that attracted the most attention. While this was good news for anyone trying to sell a house or apartment in the capital the news from the rest of the country was not so good, with average prices outside of Dublin falling by 1.5% over the same period.

While, after more than five years of falling prices , any bit of good news from the housing market is welcome, it might not be a good idea to declare the property price crash over just yet. For a start, the CSO house price index only includes properties that were bought with a mortgage. While virtually all homes were purchased with a mortgage during the boom years, this is no longer the case.

Figures published by the Irish Banking Federation on Thursday revealed that while 2,852 mortgages were drawn down during the second quarter of 2013, 5,642 houses and apartments changed hands. In other words, cash transactions now account for just under half of all purchases. Unfortunately, these cash transaction are not being captured by the CSO figures. However, going on the evidence of auctions of repossessed properties where the majority of deals are for cash, it would appear that prices are down by 60% or more rather than the 50% indicated by the CSO data. Doubts about the reliability of the CSO figures are only part of the problem. Even if every house was being purchased with the aid of a mortgage, a far bigger obstacle to gauging the true state of the housing market is the fact that transaction volumes, either with or without a mortgage, have virtually dried up.

According to the IBF, just over 10,000 houses and apartments changed hands in the first half of this year. While this was up more than 10% on the total for the first half of 2012, it would be a brave man who would bet on the increase being sustained into the second half of this year. The number of housing transactions in the second half of 2012 - more than 15,000 - was artificially swollen by a number of tax breaks for first-time buyers that expired at the end of last December.

Far more likely is that the number of houses and apartments changing hands this year will be somewhere between the 18,000 recorded in 2011 and the 24,000 for last year, probably not much more than 20,000. What this means is that, at current levels of activity, each one of Ireland's almost two million houses and apartments can expect to change hands once every 100 years. That's clearly not a sustainable situation. And why have transaction volumes evaporated to virtually nothing? Blame the banks. Despite expensive advertising and PR campaigns designed to get us to believe the opposite, the brutal truth is that even based on the IBF's own figures, mortgage lending is still falling, down another 1% to €518m in the second quarter of 2013 compared to the same period last year. The IBF's claims that mortgage lending was up quarter-on-quarter are completely irrelevant, not to say disingenuous, as the first quarter is traditionally by far the quietest time of the year for the housing market.

So far this year the banks have approved €850m of new mortgages. Baring a sudden and unexpected increase, it is hard to see new mortgage lending for the full year going much over €2bn, a 95% reduction on the €40bn lent in the peak year of 2006. given the reluctance of the Irish banks to lend, even to good customers, and the obscene interest margins they are gouging from their variable rate borrowers, it hardly comes as any  surprise that a number of overseas banks, most notably the South African lender Investec, are looking at entering the Irish mortgage market. So no credit and tiny transaction volumes on the one hand, but an apparent price recovery, at least in the better Dublin suburbs, on the other. What the blazes is really going on in the Irish housing market?

Looking at the current situation, it's hard not to be reminded of 18th Century Russian statesman Prince Grigory Potemkin, chief minister and sometime lover of Empress Catherine the Great. Whenever the Empress got it into her head to journey through her vast territories, Prince Potemkin would travel a few days ahead of her constructing "villages" that were in reality no more than facades, populated by suspiciously well-dressed and fed "villagers" thus ensuring Her Majesty  rapturous reception wherever she went. While the Russians may have had Potemkin villages with an attractive facade concealing the poverty that lay behind, we in Ireland have a Potemkin property market, where the facade of an apparent increase in prices conceals the reality of tiny volumes and virtually no mortgage credit that still stands in the way of any sustained recovery.

A NEW DAWN OR MORE OF THE SAME - DEBT IN IRELAND

Most people are aware at this stage that the new insolvency laws are about to come into play in Ireland in the next few weeks.  The idea behind the new system is that the options for debtors within the scheme will allow households to gain control of their finances and deal with the uncontrollable debt problem in society.  Ireland historically over the last generation has had a very punitive system in place in terms of dealing with insolvency matters, and although some would view the new rules as some way off a solution, I suppose it’s a step in the right direction.

