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The Next Wave of Debt

Kathleen Barrington writing in the Sunday Business Post always has a well founded viewpoint.  Her latest article “Living in the Shadow of Negative Equity” warns of more debt to come.  Nama has not reckoned for this debt and the overpayment for developer debt leaves little room to maneuver to help the small guy.  There is no indication that the debt write-off scheme in the new Programme for Government will have the depth of resources or flexibility to cover mortgage debt.  Will we see the usual political inaction in the face of this growing problem even though it is entirely predictable, as we saw for the property bubble amd fiscal revenue collapse?  Here is an extract of Barrington’s alarming article.

The scale of the mortgage debt in Ireland is absolutely enormous.

Duffy notes that there was a huge increase in the level of residential mortgage debt outstanding from €14 billion in December 1996 to nearly €148 billion in December 2008.

On the assumption that interest rates in the EU will rise as an economic recovery takes hold, the cost to borrowers of repaying that €148 billion in mortgage debt is set to increase from its current historic lows. The question is whether borrowers will be able to afford those higher repayments given that the outlook for the domestic economy still looks relatively bleak. Derek Brawn, a former economist and banker, reckons that consumers will be paying almost €500 a month more on a standard €300,000 mortgage in three years’ time. Brawn based his prediction on the assumption that mortgage holders will be paying almost 6 per cent on a standard variable mortgage by 2012.

That’s because the money markets are expecting the European Central Bank (ECB) to begin raising interest rates by July next year, rising 3 per cent by March 2012. Brawn reckons Irish banks will also widen the margins they charge over the ECB rate to the higher levels they enjoyed before the boom, a process that already began when Permanent TSB pushed up rates by 0.50 per cent even though the ECB held rates unchanged at their current historic lows.

What does it mean, however, for the average Joe/Josephine Soap? ‘‘It means 6 per cent home loan rates in 2012 as opposed to the average 3.25 per cent today. A typical mortgagee with a €300,000 25-year loan at 3.25 per cent APR is paying €1,462 per month. That figure will be €470 per month higher in three years’ time’’ Brawn said. ‘‘This will be on top of pay cuts, lower home values, massive emigration, persistently higher unemployment levels and rising home foreclosures,” he predicted. The calculations are based on standard variable mortgages and do not apply to tracker mortgages which consumers may have bought at favourable rates during the boom years.

Brawn, a former economist with Savills Hamilton Osborne King and a former executive with investment banks UBS and Morgan Stanley, predicted that there ‘‘will be less lending and less credit availability going forward, especially compared to before. Plus banks will be lending to fewer people and charging more.” The question is whether those higher interest rates will represent too great a burden for borrowers to shoulder and what will happen if they default in large numbers? Will the government take measures to keep defaulters in their homes at the taxpayers’ expense?

Or will it stand idly by as the banks, which have been bailed out at taxpayers’ expense, repossess those homes and throw the defaulting borrowers out on the streets?

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