Labour’s Planfor Distressed Mortgagesand Household Debt

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EXECUTIVE SUMMARY

Fianna Fáil’s policy of putting the interests of big developers and the banks ahead ofpeople looking to purchase a modest home was a direct cause of Ireland’sdisastrous property boom and bust. The collapse in the economy has left thousandsof people facing unemployment and loss of income, who in turn are facing difficultieswith their mortgages. This has also resulted in huge additional expenditure for theState in a range of housing supports. Labour is committed to helping homeowners indistress to weather this recession, and achieving better use for scarce publicresources.

The burst in Fianna Fáil’s property bubble has left thousands of families in distresswith their mortgages, and many are facing the nightmare of losing their home.

The mortgage crisis is having a devastating impact both on the lives of those peopleaffected by it, as well as on the wider economy. It is well-established that individualsaffected by negative equity or experiencing mortgage arrears are less likely tospend, with consequences for domestic demand.

People in arrears on their mortgages are also likely to be experiencing other forms ofpersonal debt, including car loans, credit card debt and other forms of unsecuredlending. Such individuals are highly vulnerable to a sudden change in circumstances,such as the loss of employment or additional caring responsibilities.

The key focus of Labour’s policy is to assist home-owners currently in mortgagedistress, and who make an honest effort to pay what they can, to keep their homes.There is no one-size fits all solution to this problem. Every case comes with its ownstory and its own particular circumstances. What is required is an approach that iscapable of dealing with what is a complex and difficult problem, at a time when theState’s resources are heavily constrained.

Already, as a result of the recession, the State has incurred huge additional costs inhousing supports. The cost of rent supplement has increased to over €500m peryear (see appendix). As rent supplement is a demand-led scheme, this cost willcontinue to be high, unless action is taken to reduce the numbers forced to claim forrental support, and to reform how the State provides that support.

Labour is proposing a comprehensive package of short and medium term supportsto minimise repossessions of principal primary residences, including:

· A two year moratorium on repossessions. This will give people time tosort out their financial position, and remain in their home.

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· Converting the Money Advice and Budgeting Service into astrengthened Personal Debt Management Agency to provide strongersupport and impartial, professional advice for people in financial difficulties.

· Giving families who make an honest effort to repay their loansprotection from their creditors so that they have time to sort out theiraffairs, by putting the Personal Debt Management Agency on a quasi-judicialfooting.

· Reforming the bankruptcy laws for those who have to take that route.· Making greater use of Mortgage Interest Supplement to support home

owners who cannot meet their mortgage payments, which is a cheaper andbetter value option than paying rent supplement when a person loses theirhome.

· The Central Bank Commission will be tasked with introducing a licensingsystem to regulate debt collection agencies and increasing the level ofregulation of ‘payday’ loan providers.

Labour is also proposing changes to public policy to ensure a more sustainableapproach to housing into the future, such as:

· More comprehensive and intensive scrutiny of credit institutions’mortgage lending practices by the Central Bank and Financial Regulator.

· Providing for a national, publicly-available housing price database.· Taking remedial action to deal with the legacy of bad planning and ghost

estates in the context of a new National Development Plan· Requiring local authorities to carry out an ‘Educational Impact

Assessment’ for all new zonings for residential development to ensure anadequate supply of school places.

· Working within existing resources, introducing a staged purchase scheme toincrease the stock of social housing, while achieving the best possiblevalue for public investment.

· When market conditions normalise, enabling large housing associationsand local authorities to access private sector funding to build or acquiresocial housing by issuing ‘social housing bonds’, secured on the value oftheir existing housing stock.

· Addressing the issue of anti-social behaviour by introducing a twelve monthprobationary tenancy for all new tenants in social housing estates.

· Introducing a ‘housing first’ approach to accommodating homelesspeople that will radically reduce the use of hostel accommodation and theassociated costs for the Exchequer.

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HELPING HOMEOWNERS WEATHER THIS RECESSION

A two-year moratorium on repossessions

People experiencing distress with their mortgages as a result of unemployment orloss of income, come from a range of different circumstances. There is no single oruniform background to their problems, and no one-size fits all solution. A keystarting point to fixing the problem, however, is time. Labour believes that anyonewho makes an honest effort to pay what they can, should not face repossession forat least two years after they first fall behind on their mortgage. This will give themtime to try to get back on their feet, and to work out a reasonable solution that willkeep them in their homes.