Our business GDP partnership set up a debt advisory team in 2010 and we have been very successful with this model in Northern Ireland over the last few years; typically bringing solutions on behalf of borrowers to creditors, mostly institutions.  Although the banks are particularly difficult to deal with we would have seen a seismic shift in their attitudes along the course of the last few years.  The insolvency system in the UK works quite well, and generally if Mediation by our team is hitting a brick wall then our clients will avail of the options at their disposal under the insolvency laws. The huge difference between the insolvency laws In the North is that they have been working more than twenty years – the huge challenge facing the South of Ireland is that a completely new system is just about to be introduced.  Having spent some time studying the options available to deal with the debt overhang, it’s very clear in my view, that in the short to medium term there will be organised chaos in the weeks and months ahead.  Over the past few months I have spoken with a number of legal, accountancy and insolvency firms in Republic of Ireland, and the feedback on the new rules is overwhelmingly negative.  Under the new system there will be two key players 1) Approved Intermediary and 2) Professional Insolvency Practitioner.  The AI deals with the lower end unsecured debt and the PIP will be dealing with the secured and unsecured debt.  Last week the ISI handed out 14 PIP licences to the first batch of professionals and the idea is that over the next few months, more PIPs will get their licence to practice.  The success of this new system in my mind lies with the attitudes of the banks in Ireland.  Very simply if they do not play ball and accept the proposals put forward by the borrowers, the system will spectacularly fail.  This is at the heart of my concerns and is a very real possibility.  In my experience the bank will not want to be dragged into a personal insolvency arrangement and worse bankruptcy case.  They will want to get their pound of flesh out of their customer on a one to one basis. This is power for the course in Northern Ireland and will be duplicated in the South of the country.  It’s very straight forward from my point of view.  If the banks do not pay ball then they need to be held accountable by the Central bank who is telling anyone who wants to listen that the banks will be working positively with the new rules. I am not so sure about this given my experience of the past few years.

The key for me in all of these things is education.  Education for the borrower around the options, banks policy and devising a plan that is best for them and their family.  Make no mistake about it; the island of Ireland has way too much debt, from a sovereign, SME and personal point of view.  We will not recover and move forward as a nation to the debt overhang is dealt with.  For me this will take a minimum of five years, and unless the banks in the country toe the line and start being proactive and more transparent in how they run their business, the pain will continue for some time yet.  I will be watching with interest how the next few months go in terms of the new framework now in place.

Conor Devine MRICS

Banks don't want the keys back!!

Accounts recently filed by AIB’s mortgage unit include details about the health of the bank's mortgage lending and their efforts to restore normality, make for very grim reading. What the accounts show is that repossessing property is not a solution for either the Bank or Borrower. In the last year AIB have forcibly repossessed and sold 17 properties for €2 million with an associated debt of approximately €6 million, this resulted in a LOSS of €4 million to the Bank. AIB will now look to the borrowers for repayment of this €4 million loss.  The chances of them retrieving all of the shortfall…well, I’d say there is more chance of Joe Brolly getting the freedom of County Tyrone!!!

 GDP Partnership has been pioneering an alternative method to forced repossessions for the last 4 years in Northern Ireland and more recently in the Republic of Ireland. This is the Consensual Sale method which results in a greater return to the Bank on the sale of the property and also maximum debt reduction for the borrower. The Consensual Sales method is where the property is sold privately by the borrower on the open market to achieve the best possible price, all with the blessing of the bank. As we have all come to know when word gets out that a property is being sold by the bank its value typically plummets at times up to 50%.

The consensual sale process mitigates this risk, which clearly is better for the bank and borrower.  The other positive for the bank is that they do not have to instruct their lawyers or receivers saving money and time.  In conclusion it’s the best way forward on many occasions.

The method requires both bank and borrower to work together in an open, willing and transparent manner. GDP Partnership has been working to facilitate this relationship between bank and borrower through our mediation services. Our experience has proven that debts issues can be successfully and quickly resolved to the economic benefit of borrower and bank through the mediation and consensual sale process.

