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Column The mortgage crisis is stoked by mistrust. Here’s how we might fix it.

Aggressive banks are making mortgage resolution impossible, writes David Hall of New Beginning – and suggests a way to restore trust between lenders and borrowers.

WHEN WE TRUST in someone or something we expect that our trust will be respected and honoured.

Over recent years there has been a substantial diminution in the public’s trust in our systems, institutions and political leaders; and in recent weeks we have seen those of the Catholic faith being challenged again by the lack of trust in some of its senior figures.

When someone breaks that trust it is very difficult, if not impossible to regain.

In Ireland our trust in the banking system was shattered in recent years with citizens paying a very high price. We are all too familiar with this story.

This government promised action on a number of fronts. After 14 months in power they still have not introduced new insolvency legislation.

They promised to deal with household – and specifically mortgage – debt. There has been report after report, spin after spin and no action. The Taoiseach was to form a sub-committee of the cabinet and chair it himself; the Tánaiste was frustrated with the inaction of the banks – all fine words but what we need is action.

Many householders are struggling with debt and are making every effort to pay as much as they can. Many are paying more than they can reasonably afford and the economy suffers as a result. If people don’t spend in their communities, the small businesses shut down and then there is more unemployment and more indebtedness.

‘This is a car-crash’

People eat into their savings to make current payments; parents use their savings and income to help children who face eviction. From any point of view this is a car-crash happening in slow motion.

The root of the problem is that the banks are in control. Letters demanding ‘immediate full repayment of debt’ issue with relentless aggression and in a menacing tone. Pay us all the money and interest or vacate the property within seven or 28 days. The latest Central Bank quarterly report states that some 9,000 final demand letters have been issued and that there were 3,000 sets of legal proceedings. This is a small fact forgotten when the banks spin about the low number of repossessions.

Borrowers need and deserve professional representation in dealing with well-funded banks.

Some people will lose ownership of their homes, as the debt is simply too high and their income no longer will support any realistic payment of the debt. But there is a serious discussion to be had regarding the balance of this debt after the house or property is sold.

Let’s be realistic about this debt. I believe there is no issue with a bank asking someone to make significant changes to their budget as long as the bank is realistic and will agree long-term solutions. To try and extract small monies by changing someone’s household budget is in my view unacceptable. Restructure the debts so the borrower has certainty. We need certainty for growth and for renewal. Nobody can begin again when their future can be taken away from them at the whim of some unknown banker.

‘The borrower does not trust their bank’

The key challenge in resolving the over-indebtedness is trust. The borrower does not trust their bank and I believe in most cases the bank does not trust the borrower. It is incredible that in 2012 banks cannot devise a system that will allow transparency for a borrower’s finance.

Maybe a sworn standard financial statement given to the bank by the borrower might be a starting point.

A borrower completing the standard financial statement does so with the bank being the enemy. There is an incentive to declare high expenditure, to use as a bargaining tool with the bank. This may even cause the bank to view the debt as unsustainable by reason of the expenditure being stated as higher than it might actually be. Having a sworn financial statement would be at least a step towards making sure both parties begin the discussions with some level of trust.

And if trust is gone then solving this crisis will be significantly more difficult.

There must be a way to renew or reestablish that trust. But one sure way not to restore that trust is by giving the bank a veto in the upcoming Insolvency legislation. Does anyone believe that if a bank has a veto it won’t use it?

Now the Government has delayed the introduction of the insolvency bill and created yet again an air of fear and uncertainty. Moral hazard is not the issue – it’s government hazard.

Let’s now move on to solutions.

‘The current system does not work’

The current system does not work, as the banks hold all the cards. We may be wasting time waiting on the banks and our Government to act as they have both failed to do so in any meaningful way in the middle of a massive financial and human crisis.

Over the next three months New Beginning will expand its services. We will continue to arrange legal representation for those facing repossession of their family home and who have no representation, advocating on behalf of those in debt and promoting solutions. We will add financial and negotiation services for borrowers to help deal with their creditors.

Borrowers need power to be rebalanced. One way is by borrowers coming together. This is very important in order to give the borrower the best chance of working towards a common aim.

Many debt companies will be established over the coming months but my view is that a more powerful way of finding a solution for the thousands of homeowners in difficulty is through one central organisation representing borrowers. This would give a very strong negotiating position. Dealing fairly with this debt burden is essential for the economic recovery of our country.

New Beginning will play a part and provide vital services to help borrowers and our economy recover by seeking fairness and recovery for all.

David Hall works with New Beginning, a group of lawyers, businesspeople and citizens set up to defend citizens facing home repossession.

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