This Irish Times report about the extension of the moratorium on mortgage repossessions made me think of an alternative way to get out of the current mess. Here are the key components:
1. The state should put an end to mortgage payment assistance. Although mortgage payment assistance is couched in the language of welfare, it is just a wealth transfer to banks without any corresponding gain for society.
2. End the repossession moratorium.
3. Allow under-water borrowers to walk away from their mortgages if lenders are unwilling to adjust monthly payments to affordable levels. This would just be efficient breach by the borrower. There is nothing wrong with walking away from a contract if one looks at performance and breach as morally neutral choices. Commercial entities frequently make decisions that are purely in their self interest without any regard for moral considerations. Why should homeowners be any different? Lenders will be incentivized to renegotiate payments if the prospect of getting very little for repossessed properties is real (as it would be in the current market).
4. Banks should only be able to reach the collateral (i.e. the house) and not any other asset of the defaulter.
5. Set up a state venture capital fund to buy properties put up for auction by banks.
6. This fund should be professionally managed and only buy properties at open market auctions if there is potential upside. Such a policy will eliminate the moral hazard created by a mandate to buy all properties.
7. Lease out these properties. The rental market is strong and should be able to support funding costs.
8. Sell properties and exit when market recovers.
9. This would allow the taxpayer to get the benefit of the rise in equity, whereas the current payment assistance plan is just throwing money down the drain.
10. It would also allow home prices to adjust to more realistic levels without the artificial cushion offered by the current regime.
11. Key to the proposal is a radical reform of the bankruptcy system.
12. Decriminalize willful debt defaults. Allowing private lenders to use the state's police power for purely private contractual arrangments is anachronistic. If lenders make stupid decisions to extend credit to dodgy borrowers, they must bear the risk. The availability of criminal sanctions skews the bargaining position in favour of lenders and creates incentives for risky lending. There is no reason for taxpayers to subsidize the enforcement costs of lenders; Irish law must shed this antiquated approach to debt default.