Split mortgages ‘best way’ to keep borrowers in the home

Split mortgages are the most effective way of keeping insolvent borrowers in their homes while ensuring that the taxpayer, through ownership of the banks, can share in the upside of the economic recovery, according to the governor of the Central Bank, Patrick Honohan.

The Central Bank has been at the forefront of efforts to tackle the mortgage arrears crisis. In early March it gave the banks targets to offer solutions to distressed borrowers over the course of this year and then treatments over the course of 2014.

There are a number of potential loan repayment modifications in place. “To be sure, the triage process needs to start with the question: is this a distressed case, or one in which the borrower does have the capacity to come back on track? It is evident that a significant proportion of arrears cases fall into the latter category, as seems to be confirmed by the measured characteristics of households in arrears, as well as the practical experience of lenders engaging with borrowers. Getting these cases back on track is a crucial part of what is now needed, said Mr Honohan, speaking at a conference in Dublin yesterday.

The real challenge lies in dealing with unsustainable cases. There will be instances where there is no alternative to repossession, said Mr Honohan. The amendment to the Dunne ruling is necessary to ensure banks can take possession of a home in the event of non-payment. This also acts as an incentive for distressed borrowers to engage with the bank in an effort to come up with a viable alternative.

A split mortgage involves an arrangement whereby part of the overall amount is warehoused. Payments are made on the balance. However, it is important that payment levels are agreed at a level that enables a reasonable standard of living.

The benefit of a split mortgage to the bank is that it gives the bank an opportunity to share in an improvement in the borrower’s circumstances, noted Mr Honohan.

An essential component of a split mortgage is that there should be full transparency to borrower and lender of what happens when the non-warehoused part of the loan is repaid.

Mr Honohan argued that “recourse at term should be limited to collateral value. In other words, the modification agreement should specify that, at the end of the term, any shortfall in the warehouse after sale of the property would be no longer owed.”