Ireland Passes Law to Bolster Housing
Ireland’s Parliament passed a sweeping new law on Wednesday that could let thousands of borrowers reduce the amounts they owe on their mortgages.
The impact of the so-called personal insolvency bill, which overhauls several aspects of Ireland’s consumer debt laws, will be closely watched in other countries still grappling with housing busts.
The bill contains a groundbreaking measure that would let stressed borrowers work with their banks to write down the value of their mortgages. The intent is to make the loans more affordable and avoid a wave of foreclosures.
In America and Europe, officials have generally shied away from policies that would make mortgage write-downs a major part of efforts to clean up their housing messes.
In a news release, Ireland’s Department of Justice and Equality, which handled the legislation, said the bill was “a fundamental part of the government’s strategy to return this country to stability and economic growth.”
The department acknowledged that the part of the bill that could lead to write-downs was unorthodox, saying it introduced “a concept unique in international insolvency law.”
The law, however, may not translate that readily to the United States.
There have been very few foreclosures in Ireland. The government owns large stakes in the biggest mortgage banks, and officials instructed the banks to refrain from repossessing large numbers of homes. As a result, uncertainty hangs over struggling households and weighs on the banks. The new bill aims to resolve that limbo.
Banks are expected to work with borrowers to make their mortgages payable. Where deals are possible, the borrower and the bank will be on a much more certain footing. Where there is too much debt, the banks will have more leeway to foreclose.
Nearly 18 percent of Irish mortgages on first homes were in default at the end of September, according to the Central Bank of Ireland. Ireland has nearly $ 150 billion of mortgage debt on first homes. Defaults are also high on mortgages taken out on investment properties, a big part of Ireland’s housing market.
Though the new law was constructed carefully to avoid unintended circumstances, it still carries significant risks.
It could prompt borrowers to default even if they can afford to repay the loan. That could lead to unexpected losses for Ireland’s banks, which could undermine their ability to finance a recovery. In a letter in September, Mario Draghi, the president of the European Central Bank, expressed concern about the potential costs the bill could place on Ireland’s banks.
The banks could still decline mortgage write-downs even when they may help borrowers. As the law is written, a majority of creditors have to agree to a write-down. Consumer advocates have criticized this part of the bill, saying it tips the balance of power in favor of the banks.
Alan Shatter, Ireland’s minister of justice, responded to those concerns on Wednesday. In the department’s news release, he said, “The reality is that it is in the best interests of both debtors and creditors to seek to conclude an acceptable and workable bilateral arrangement.”