Another look at that bank deal and what it means for the Pats and Annes of Ireland
Tuesday 5 March 2013Extract from article by Tom Healy. The full article can be found in Shopfloor.
While politicians have claimed victory in terms of possible fiscal easing with an additional one billion, others have cautioned against jumping to this conclusion. There are many uncertainties this year and beyond.
A comparison may be made with a couple – Pat and Anne with three children who took out a mortgage on a house worth €300,000 during the boom years and with a market value of only €150,000 today.
They had got bad advice from people in the bank who pushed all sorts of loans at cheap rates of interest. Then, in 2008, Pat lost his job while Anne had her working hours cut in half.
The couple simply could not pay the mortgage of €3,000 every month. So, rather than lose everything the bank – smartly – gave Pat and Anne an ‘interest-only’ mortgage with special low (variable) interest rates so that their monthly bill only came to €1,000.
They were given an extension on the mortgage to 40 years. This seemed like terrific news at first and there was a family celebration where all the local big-wigs were invited into the party in Pat and Anne’s home.
“A real game-changer,” said the grandparents. “The best possible deal in the circumstances,” added the neighbours who knew how stressed-out Pat and Anne had been recently.
Their dear uncle from Limerick told them how he had bought a house for £3,000 many years ago and paid off the mortgage with one month’s salary years later. “It will all work out well,” he assured them.
For months after, the local moneylenders stopped pursuing them and the Credit Union upgraded their credit standing. However, Pat could not get employment apart from a few hours here and there.
Anne’s wages were increased but the cost of energy, school, household charges and then water charges made it increasingly difficult for them to make the monthly repayment.
Added to this the interest rate doubled over a short period of time (their uncle had not told them that the same thing happened to him back in the late 1980s).
The last straw was when their welfare benefit on part of the mortgage was stopped as part of a combined activation/incentivisation scheme to get people like Pat back to work.
Pat and Anne approached the bank to see if they could stop making monthly paymentns for a while. The bank refused.
A nice solicitor helped Pat and Anne to take a case against the bank having discovered that the house they had bought and which was ‘noted’ and approved for loan approval by the bank in the first place had been built on a flood plain with no solid foundations.
Not only was the bank corrupt but it had received letters from other financiers who lent to the bank to say that under no circumstances should people like Pat and Anne be given a debt-write down on their mortgage.
The letter also said that people lending to the bank – called bondholders – should be allowed to default by having all their money back when due without any reduction in the amount owed even though their loans were now worthless and they had originally agreed to take a risk with consequences.
This discovery of the letter together with the proof of defective house plans was a major breakthrough for Pat and Anne and they now had a perfect legal case to challenge the legality of the whole mortgage contract in the first place – so they thought.
So off they went to court. After much contestation it came to light that what they thought was a mortgage originally was not a mortgage but a strange arrangement referred to as a Promissory Note debt which was very similar to a mortgage but was open to legal challenge according to advice the bank got from its legal team (in fact the bank’s legal teams strongly urged the bank to get rid of the Promissory Note arrangement quickly to make it look like a big win for people like Pat and Anne).
In signing up for an extension in the term of the loan and no repayment of the ‘value’ of the house, Pat and Anne did not fully understand the meaning of a clause written in by the bank that they could never default on mortgage payments and, if they did, they would lose their home.
Things did work out – in a manner of speaking – for Pat and Anne eventually. Pat got a job eventually even though his wages and Anne’s remained very low and both ended up working longer hours than ever.
Decades after all of this happened, Pat and Anne passed away and there was the question of the will.
There were three children and they expected a share in the final estate. However, not only was there no estate but the contract designed by the bank when Pat and Anne got an extension stipulated that, legally, their children and their grandchildren were obliged to repay the debts in full.
This had been pointed out at the time by Pat and Anne’s first solicitor but he had reassured them that inflation and economic growth would make the real value of the debt to their children tiny.
Their children would be earning huge salaries and everything would cost more so that the outstanding mortgage of €300,000 would be worth only a fraction of what it is worth in today’s prices and wages.
Pat and Anne believed this story and took the view that a good deal involving interest-only payments would free up money to pay for the children’s education and welfare.
As it turned out the children were not able to meet the debt payment after the parents passed away so they agreed to a new arrangement with the bank which by now was a major international player earning huge profits and present in many parts of the world.
The debt was simply ‘rolled over’. As Pat said before he passed away: “We will never pay off that debt because we cannot afford to do so.”
This is indeed true and banks and governments know this. This is why they charge a rate of interest on the amounts you and I own. And in the Irish language there is a saying, thíos seal, thuas seal – “down for a time and up for a time”.
The interest rates are very thíos right now across Europe.
Tom Healy is Director of the Nevin Economic Research Institute (NERI)
