Final fate of buy-to-let investors will be decided by politicians - Irish Times

JOHN McMANUS

The banks would like to keep debt forgiveness to a minimum because it’s good banking policy and they are strapped for cash

EVER SINCE Patrick Honohan forced the Government into the open on the bailout in 2010 the Central Bank governor’s every comment tends to be parsed for pearls of wisdom and policy clues.

Last week was no exception with his seemingly routine speech to a student society in Limerick interpreted as a warning to the banks to get serious about sorting out their mortgage books or face having a solution imposed on them by the Government via the new insolvency regime.

The trouble with looking for coded messages to the banks in Honohan’s public utterances is that he does not have to communicate with them in such a fashion. He is the governor of the Central Bank. If he wants to say something to the banks he just calls them in.

There is really only one constituency that Honohan has to play this sort of game with; public opinion. With that in mind the meat of Honohan’s speech would seem to be his exhortation to the banks to throw buy-to-let mortgage holders to the wolves.

His comments should be viewed in the context of a number of decisions that are going to be made over the next six months about the insolvency regime and in particular who will be inside the debt forgiveness tent and who will be outside it.

There is clearly a difference of opinion between the banks and the public on the issue. The banks would like to keep debt forgiveness to a minimum because its good banking policy and they are strapped for cash. Public opinion would by and large favour generous debt forgiveness.

The banks would appear to have lost the first round in this battle following the decision to include secured debts – ie residential mortgages – in the new insolvency regime. The next fight looks like being over buy-to-let mortgages. The new insolvency regime is ambiguous with respect to buy-to-lets and the governor would appear to be trying to draw a line in the sand.

He may well succeed as there is clearly an opportunity to divide and conquer public opinion. Whilst the majority of people – including those with performing mortgages or no mortgage at all – would see some self-interest in residential mortgage forgiveness they may well baulk at letting buy-to-let investors off the hook.

Honohan himself pointed out last week that: “public policy could hardly countenance any debt relief arrangements that in practice discriminated in favour of middle and high income people when so many households – debtors and non-debtors – have had to fall back on social protection payments.”

However, there are more than a few shades of grey here. Not every buy-to-let investor is the same. The individual who bought one overpriced property as a pension is not in the same boat as someone who has 12 buy-to-let apartments. Likewise the young couple who – on the advice of their bank – held on to the first home when the kids came along and they bought the family home.

There is also the whole issue of recourse. There is little to be gained by foreclosing on a buy-to-let mortgage if you then force default on an individual’s residential mortgage on which they will then potentially get debt forgiveness under the new insolvency regime.

Now there appears to be no reliable data that would allow one to even try to estimate what would be the consequences – in terms of forced or strategic defaults on residential mortgages – of foreclosing on buy-to-let. But the Central Bank’s own research shows that 20 per cent of outstanding mortgage debt is owed by small investors.

One can only assume the Central Bank is alive to this and feels it is a risk worth running and no doubt they are influenced by external perceptions and the wider agenda. It does not strengthen your hand when looking for changes to promissory notes and various other measures to hopefully finally sort out the banks if you create the impression that this will result in debt forgiveness for greedy landlords.

Reports from Moody’s saying one in four Irish mortgages could be restructured under the new regime don’t help much either when you are trying to save a banking system.

Thus, from where Honohan sits, buy-to-let borrowers are best left out of debt forgiveness. But it is not his decision. The final shape of the new insolvency regime and the fate of buy-to-let investors will be dictated by politicians and they listen to little other than public opinion. Expect a lot more speeches.

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