Stephen Donnelly (Wicklow, Independent) | Oireachtas source

I commend Deputy Joan Collins's proposal.

The proposal would see the mortgages of insolvent borrowers written down to 110% of market value. This would be one specific solution within the new insolvency legislation and I want to illustrate for the House how this would work.

For example, let us take two borrowers, both of whom are insolvent and with no chance of getting out of insolvency in the next five years. They both owe €400,000 and the houses are now worth €200,000. One borrower is a higher earner than the other. Under the new insolvency legislation, here is what would happen. One mortgage would be written down to, let us say, €220,000, which is what that person could afford to pay and live with dignity, the other mortgage would be written down to €300,000, as that borrower is a higher earner and would get a smaller write-down, and after approximately a five-year period, the amounts that had been written down would essentially be written off. There are two advantages to this. First, both borrowers get to stay in their houses and get on with their lives, and second, the minimum write-down required is achieved.

However, there are serious disadvantages. The higher earner is being penalised for being a higher earner by getting a write-down of €100,000 versus a write-down of nearly twice that amount for the next-door neighbour. This creates a very serious incentive for the higher earner to become a lower earner so that he or she can avail of the better write-down. It leads to perceptions of unfairness and inevitably would lead to a certain amount of resentment.

Under Deputy Collins' proposal both mortgages would be written down to €220,000, which is 10% above their market value. The main disadvantage of this is that the banks would end up writing down more money than they would under the new insolvency legislation. However, there are several very serious advantages. The first is that the higher earner is not penalised for being a higher earner. The deal is more transparent because it is the same deal for everybody so the banks do not need to hide who got what. Another advantage is a perception of fairness and, of course, it would be very difficult for the banks to do deals. The Minister may have been following developments in the mortgage arrears crisis in that the banks are doing all they can to stay away from the personal insolvency legislation. Some of them are acting more reasonably than others. I ask whether it is better to go through the insolvency legislation or to adopt Deputy Collins' proposal.

Last year I met with some IMF officials who pointed me to recent research from the IMF which studied over 100 years of housing crises all over the world and which arrived at three main conclusions. First, governments do not tend to become involved in these complicated matters. Second, when governments get involved, it tends to fail and it fails because of perceptions of a lack of fairness - the perception that someone else got a better deal - and because of the complexity involved. Third, the only two successful examples in 100 years were Iceland and Norway - Iceland a few years ago and Norway in the early 1990s. Both of those models, as evidenced by the IMF, are the same as Deputy Collins' proposal; a writing down of the unsustainable mortgages to 110% of market value. This is some serious food for thought.

I acknowledge that cost is the obvious challenge with regard to Deputy Collins's proposal. The banks would have to write down more money. I would like to see a cost-benefit analysis. It is clear there are additional costs and additional advantages. The IMF believes that Deputy Collins's proposal is the only one that has worked anywhere in the world in 100 years. Therefore, it merits very serious examination and some serious cost-benefit analysis because the current process is not working.

Along with other members of the finance committee I met with the chief executives of the four main lenders and with the Governor of the Central Bank, Professor Honohan. I saw threatening legal letters masquerading as offers of sustainable solutions with the blessing of the Central Bank and a huge variance in how borrowers are being treated by banks. Some are being treated quite reasonably while others are being treated very badly. There is a very different quality of offers as between the banks. Split mortgages will essentially result in marginal tax rates of 76% for the next 20 years for people who avail of them; virtually no write-down in capital, in spite of the billions of euro made available for that; mortgages being restructured in such a way that they will suck the cash out of the economy for many years to come.

Deputy Collins's proposal does require more capital but it is the model that worked in both Iceland and Norway. Unfortunately, the process as I see it evolving here is taking us down the path of Japan where boom time debts were locked in for many years and Japan saw two decades of economic stagnation.

While Deputy Collins's proposal is being considered there is an interim solution which achieves the benefits of what she is trying to achieve without the very great capital requirements which may be required. It is a debt for equity solution.

If we return to the previous example the mortgages would be written down to what is affordable, not necessarily to 110% but affordable for the two borrowers. The bank would take an equity stake of the difference which they would get back at death from the estate - hopefully in very many years' time. The advantage is that both borrowers get to continue with their lives. Critically, the banks are not going to knock on their doors and take more money if the borrower's economic situation has improved. This proposal is transparent and fair. It does not require the additional capital from the banks. There is no potential stigma attached because the bank gets paid back in full. Critically, it does not encourage the higher earner to try to earn less so that he or she can get a better write-down.

I would like the Government to undertake a rigorous cost-benefit analysis of Deputy Collins's proposal, on the basis that it is the model that seems to work. I draw the attention of the Minister to the fact that the current process, as it is evolving in front of us, will lock-in economic stagnation for many years and unnecessarily. I ask the Minister to look at the debt for equity solution which I would be very happy to discuss with him. I believe it achieves many of the advantages Deputy Collins is seeking without the potential capital implications for the banks and the State.

See this speech in context