In the vast majority of cases, the cheapest and best solution for everyone – thefamily, the bank, and the Exchequer – is keeping a family in their home. Providedthat their house is appropriate to their needs and of modest value, this is the solutionthat causes least stress, least cost to the bank, and the smallest burden for the State.

A two year moratorium for those who are making an honest effort to repay theirloans, and who have a reasonable prospect of being able to repay their mortgage,puts the onus back onto the bank to work out a reasonable solution to the family’sproblems, including using the available State supports where appropriate. As well astime, however, families also need direct assistance in negotiating with their lender.

A new Personal Debt Management Agency

People who are in distress with their mortgage face a range of problems. Often theirmortgage is not their only loan that they have difficulties paying. They areexperiencing pressure from a number of sources, and have to juggle a range ofcompeting pressures. People in these circumstances often need professional andimpartial assistance to engage with their creditors, and work out viable and balancedrepayment plans. To achieve this aim, Labour will develop the Money Advice andBudgeting Service into a Personal Debt Management Agency (PDMA), which willundertake this work, but which will have greatly strengthened quasi-judicial powers.

Securing legal protection from creditors

At present in Ireland there is no means, short of bankruptcy, to give a family indistress protection from its creditors. The Money Advice and Budgeting Service cannegotiate voluntary agreements, but they have no force in law. This is in contrastwith other countries, where a person can be protected from their creditors, withouthaving to undertake formal and costly bankruptcy proceedings.

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Labour will therefore give the PDMA the powers to oversee non-judicial debtsettlement arrangements – Debt Settlement Arrangements and Debt Relief Orders -as recommended by the Law Reform Commission in its recent report on personaldebt.

· A Debt Settlement Arrangement would be a legally binding agreementbetween creditors and a debtor whereby the debtor would repay an agreedamount of personal debt to creditors over a period of time (up to 5 years).Compliance with the Debt Settlement Agreement would enable people to startagain without any damage to their personal credit rating.

· A Debt Relief Order would be made by the PDMA in the case of debtorswhose financial circumstances were such that there was no prospect of thempaying back any debt. The effect of such an order would be to effectively writeoff the debt.

Either the debtor or his/her creditors will be able to request the commencement of aDebt Settlement Arrangement process. Once such a process has been commenced,both the debtor and creditors will be obliged to participate in discussions on thesettlement arrangement.

Labour will ensure that the PDMA deals with these debt settlement arrangements bytaking into account the individual debtor’s entire indebtedness, so that theconclusion of the settlement arrangements represents a fresh start for the debtor inquestion, and there is no additional expense or threat of further costly andproceedings. The PDMA will also be required to ensure that an appropriate balanceis struck between the interests of creditors and the debtor in a specific case, so thatthe processes are not abused by debtors acting in bad faith.

Reform of bankruptcy laws

Irish residents who are unable to pay their personal debts face bankruptcy lawswhich are among the most punitive in the developed world. For those who cannotwork out their affairs through the PDMA, Labour will implement the recentrecommendation of the Law Reform Commission in its report on personal debt toautomatically discharge individuals from bankruptcy after three years, increasethe minimum debt level required to bring a creditor’s bankruptcy petition to €50,000,andstreamline the judicial procedures for bankruptcy.

Reform of Mortgage Interest Supplement

Since 2008, there has been an enormous increase in public expenditure on housingsupports. Within this increase, the number of claimants of Mortgage InterestSupplement scheme has risen significantly. Nonetheless, we believe that this

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are currently unable to pay their mortgages. In 2009 Mortgage Interest Supplementcost €4,079 per claimant household, whereas the average payment under the RentSupplement scheme was €5,490 per claimant household in the same year.Therefore it makes sense to help a family – for a limited period – to stay in their homeand to retain their asset, rather than paying out public money indefinitely in rentsupplement for a family that has lost their home.