Over the next few months, thousands of properties will be coming to the open market as the banks continue with the very difficult job of cleaning up their balance sheets. It would be our view that we will see a more consensual approach being applied to the sales process and less fixed charge receiver appointments.

Conor Devine MRICS – Principal

House prices to fall further in Ireland

I don't care how good you are at PR or excel in the use of words, it would be impossible to suggest that I was a leading student of economics. That being said, I have no problem understanding the basics.

The media frenzy over the past ten days regarding the housing recovery in Ireland has been a little disturbing and premature at best.  Day after day we are seeing some journalists, estate agents and economists predicting that we have hit the bottom and that prices are beginning to recover across the country. Let me remind these erstwhile commentators of their first economics lessons. All other things being equal, when demand exceeds supply, prices will rise. When supply exceeds demand, prices will fall. Their most recent reports are suggesting that demand is now equalling supply thereby bottoming out the market and is now set to rise. What rubbish!

I'd suggest that they spend less time in the boutique cafes of Amsterdam and more time telling the truth. Over one hundred and eighty thousand residential and buy to let mortgages are in arrears of over 90 days. A leading treasurer at a UK bank once informed me that when a mortgage is missed by more than two payments, typically 60 days, only 2% of these people ever get their mortgage back on track. That’s a shocking statistic! What is going to happen with all of these buy to let mortgages, they are going to hit the market in the next few months more supply. Of the 100,000 or so residential mortgages in arrears, how many will be restructured and kept from the market. A few will but many borrowers are already returning the keys in advance of having their home repossessed - even more supply. I'm only touching the surface here and not taking into account the hundreds of thousands who have been able to keep paying by the skin of their teeth but are now experiencing real difficulty. There is a serious correction going on at present across both the residential and commercial markets in Ireland and further afield and this will continue.

I have found in my life to date that people generally react better and prefer to be told the truth, however hard that truth may be in 1995, I saw no amount of lawyers who promised me the world. Some promised me imminent release; others suggested I might only spend six months in jail. Many professionals only tell you what they think you want to hear. It’s a great way to make a sale and has worked for them for years.
The fact of the matter in Ireland right now is that the banks are in a particularly bad state. Their balance sheets are massively impaired and the IMF and Central bank only this year have told them to address the situation. This is only now beginning to happen. Make no mistake about it, the debt problem in Ireland is largely property related and as a consequence more houses will be coming to the market as the Banks seek to address their balance sheet deficiencies.

Every week in our Dublin office we are seeing more and more people come through the door that have significant borrowings in a serious state of negative equity looking for solutions.  One solution would be for the banks to offer all of their customers a new 15 year facility at a repayment level that works for the borrower, and hopefully ride out this storm over the next five or six years.  Dare I say if this was an option for people the borrowers would snap their hands off.  The very frustrating nature of the country’s current problems is that people borrowed long term money and because there has been a material change in the markets, the banks have called the loans in now, which has completely distorted the economy and left the country on life support.

Over the next twelve to twenty four months there will be thousands of houses come to the market across the country and my view is that prices will soften further up to 20%.  In fact Moody’s have already stated in March of this year that this is what they expect to happen in Ireland.   I agree that in the Dublin area there has been good activity in the past twelve months and this has to be welcomed, as everyone wants to see an active housing market; however with what’s around the corner, I would be very cautious with the optimism and words like recovery possibly premature.

Go and speak to people in Galway, Sligo, Cork, and Kildare and throughout the country and explain to them that the housing market is in recovery.  A client of ours only last week sold his beautiful detached home in Galway for €210,000.  The mortgage on the property was €575,000 – does this mean the market is in recovery – depends on your interpretation I suppose, but I certainly wouldn’t be cracking open the champagne if I was in that position.  As the banks are now gearing up to dispose of the stock that is impairing their balance sheets, let’s see how this one plays out, however I would urge caution across the board in the short to medium term.

