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Moral Hazard

Irish people stopped paying mortgages in their droves after a ruling blocked the banks from evicting

The Dunne Judgement from July 2011 stated that banks could no longer foreclose until new legislation was brought in on the issue.

shutterstock_530930494 Shutterstock / Rtbilder Shutterstock / Rtbilder / Rtbilder

IRISH PEOPLE STOPPED paying their mortgages in their droves after a court ruling blocked the banks from repossessing their homes, according to a Central Bank paper.

The ‘economic letter’, by economist Terry O’Malley, refers to the July 2011 ‘Dunne Judgement’ (Start Mortgages v Gunn, which can be read here) in the High Court, which ruled that the banks couldn’t evict people from their homes until new legislation on the matter was introduced.

“I find that borrowers did in fact default more than they otherwise would have, if the repossession regime at the time had been legally upheld,” O’Malley says in his paper.

The paper discusses the issue of ‘moral hazard’ – that is, trading off the benefits of less repossessions against the problem of people feeling free from repayment obligations because the threat of foreclosure no longer exists.

default Graph depicting the spike in mortgage defaults seen after the Dunne Judgement in July 2011 Central Bank / Terry O'Malley Central Bank / Terry O'Malley / Terry O'Malley

“Drivers might be more willing to take risks on the road when they know their car is insured against damage,” O’Malley says.

Comparing the rates of default both before and after the landmark decision of Justice Elizabeth Dunne, O’Malley concludes that the rates seen after the judgement were 0.5% higher in each quarter for a year afterwards.

However, the economist does clarify in his conclusions that ‘only borrowers with the most to lose from continuing to pay default after repossession risk is removed’ – and that ‘strategic default’ (ie a borrower not paying even when they have the capacity to do so) is not common among Irish mortgage-holders.

You can read the O’Malley economic letter here

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