In government Labour will reform Mortgage Interest Supplement along the linesrecommended by the Mortgage Arrears and Personal Debt Expert Group (2010).These reforms will liberalise rules regarding access to include some people in fulltime employment who satisfy a means test. We will also introduce more detailednational guidelines on the administration of this benefit by Community WelfareOfficers (CWOs) to eliminate inconsistencies in its availability between differentCWOs and regions of the country. Labour’s strategy will be to curtail the growth inthe amount being spent on rent supplement, by making greater use of what is acheaper and better value for money support.

Labour will instruct the Personal Debt Management Agency to review the cases of allhomeowners who have claimed Mortgage Interest Supplement for two years. Thoseable to meet two-thirds of the interest payments on their mortgage will be eligible fora further three year moratorium on the repossession of their home as recommendedby the Expert Group.

Home owners unable to recommence servicing this proportion of their mortgagepayments will receive a public subsidy to the same value as the rent supplementthey would have received had they rented a home appropriate to their needs on theprivate market. Where rent supplement is sufficient to cover both the capital andinterest portions of the mortgage servicing costs the State will gain an equity stake inthe dwelling which reflects its contribution to the full mortgage costs over the lifetimeof the loan. This scheme will incur no additional costs for the State since the vastmajority of households who have had their homes repossessed by their lender areeligible to receive rent supplement. In addition by taking an equity stake in thesedwellings the State can recoup the cost of supporting a family to stay in their home.We envisage that this additional support will be available for three years only.

Labour will reduce expenditure on rent supplement by setting recipients’ contributionto their rent at a proportion of their income rather than a flat amount (e.g. €20 perweek) as is currently the case. This reform will incentivise recipients to negotiatelower rents with participating landlords. To further reinforce recipients’ negotiatingpower the maximum amounts of rent supplement payable in different localities will nolonger be made publicly available on the Health Service Executive website.

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NEVER AGAIN: ENDING BOOM AND BUST IN THE HOUSING MARKET

Labour believes that both the regulatory system and the housing market must bereformed to ensure that this kind of economic disaster doesn’t happen again.Labourwill reform the housing market to achieve a number of key objectives.

Normalising the market for homes

For the Labour Party a ‘normal’ home market is one in which mortgage lendingpractices are prudent, house price inflation does not sky-rocket, and where the vastmajority of people can afford a family home. Labour will ensure that the Central Bankand Financial Regulator supervise credit institutions’ mortgage lending practicescomprehensively and intensively. Where credit institutions fail to adequately controlmortgage lending risks, the Central Bank will impose loan-to-value ceilings onmortgages, caps on loan-to-income multiples, limits on the term of new mortgages,and more rigorous procedures for verifying borrowers’ incomes.

A well-functioning housing market requires that both buyers and sellers have accessto reliable information on price trends in their neighbourhood, and for differentdwelling types. Labour will improve the quality of information available on the Irishhousing market by requiring that the selling price of all dwellings is recorded in apublicly available, national housing price database.

Strengthening consumer protection

Lax regulation of the mortgage and wider consumer finance market was at the heartof the irresponsible lending and borrowing that ultimately led to the housing collapsein Ireland. As such, far stronger and more intrusive regulation will be a centralelement of Labour’s approach to the area of personal debt generally.

In particular, while Labour wholeheartedly supports the moves of the Central Bankand the Financial Regulator to introduce far greater discipline into mortgage lending,we do not believe that sufficient attention has been paid to certain sections of thefinancial market, specifically debt collection agencies and ‘payday’ loan companies.

On this basis, Labour will legislate to require the Central Bank Commission tointroduce a licensing system to regulate debt collection agencies. In particular, theCommission would be able to withdraw the license of debt collection agencies actingin an unscrupulous or illegal manner by engaging in for example harassment ofdebtors.

Labour will also legislate to ensure that there is far greater supervision of the

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sufficiently scrutinised to date. People in mortgage arrears and experiencing otherforms of personal debt are particularly vulnerable to these companies and there is avery significant danger that already unsustainable personal debt situations couldspiral out of control by reliance on payday loans to pay everyday bills and livingexpenses.

Dealing with ghost estates

Ghost estates are a bitter reminder of the planning failures of the past. They are aheadache for residents of these estates, and for the wider community. Under Labour,the Minster for the Environment will bring forward, as a matter of urgency, a coherentplan to resolve the problems associated with ghost estates. This plan will bedeveloped in cooperation with NAMA and local authorities, and will include, whereappropriate, the demolition or completion of part built dwellings; the acquisition ofproperties by social landlords; or the sale of properties on the open market wherethis is possible. Such remedial action to deal with the legacy of bad planning andghost estates will be in the context of a new National Development Plan 2012-2019.

