Peter Fitzpatrick (Louth, Fine Gael)

I would like to talk about negative equity. Is it that the homeowners cannot afford to pay or is that they are declining to do so because their homes are now worth less than their mortgages, which is known as negative equity? Economists are divided on the relative importance. One school thinks that even in cases of negative equity, most homeowners will not default if they can afford their payments not least because default would affect their credit record. A second school believes that once the home is worth less than the mortgage, homeowners have a significant incentive to walk away even if they can make the payments since in many states lenders cannot pursue them for the shortfall.

Since 2007 those most exposed to negative equity are borrowers who obtained high value mortgages which were commonplace before the credit crunch and they are most at risk if there is a decline in property prices. The term "negative equity" was widely used in the United Kingdom during the economic recession between 1991 and 1996 and in Hong Kong between 1998 and 2003. These recessions led to increased unemployment and a decline in property prices which, in turn, led to an increase in repossessions by banks and building societies of properties worth less than the outstanding debt.

It is also common for negative equity to occur when the value of a property drops shortly after it has been bought. This occurs regularly with car loans where the market value might drop 20% to 30% as soon as the car is driven out of the lot.

This debate about negative equity has grown stronger as the economic climate has continued to descend and the sting of the recession lingers. However, to establish a clear debate, a few issues should be clarified. In addition, certain parameters should be established. Each case must be treated on an individual basis. This is a mammoth undertaking not only in terms of man hours, but also given the cost to the State and financial institutions. The question of whether it can be justified should fall under the remit of a select group. The group should start by seeking people who warrant being considered for support. This is opposed to the approach of trying to eradicate those who should not avail of help. While they may appear to be one and the same, a subtle difference ensures that institutes should err on the side of caution and give borrowers the benefit of the doubt. This approach also prevents a witch hunt in which creative reasons for not including someone are sought. The reason for the purchase of any home needs to be established. Certain reasons would entitle some loans to be the only ones further examined.

It is worth considering whether the mortgage holder provided accurate and honest information at the time of application. It has come to my attention that numerous mortgage holders got their loans with fictitious documents and dishonest statements of affairs. Creative accounting or cheating should not render one credible and worthy of the State's empathy. Furthermore, endorsing such activity should not be considered.

Further knowledge should be sought about one's choice of home. For example, if a couple bought a house to rear a family, settle down and become a part of a community, the question of whether the house appreciated or depreciated in value is immaterial. Those people were never going to sell their homes. Thus, prices and negative equity are irrelevant. People who released equity in their homes for non-family-related activities, such as the purchase of apartments in Bulgaria, going on six-week cruises, etc., should be excused. They have chosen to use their family homes as vehicles to fund their lifestyles or to generate finance for investing in assets. They have used their homes to provide returns. Thus, they have used them in commercial exercises.

It is not for me to guess, but it will be interesting to see whether there is a strong correlation between negative equity and higher-than-standard interest rates. If this is true, as I suspect, it begs the question of whether such people should have received loans in the first instance. If a person's only recourse to a mortgage was via a higher interest rate, it suggests that he or she was a higher risk. I imagine such people's plights were sealed in the hands of non-mainstream lenders. A fundamental question should not be underestimated. Is it that home owners cannot or do not want to pay?

What are the consequences of negative equity? Owing a bank or building society more than one's house is worth means moving is impossible, since one is unlikely to be loaned money by banks. Negative equity also creates a headache for those seeking to remortgage.

The answers to my next questions may add further credence and substance to the debate. What percentage of homes are not in negative equity? What percentage of homes are owned outright with no mortgages? What is their accumulated value? What percentage of homes are mortgaged but are not in negative equity? Will we help those who suffer negative equity in future? Is the benchmark per capita 10%, 20%, 30% or so on? Are there people who are not currently in negative equity but could be in six, 12 or 24 months time? Should the signal we send to society be that we must honour our commitments? These questions must be answered when trying to reach a solution. One must always realise that, on the day one buys property with a 100% loan, one develops negative equity immediately.

A wider unmentioned debate needs to be analysed. The proportion of persons holding negative equity varies significantly by purchase date, deposit size, location and housing type.

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