Ireland had one of the larger housing bubbles in the world. I remember visiting the country in 2006 and seeing these brand-new roads and buildings everywhere. The Celtic Tiger included a housing boom, and that went bust in a hurry. For years, the country has struggled under bailouts and austerity programs. The Irish housing market is in a painful state. Prices are 50% below the peak (not that a bubble peak should be the goal), and over half of all mortgages in the country are underwater. Over 1/4 of Irish mortgage debt stands in default.
Now, years later, the Irish government has resigned themselves to do what every country with a housing collapse ought to do – reset the market.
With its economy still reeling from the housing crash, Ireland is making a bold move to help tens of thousands of struggling homeowners.
The Irish government expects to pass a law this year that could encourage banks to substantially cut the amount that borrowers owe on their mortgages, a step that no major country has been willing to take on a broad scale.
The initiative, which would lower a borrower’s monthly payment, could prevent a tide of foreclosures, an uncertainty that has been hanging over the Irish housing market for years. If it works, the plan could provide a road map for other troubled countries.
Unlike HAMP, this involves principal write-downs, long seen as the most effective loan modification strategy to keep people in their homes, with far less downside than banks claim. And the Irish government plans to use the large ownership stake they’ve retained in their banks and mortgage lenders to force the banks to engage in the write-downs. They have already slowed the foreclosure pipeline, as “Ireland’s leaders have considered it socially unacceptable for banks to seize large numbers of homes,” in addition to worries about the real cost of foreclosures. One foreclosure in the US, for example, could cost as much as $250,000 to the economy in lowered property values, local government costs, etc., according to analysts.