Left to their own devices, Irish banks will do little to solve their own mortgage arrears problems but some policies to clean up the loan books may make matters worse, according to the Central Bank, writes Eamon Quinn.
The new study reviewing the Central Bank’s policies of the huge arrears issue was written by its own staff members, including deputy governor Sharon Donnery, who also chairs a major group of the ECB on non-performing loans, or NPLs.
The new paper sets out the costs of doing nothing about the mortgage arrears and other types of NPLs held by Irish banks, which have among the highest burdens 10 years after the start of the financial crash and despite the huge economic upswing in recent years.
According to Central Bank figures, the overall value of all arrears on all mortgages in distress stood at over €2.51bn at the end of 2017, while the outstanding mortgages on those accounts stood at almost €12.82bn.
High-levels of NPLs weigh on banks because they eat up capital which in turn means banks curtail lending to firms and households, possibly by significant amounts in countries like Ireland with large amounts of soured loans. Detailing the history of the introduction of mortgage arrears codes nine years ago, the paper says the Central Bank remains dedicated to protecting borrowers. It says 2,722 of the 8,195 homes that changed ownership since late 2009 were due to court repossession orders. The rest were surrendered voluntarily.
The paper also deals with some aspects of the current controversies surrounding banks and mortgage arrears, saying the existing protections given to mortgage borrowers travel with them when their loans are sold by the mainstream lenders to unregulated banks because the existing Credit Servicing Act guarantees the same consumer safeguards.
Political pressure brought by opposition politicians to change the regulations surrounding the sale of residential mortgages to so-called vulture funds has embroiled the €3.75bn sales plan of residential and buy-to-let loans by Permanent TSB and a similar plan formerly hinted at by AIB.
Advocates such as the Free Legal Aid Centres, or Flac, have long said that the failure rate, of 13%, in the number of restructuring deals struck between lenders and distressed borrowers throws light on serious shortcomings in the current regime.
Advocates for households in debt have said the failure rate of deals which are supposed to be sustainable shows that the debt burdens are not sustainable in the first place and that lenders should be encouraged to write down mortgage debt.
In the paper, the Central Bank says that people in long-term arrears who had engaged with the bank were “significantly more likely to receive a short-term restructure arrangement than those currently in earlier stages of arrears”. It warns about taking policy decisions “outside of the scope of” regulators because it may complicate reaching deals with existing borrowers in arrears, as well as “undermine payment discipline, and may lead to lower supply of mortgage credit or higher interest rates for the overall market in the future”.
Reviewing the progress in dealing with NPLs, it says its policies are driven by “putting the fair treatment of those in financial distress at the centre of the Central Bank’s response to the crisis”.