Looking to the future: planning for liveable communities

Labour will reform how we plan for residential development, to prioritise liveablecommunities, and a healthier, safer environment.

Labour will link planning permission for residential developments to the provision ofpublic transport, healthcare, recreational areas, shops and facilities. As part of this,local authorities will be required to carry out an ‘Educational Impact Assessment’ forall new zonings for residential development to ensure an adequate supply of schoolplaces.

To make the planning process more democratic, Labour will amend the recentPlanning and Development Act (2010) to allow for detailed public submissions onzoning, and to rebalance power towards elected representatives. Local authoritieswill be required to carry out a flood risk report in the preparation of their City andCounty Development Plans, and will also be legally required to manage flood riskthrough sustainable planning and development.

Labour will pass legislation to allow local authorities take housing estates ‘in charge’after three years, and substantially increase existing penalties for those who breakplanning laws.

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High quality, accessible social housing

Working within existing resources, Labour will introduce a staged purchase schemeto increase the stock of social housing, while achieving the best possible value forpublic investment. Under the terms of this scheme, leased dwellings will revert tothe ownership of local authorities and housing associations at the end of theleasehold period.

When market conditions normalise, Labour will also enable larger housingassociations and local authorities to access private sector funding to build or acquiresocial housing by issuing ‘social housing bonds’, secured on the value of theirexisting housing stock. We will direct the Housing Finance Agency to design andoversee the implementation of this funding mechanism, drawing on best practice inthe many other countries where bonds are used to fund social housing projects.

In government, Labour will extend the remit of the Private Residential TenanciesBoard to regulate social tenancies, as well as the private rented sector. This willbring much needed regulation to social housing tenancies, which currentlyundermine tenants’ rights and force landlords to engage in expensive courtprocedures if they wish to terminate a tenancy.

In addition, we will amend the Housing (Miscellaneous Provisions) Act (1992) torequire all local authorities and housing associations to register with the Departmentof the Environment if they wish to access government subsidies or other supports forsocial housing provision. Social landlords will be required to make annual returns tothe Department to demonstrate their compliance with specific financial, housingmanagement and governance standards. Landlords that fail to meet thesestandards will not be eligible for any Exchequer support.

In recent years the standard of social housing management has improvedsignificantly but unfortunately anti-social behaviour remains a problem for many. Ingovernment we will address the issue of anti-social behaviour by introducing atwelve month probationary tenancy for all new tenants in social housing estates. Iftenants or members of their households engage in anti-social behaviour during thisperiod the tenancy will be terminated.

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Homelessness

Despite improvements in policy making, service development, and substantial publicinvestment, the numbers of homeless people remained high throughout theeconomic boom and have recently begun to rise as the economy has declined.

In line with our Comprehensive Spending Review, Labour will alleviate the problemof long-term homelessness by introducing a ‘housing first’ approach toaccommodating homeless people.

Labour will lease-purchase or enable social landlords to build adequate numbers oflong term dwellings for homeless people and fund support staff to enable them tosuccessfully maintain these tenancies over the long term. In this way we will be ableto offer homeless people suitable, long term housing in the first instance andradically reduce the use of hostel accommodation and the associated costs for theExchequer.

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Appendix 1: The Rising Cost of Rent Supplement

Claimants ExpenditureExpenditureper claimant

N € €

1994 28,800 56,884,266 1975.1

1995 31,800 69,454,673 2184.1

1996 34,700 79,485,604 2290.7

1997 36,800 95,611,277 2598.1

1998 40,000 111,736,951 2793.4

1999 41,900 127,702,000 3047.8

2000 42,683 150,740,000 3531.6

2001 45,028 185,800,000 4126.3

2002 54,213 259,900,000 4794.1

2003 59,976 339,300,000 5657.3

2004 57,874 353,800,000 6113.3

2005 60,176 368,705,000 6127.1

2006 59,861 388,339,000 6487.3

2007 59,726 391,466,000 6554.4

2008 74,038 440,548,000 5950.3

2009 93,030 510,751,000 5490.2