Stephen Donnelly (Wicklow, Independent)

Earlier this week I sat down with one of my constituents at her kitchen table to discuss her situation. For the purposes of this example, I will refer to her as Laura. The woman in question is self-employed, has worked for more than 20 years and has paid her taxes. She is a single mother with a daughter in university and, during the boom, she bought a nice semi-detached house in a new estate in Wicklow. Her business clientele comprises mainly young professionals. She was doing fine but, as is the case with many of our constituents, when the recession hit, she was badly affected. In the run-up to the budget of 2010, people became very concerned and stopped spending money. Laura informed me that as this year's general election was approaching, people again stopped spending and, as a result, she fell into arrears for the first time. She said she immediately went to the money advice and budgeting service, MABS, which negotiated a six-month agreement with her bank. She is now back in arrears because the domestic economy remains depressed. People are again not spending money because they are concerned about what the forthcoming budget will contain. Laura is now in negative equity to the tune of between €200,000 to €300,000.

Three days prior to the end of the six-month agreement to which I refer, multiple branches of the bank with which Laura has her business began to telephone her place of work several times each day to inquire what she intended to do to meet her repayments. Before the end of the agreement, one of the bank's debt collectors called to her front door. When she arrived home that day, her daughter handed her a letter from the bank which basically said "We need to talk". It was then that my office first heard from her. I am sure the Minister of State has had experiences similar to mine in this regard. Laura is absolutely distraught, she has not been sleeping and she does not know what she is going to do in respect of her business. She feels humiliated. What really struck a chord with me was when she said she feels violated by what her bank has done. Laura went back to MABS but was informed that it does not have the capacity to help her any further and that she is on her own. She has called in favours with several people and asked them to support her as she attempts to renegotiate with the bank this week.

It is fair to state that every Member of the House wants to solve situations such as that to which I refer. The obvious question that arises relates to why we cannot just write down Laura's mortgage. If she owes €500,000 but can only make repayments in respect of an amount of €300,000, why not just write off the remaining €200,000? If we could afford to do this, it would be a great solution because Laura would be economically productive again, would be able to invest in her daughter's future, would be able to pay the bank as much as possible and would be able to get on with her life.

Two arguments are repeatedly put forward with regard to why we cannot write down mortgages. These have merit but they need to be challenged. The first argument - which I do not accept - relates to moral hazard and is continually put forward in the Keane report. There is a notion abroad that a swathe of mortgage holders are waiting for the opportunity to make gains against the system and obtain write-downs they do not need. There are two aspects to the moral hazard argument. The first of these is that if we write down Laura's debt, she might borrow again, purchase a bigger house and try to get back to the position she previously occupied. The second interpretation is that other people monitoring her situation might decide to work less and reduce their incomes to try to create a false case and obtain a write-down. I do not believe that the first of these aspects of the moral hazard argument is credible. The second is credible but it can be controlled through legislation and by dealing with matters case by case.

The second argument put forward in respect of not allowing mortgage write-downs is that we cannot afford them. The belief is that we own the banks and that, therefore, any surrender by the banks of a call on a loan would essentially mean a hit to the State. In that context, I am obliged to state that we do not own all of the banks. We own one or two banks in full and we own parts of a number of others. However, there are also banks which are extremely active in the Irish mortgage market which we do not own at all.

There is a second aspect to the argument which states that we cannot afford write-downs, namely, what will happen if we do not proceed with them? I return to the case of Laura. If she cannot obtain a write-down, she will find herself involved in bankruptcy proceedings, the bank will inevitably seek to repossess her house and the State will be obliged to rehouse her. She may not work again and may not be in a position to invest in her daughter's future. As a result, there is an immediate cash cost and a longer-term social cost to not allowing write-downs.

