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Negative equity insurance is not the answer

Negative equity mortgages are slowly creeping into the Irish property market to try and help families unable to sell up to move house.

But the deals are private and the banks certainly don’t like admit they are doing them.

Now along comes an insurance company with a “negative equity insurance” product to try and help sellers shift property at a time when prices are still falling.

Financial services company IFG reckons its product will enable home-buyers insure against a drop in property prices.

Under the scheme the seller would forego some of the cash proceeds of the sale and lodge them in a trust which would be paid out to the buyer in the event of a property price fall.

So, if for for instance, a customer bought a house for €200,000 (£173,000), 10% of the amount paid would be held in trust for between one and four years. If the value of the home drops by 10% by the end of that period the money would be taken from the trust and paid out to the buyer.

Clever people over at ING. The risk is shouldered entirely by the seller – if, for example the property falls by €20,000, the vendor will forego that money.

“The vendor has to fund this out of their own cashflow,” says Karl Deeter of Irish Mortgage Brokers.

So it will only suit those that have a very small mortgage – mainly older people and those that bought long before the peak – because those are the only ones who will make a profit on their property sale.

Deeter is sceptical the insurance is the way to kick-start the moribund Irish market.

“It’s part of the general medical box but it’s not the cure,” he says.

Deeter is of the view that the government needs to bring in a personal insolvency laws urgently, like Chapter 13 in the US AKA, “wage earners bankruptcy”.

Both the UK and the US have long treated personal insolvency in a non-judicial way unlike Ireland’s whose ancient bankruptcy laws which don’t release people from their debts for 12 years (in the UK, it’s one year),

So why, after three years, of a recession, isn’t there so little political will to follow suit?

The bankruptcy laws will be changed within the next six months to enable bankrupts to be discharged of their debts in five years instead of the current draconian 12. But that is not a solution for those whose outgoings are outstripping their income on a monthly basis because of pay cuts or mortgage interest rate hikes.

Chapter 13 is an option for consumers who cannot repay their debts as scheduled, enabling them to repay all or part of their debt at a rate they can afford with a new repayment plan.

It helps people avoid repossession; extend other secured debts over a period of three to five years; and gives them protection against other creditors. During the repayment period, creditors are barred from pursuing collection or contacting the customer directly.

Instead all payments go through an appointed trustee who then distributes the money to creditors on a pro rata basis.

Under the terms of the IMF/EU bailout, the Irish government is obliged to overhaul Ireland’s personal insolvency laws by March 2012. And there’s the rub. The government’s reforms are a result of external pressures and not a recognition that personal insolvency is an everyday part of capitalist economies, recession or no recession. © 2011 Guardian News and Media Limited or its affiliated companies. All rights reserved. | Use of this content is subject to our Terms & Conditions | More Feeds