Stephen Donnelly (Wicklow, Independent) | Oireachtas source

I thank Mr. Duffy and his management team for their time today. Before we get into the mortgage crisis figures which is the purpose of the meeting, I want to recognise that there has been significant progress in AIB. Some of the figures Mr. Duffy presented on loan-to-debt ratios and operating costs of the bank are all moving in the right direction. While there are various matters with which I will take issue here, at a macro level Mr. Duffy and his management team seem to be turning the bank around and that must be recognised. I recognise that.

The focus of today's meeting is the arrears targets. As the Chairman stated earlier, it was to look at how the banks are doing versus the targets that have been set by the Government. I believe the targets are a genuine attempt by the Government to solve the mortgage crisis. I happen to believe that the targets try to solve the wrong issue. The symptom is arrears. The problem is not arrears. The problem is that Irish households have too much debt relative to their incomes. I have stated consistently that targeting arrears as solving the mortgage crisis will not work. First, it is trying to solve the wrong problem. Second, I was not convinced that the banks would engage in it in the spirit that, I believe, the Government and the Central Bank wanted, which was long-term sustainable solutions.

I want to go back over the figures that have been presented. I take Mr. Duffy's point that this is a single quarter and, as he stated to Deputy Pearse Doherty, maybe this is an unusual quarter, but the purpose of this meeting was to see how the banks have been doing in Q2 against the Government targets. If we go through them, 8,600 offers have been made. Of those, 5,900 are legal letters seeking engagement. While I accept that those letters have to be written, I do not think anyone would seriously suggest that a letter stating the customer must engage with the bank counts as an offer of a long-term restructuring of the customer's mortgage and I imagine that when the Central Bank audit is done, the Central Bank will conclude the same. I appreciate those letters have to be written but I see no justification for suggesting that any of those letters are, in fact, an offer of a long-term sustainable restructuring to a mortgage. Therefore, I would take those 5,900 out.

A further 1,000 are cashflow help and mortgage deemed affordable. In other words, there was no restructuring. Either the bank helped them find extra money to pay it or it determined that they had the money to pay this, were choosing not to do so and needed to start paying it. A further 1,100 are capitalisation of arrears and term extensions, both of which increase the profits to the bank and increase the payments from the lender. They are not a long-term restructuring. They are saying "You, borrower, have €2,000 in arrears. We deem you able to pay that if we roll it into the €150,000 you owe. Therefore, that is the long-term restructuring." Perhaps that is the case in some cases but based on the anecdotal evidence I am seeing on the ground, in many cases, those kinds of offers are not really long-term restructuring of unsustainable debt. It is worth noting that both the capitalisation of arrears and term extensions lead to increased payments over the lifetime of the loan from the borrower.

That leaves us with just 600 offers which are split between the voluntary surrender. I was delighted to hear Mr. Duffy say that in the case of voluntary surrender, AIB is taking the hit. My understanding is that if a borrower owes €200,000, the house is sold for €100,000 and it does not look like the couple could pay any more, AIB is saying that they no longer owe it the remaining €100,000 and that it is making a provision in its books, will never come back after them for that money and is legally surrendering the money. I am delighted to hear that.

We then have about 143 split mortgages. We can disagree on this but as I see it, the long-term sustainable offers that have been made do not number 8,600 but 600. We can argue the toss on the cashflow help and the capitalisation of arrears but what is unambiguous is the nearly 6,000 which are legal letters. I would much prefer AIB to have come here today and say that it has not hit the targets and is doing its best to hit them but is not going to pretend that the 6,000 legal letters are long-term sustainable offers. That would have been a preferable position for AIB to have taken today.

Voluntary surrender is good. The delegation might confirm to me that my understanding is correct but I am delighted to hear that the bank lets the couple or borrower walk away from the difference, which leaves us with the split mortgage. Mr. O'Connor said that the split mortgage is less attractive than one may think. Of course, it is. Ultimately, the split mortgage does not work for the economy. Mr. Duffy said that one of the core strategies of AIB is to return economic growth to the country. Here is why it does not work. The marginal tax rate is 52%. Let us talk about a couple with a split mortgage. Again, I recognise the 0% being charged on the shelved portion, which is very welcome and very different to what Bank of Ireland is doing, which is a disgrace. I recognise that 0%. I thought it was 1% and am delighted to see it is 0%. Here is the problem. I calculate that there are about 650,000 men, women and children in Ireland living in houses - residential, owner-occupied or buy-to-let - in arrears or restructured not in arrears. It is a huge problem and, as we know, it is rising. The marginal tax rate is 52% so there is 48% of any additional income left. Let us say Mr. O'Connor gets a split mortgage and his partner may be out of work to raise kids. One of the parents may be out of work and decides to return to work, retrain, work overtime or get a master's degree and get a new job. They decide that they or the couple are going to better themselves. Here is what the split mortgage does. It says that the Government will take 52% of any additional income coming into the household for the rest of their lives. Of the 48% left, AIB will take 24% so they are left with 24%. It is an effective tax rate of 76% and I have yet to find an economist on Earth who would say that a 76% marginal tax rate is not a massive dampener on economic activity. That is my concern and one of the reasons people are not taking up the split mortgage.

The other problem is that AIB has set the baseline for a reasonable standard of living not against what a person earns but against what the insolvency service has said, plus 20%.

That 20% is good but let us be clear that the service's guidelines allow for a punitive level of living during bankruptcy. It took the Vincentian approach, which was minimalist to begin with, and took things like holidays out of it. One cannot have a holiday. One raises one's children until they leave the house. According to the guidelines one will never be able to bring one's children on holiday or take a holiday oneself. They were always meant as a short-term punitive standard of living. Unfortunately, what is deemed sustainable by AIB and the other banks is to say it does not matter if a household is on two average industrial wages, which would amount to approximately €70,000 or if it comprises two doctors earning €200,000. Everyone is going to this highly punitive standard of living plus 20% and if somebody earns more than that over his or her lifetime, he or she will be allowed 24% of the amount. If that is the best we can come up with, an entire generation of Irish people who should be bettering their financial circumstances and creating jobs and entrepreneurship will be stuck in a debt trap.

After a long preamble, I will now ask the following question. The Blackrock stress test made €2.5 billion of public money available to AIB to deal with residential mortgages. I understand that the write-downs to date comprise approximately €100 million, which is approximately 4% of the aforementioned figure. On the basis that Irish people have made €2.5 billion available to deal with residential mortgages, why is only €100 million being used to write down mortgages in distress?