 

Nick Leeson - GDP Partnership

www.gdpni.ie

A recovery in Ireland..... Really??

Whereever you look at the moment there is conflicting evidence in the economic recovery of Ireland. House prices we are told are showing some signs of recovery, although this is largely based in the prime Dublin locations yet the country as a whole is back in recession. It's very easy to put a positive spin on stories and bring the small positive to the centre of an overwhelmingly negative situation. Economists have been doing it for decades, some like David McWilliams with a touch of flair and accuracy but the majority of them with about as much success as me predicting the future value of the Nikkei 225. They are often aided and abetted by certain strands of the media that are looking for a good story, almost at any costs.

 Personally I think people respond better to being told the truth rather than being led down the garden path. It is easy to be fooled though. There is a lot of property being sold at the moment, typically it is large lot sales to either very wealthy individuals or large funds that are specifically set up to look for distressed assets that can be turned around. Even financial traders from the bond markets are getting involved, buying a loan book from one of the newly nationalised banks often has a far greater return than anything they can access in their own trading markets. The debt is considered as good as the government and for some there is a profitable play to be had. Whilst the state of the economy is part of the information used to make a decision, the focus is solely on how much money can be made.

 All markets are efficient. The stock market is an exceptionally efficient vehicle. It has bull runs as it races higher and bear stages as it collapses back to normally. It can be over bought or over sold but is always waiting for a correction back to normal levels. The property market is no different, the depth and length of the correction is directly correlated to the extent to which it was overbought. Japan, unfortunately became the poster child for an economy and property market that became the most overheated of modern times. The decades that followed saw deflation, stagnation, currency speculation and consistent economic uncertainty. It is only now, over twenty years on that they are truly seeing signs of turning the corner.

 Why would Ireland be any different. Its a far smaller nation and the correction phase should be easier but there is no way that we are at the bottom yet. The investors mentioned above would agree, they're not interested in picking bottoms in the market, they're only interested in looking at yields versus the cost of carry of the money and what can be achieved elsewhere. If a purchase ticks all of those boxes it will be done, if not it simply won't happen.

There are three phenomenons still to hit the Irish property market, all with negative effect.  Many of the buy to let investments that are in negative equity, all the consensual sales that distressed borrowers have to engage in and all the repossessions that are starting to increase in numbers have to come to the market. It is as simple a case of supply and demand that you will ever see. As more residential property makes its way onto the market, the prices have to fall. Interestingly I have the benefit of working in Northern Ireland over the past twelve months and the observations I would have is what has occurred in that market is now happening in the Republic.

I don't know what its like where you live but in Galway the 'For Sale' signs are popping up everywhere. Gone are the dilapidated signs that have been there for the last four years, mildewed and overgrown with weeds. The new signs are all bold colours and sparkling clean and announcing that there is business to be done. But its not nice business is it. Most are distressed sales, properties where receivers have been appointed or a series of investments that have seen the borrower lose almost everything. It certainly goes against the psyche of the Irish nation. Repossessions have never really been part of the home-owning process but they are now a real and present danger. One hundred and sixty homes were repossessed in the first three months of this year. On its own it doesn't seem like too big a number but its a significant increase on previous months. Add in those properties that have been sold with the consent of the borrower and lender and the number would be significantly higher.

The only ones really benefiting are the estate agents, they had a great time during the boom and for those who survived the initial years of the gloom, its not too bad now either! They provided you with mortgage solutions when you were looking to buy the property. Now that you are down on your knees they are looking to find you a buyer for that very same house at a fraction of the price. It was and is a fee fest, whether you are a solicitor, accountant, insolvency practitioner or estate agent, you get paid whatever the situation. The very real danger is that they are not always acting as aggressively as they should in the interest of those in difficulty. All have a huge interest in staying 'on side' with the banks, after all that is where the majority of their work is coming and will continue to come from for the next five years in this country.