What we were all seeking from the Keane report was suggestions with regard to how Laura, and the tens or hundreds of thousands of others who are in similar situations, might be provided with assistance. In referring to the report, the Minister of State, Deputy Penrose, used the phrase "wide-ranging, meaningful and comprehensive". While there are parts of the report with which I am in absolute agreement, especially the emphasis placed on reforming the bankruptcy regime, I do not believe that it is, in its entirety, wide-ranging, meaningful or comprehensive. None of the solutions offered in the report supports the principle of real burden sharing. The split mortgage and mortgage-to-rent models protect, in so far as is possible, the value of mortgages for the banks. They do not offer solutions for those who purchased houses for €500,000 but which are now valued at €300,000. These people are in a situation which is unsustainable. The banks will inform those to whom I refer that they should not have borrowed the money and that it should not have been given to them in the first instance. The banks may have given a 100% mortgage or six, seven or eight times a person's income for a mortgage. The banks were the experts and knew the property market was overheated and inevitably property prices would come down, so they are also at fault and should share the cost. There is nothing in the Keane report to suggest that will happen.

The Oireachtas Joint Committee on Finance, Public Expenditure and Reform met representatives of New Beginning, the money advice and budgeting service, MABS, the Citizens Information Board and Mr. Keane. I was impressed with Mr. Keane's presentation but it is fair to say that the burden sharing he referred to is the same type of burden sharing that the people from the banks referred to when they were before the committee. Essentially, the banks would make a provision on their balance sheet because they did not believe they would get everything back from debtors but that would not be passed to the people.

The numbers are important in this regard. After asking the question several times of the people from AIB and Bank of Ireland in the finance committee, two important figures emerged. For AIB, the total value of loans to which it surrendered any legal claim was €600,000. We have given AIB approximately €3 billion to deal with distressed mortgages and the bank has made a provision for approximately €836 million. It has passed on €600,000 of that. Representatives of Bank of Ireland were asked the question approximately six times at the committee and it took an intervention from the Chairman to force them to answer. When we found out the answer, we were not surprised as the figure was zero, or not a single penny. The mindset of the banks is clear: they will make provisions on their own balance because it is prudent accounting but they will go after debtors for everything they can get. The banks do not accept responsibility and although they accept they must deal with the financial consequences, they do not accept any moral responsibility or burden sharing. That is where the Keane report falls down.

I was going to spend most of my time addressing the shortcomings of the report but I am happy that there seems to be a growing consensus in the Houses that although the Keane report has some useful ideas, it is far from enough. I hope my perception is correct. Rather than spend my time addressing the shortcomings of the Keane report, which have been laid out very well by Members in the House, I offer ideas, some of which I submitted for consideration in the formulation of the Keane report.

The first is a debt for equity swap which is critically based on the purchase price of the property. If a house, for example, cost €600,000 and is worth €400,000 now, a debt for equity swap would lead to the bank writing down the mortgage by €200,000, and for that it gets €200,000 off the purchase price, or a third of the house. Working this process benefits the bank because the mortgage becomes sustainable for the mortgage holder, as it can be paid down, and the bank would take a relatively small hit. The mortgage holder would be kept in the house and although he or she would still be in negative equity, the mortgage would be sustainable and could be paid off. I submit that proposal for consideration.

A second idea is not mine but comes from a Government party Member, although I will not say who because I am not sure if he has announced it. We should find a mechanism to treat the negative equity portion of a mortgage as a pension contribution. In effect, it is a negative contribution and until the negative equity is paid off, a person cannot start saving for a pension. By treating it as a pension contribution, it becomes tax deductible.

I will submit more ideas to the Minister. Payments should be set at 30% to 35% of what a household can achieve and bankruptcy laws should be implemented very quickly. There is an interesting mechanism used in the US where the banks are given tax credits for write-downs. An idea was mentioned by Ross Maguire at the finance committee yesterday that could be implemented immediately. We could quickly pass legislation giving the courts discretion in cases where the banks have taken mortgage holders to court. Currently, the banks want to but are not able to apply discretion and we could bring in a law to allow them do so very quickly. I would like the Minister to consider setting up a cross-party working group to pull in elements of the Keane report and what we have heard in the finance committee and in the Dáil before formulating proposals.

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