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.
The mechanism is simple and one that the US thoroughly rejected as a solution: People will be able to access the bankruptcy courts more easily, adding to the threat of walk-aways. Banks would then see the financial incentive toward write-downs, rather than having to eat the property themselves. Cram-down, the process by which bankruptcy judges in the US could rewrite the terms of a primary mortgage, worked in a similar way, in that the goal was to level the playing field between borrower and lender. If you gave the borrower leverage in the modification process, they would have their modifications satisfied, the theory went. And it’s the same for this Irish plan.
“For the banks, where there are losses, they have to be recognized,” said Alan Shatter, Ireland’s justice minister, who has sponsored the new law, called the Personal Insolvency Bill. “This legislation gives homeowners hope for their future.”
Unfortunately, there are still problems with the bill, as it forces homeowners to jump through several hoops to get a write-down and pay large up-front fees to go-betweens who would work with the banks. But in theory, this would give homeowners a fighting chance.
There remain plenty of losses in the US system as well, but the banks don’t want to take them, and the government has refused to level the playing field. The attempts at mitigating foreclosures have been fairly pathetic. So individual homeowners took most of the losses themselves.
Basically, we had two options: reset the market, or let it come back of its own accord over a period of years, regardless of the consequences for millions of homeowners. And the US chose door number two. Ireland is choosing door number 1, and if they succeed, I’m certain other countries will follow.