The new Insolvency legislation will advance this sale process further but only if bought into by the banks will we see a re-basing of household debt in Ireland. The problem though is that the banks will retain the say in most applications to the courts and unless they are coerced into the process by the regulators or Central Bank, it will not work. For now though, with repossessions on the increase, it is more important than ever that you stay engaged with your lender and seek good independent advice.  The idea of holding onto your property portfolio if it is in negative equity, simply will not be allowed to happen.  As time moves on and interest rates rise which will happen at some point, the pain threshold will increase yet again – not a nice thought really for everyone.

Banks and Provisions - One huge Black hole!

Over the past few weeks its become clearly obvious that many of our banks in Ireland are really struggling to work out how to deal with the ongoing property market collapse and banking crisis. Most at this stage have employed their own internal property, planning and accountancy professionals to gain a better understanding of where things are possibly heading, however their overall plan seems more and more flawed as each day passes.

 The reality in Ireland is that there is no bank lending going on, there won't be any lending in the short to medium term and banks are getting smaller, closing down branches all over the place. What does that tell us ? Well one thing it does tell us is that money is scarce and lending a thing of the past.

Today in Ireland apart from one of the banks who have told everyone they are exiting the country, and are taking a very commercial position regarding winding down their book, the rest are really struggling to work out how best to deal with the problems they face. Most are obsessed with putting their customers who on many occasions they lent the money willy nilly in years gone by through hoop after hoop after hoop. A trend of very late is that some of the banks are refusing to take offers which have been made on the properties, with the reason being, -- we have that on our books at a higher value!!!! So let me get to the point on that very note.

 

Provisions.... "A balance sheet item representing funds set aside by the bank to pay for losses that are anticipated to occur in the future. The actual losses for the earmarked funds have not yet occurred, but the general provisions account is counted as an asset on the balance sheet. For banks, a general provision is considered to be supplementary capital under the first Basel Accord." 

So generally banks are minded to not sell any property that does not fall within their provision threshold which is understandable - therein lies the problem and big problem I would suggest.  If an offer comes in lower than what the bank have provisioned for then they are inclined to knock back the offers. Very simply if the banks are doing their jobs correctly and valuations accurate, then the provisions on the loans would all in line with where the market really is, so when the customer tries to sell the property on the open market and an offer comes in on the property, the bank would be inclined to accept the bid right? Wrong actually.  The major issue affecting banks in Ireland today and becoming more and more evident is that the banks are not strong enough to take the losses that are heading their direction as a result of the property collapse and they're own provisions on the toxic loans are ambitious to say the least.  This is a huge problem and as the property market continues to fall for different reasons, the problems for the banks will continue to intensify  - in fact its the banks worst nightmare.  Recently the Financial Times reported that the British banks are looking at a £40billion black hole in their balance sheers  fro this very reason and to be honest, its looking more likely that there is a significant black hole on the balance sheets of the Irish banks - its just no one knows the extent of it which is worrying!

In 1998 I qualified in Estate Management and the definition of market value back then was; "

 

Market value is the price at which an asset would trade in a competitive auction setting price after an accepted marketing period."....  15 years later and this definition remains the same - in fact, It has never changed. So when a banker tells me that they are not prepared to accept the offer for an asset which has been on the market and marketed fully for an acceptable period of time, I know that they simply have not provisioned properly for that property loan.  The issue then being that in 18 months time the market value in a depressed marketplace will be less than that of today- a never ending spiral.

You see I understand property, I have been qualified for quite some time, I understand the markets and understand the risks. The issue is the people you speak to in the banks often do not have the same level of understanding and the decisions being made at credit level often do not make any commercial sense and it seems that they are gambling on the market returning to some kind of normality or in some cases it would appear they haven't really given their decision much thought at all.

The property market will continue to flounder along the seabed in Ireland for the next 5-10 years, in fact until credit returns.  Banks need to smell the coffee and sort themselves out, get their provisions in order and stop trying to dictate to the market what Market value is. If they continue on their current policy they're will only be one outcome for them all - more pain and potentially a fatal end to their business affairs on this island. 

 

 Conor Devine MRICS