Facing up to the arrears problem

These are permanent solutions to the arrears problem, and the banks are beginning to realise that — four years on from the beginning of the crisis.

THE procession of bank executives through the committee rooms of Leinster House this week has done little more than confirm that politicians don’t know the right questions to ask and that the bankers know how to answer those questions without saying anything truly revealing.

The problem of mortgage arrears has been to the forefront of the public debate for nearly four years now but a proper resolution remains elusive. This year it was hoped that targets set by the Central Bank would see “sustainable” solutions offered to the borrowers with the most significant arrears.

Almost as soon as the targets were announced it was clear that the changed incentives introduced by the targets could lead to unintended consequences. The purpose of the targets was for the banks to offer restructured mortgages so as to ensure they did not fall further into arrears.

The most straightforward way to do this with struggling borrowers is to terminate the loan. In the case of mortgages this means a forced sale or outright repossession of the property. This is just what many of the banks have done. They have looked at their most delinquent borrowers and made “offers” stating that legal proceedings will be initiated to end the loan agreement.

These are permanent solutions to the arrears problem but it was not the intended outcome when the Central Bank issued their targets earlier in the year. The intention was that the banks would roll out restructures such as reduced interest rates and split mortgages that can offer tangible assistance to those in arrears.

The banks are slowly beginning to offer more of these but not necessarily because of the Central Bank targets. The targets could never be a solution to the overall crisis, particularly as they did not cover all mortgages. Lenders who have left the market such as Start Mortgages, Bank of Scotland (Ireland), and Irish Nationwide are not subject to the targets.

These lenders have by far the worst levels of mortgage arrears but no plan has been put in place to deal with them. One reason for this could be that because they no longer have a presence in Ireland, there is nobody for the politicians to haul in and make long-winded speeches at. They may not have a presence but the legacy of their lending remains and cannot be ignored.

Interest rate reductions and split mortgages are costly measures for the banks to introduce. In both cases the banks require the borrower to make a particular payment for a probationary period of around six months before the restructure becomes permanent. The banks have been slow to act but now have a stream of borrowers coming through this probationary pipeline.

It would not be fair to suggest all of the blame lies with the banks. They can only determine if the benefits offered by a reduced interest rate or split mortgage is suitable if the borrower presents details of their situation and financial position. The banks will not offer these concessions to a borrower who ignores all attempts to contact them. A borrower cannot pretend to be in difficulty and expect to get a better deal on their mortgage.

It must also be accepted that there are mortgages which will never be repaid no matter what forbearance measures are available from the banks. These loans should be ended, with the value of the house offset against the loan amount. Any shortfall should be written off after a set period of, say, three years.

The profligate lending of the boom means there are mortgages that will never be repaid. It is not reasonable to keep people in a property if they have gone years without making a payment on it. This is particularly true in cases where the property exceeds a household’s accommodation needs.

There are around 100,000 households showing some forms of mortgage distress. This is less than 6% of all households in the country. Of these, many will get back on track without any intervention as the reason for their missed payments will be only temporary in nature.

There will be another large group who need some assistance to get back on track. This can involve a temporary interest-only period, a term extension, or arrears capitalisation. In the majority of cases this will allow the borrower to get back on track.

There are around 20,000 borrowers who need an intervention with more of an impact. The slow rollout of interest rate reductions and split mortgages is a start on addressing many of these.

Finally, around 10,000 borrowers will not get back on track with the above measures. Voluntary sales and repossessions may be unpalatable but it must be accepted that there are a minority of cases in which they are the correct outcome.

Seamus Coffey is Professor of Economics at University College Cork

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