The Government’s approach to mortgage arrears is unravelling

The Government’s approach to mortgage arrears is unravelling
Ulster Bank CEO Gerry Mallon: ‘Ten years on from the crisis, the level of non-performing loans in the sector is still out of tolerance.’

By Eugene McErlean

Recent weeks marked a significant turning point in the long-running mortgage arrears saga where the policy of kicking the can down the road has started running out of road.

First, we had a key intervention from Edmund Honohan, the Master of the High Court, who reports from the coalface about the impending repossession crisis.

Mr Honohan said he sees people in courts on a daily basis who are struggling to hold off repossession and has observed the inadequacy of the State system that is meant to help them resolve their problems.

The picture painted by Mr Honohan is a far cry from the positive outlook of five years ago when the former minister of finance Michael Noonan, announced the Government’s plan to tackle mortgage arrears putting new legislation, structures and processes in place to deal with the issue.

These included setting targets for the six main banks.

By the end of 2013, half of customers were required to have a sustainable solution worked out with their lenders.

The Central Bank was to monitor the performance of the banks against the targets and take appropriate action in the event of banks failing to meet them.

Mr Honohan’s assessment of how that policy has worked out in practice is less than flattering.

Towards the end of last week came the news that the Department of Finance had challenged the European banking watchdog’s classification of restructured home loans as non-performing.

The ECB wants Irish banks to return to normal levels of non-performing loans, or NPLs, with the result that Permanent TSB has decided to put billions worth of loans up for sale in an attempt to reduce the huge level of NPLs on its books in a bid to reach the target level of 5%.

Ulster Bank also made a similar announcement in recent weeks stating that it was preparing to sell off part of its loans in arrears in order to reduce its NPL levels.

Its chief executive Gerry Mallon said: “There is a regulatory requirement for us to reduce our non-performing loan book. That’s the view of the ECB.

“Ten years on from the crisis, the level of non-performing loans in the sector is still out of tolerance. They require us to get to around 5% of our total loan book in non-performing loans. We’re currently at 16%”.

Both lenders announced they were setting aside extra provisions to accommodate the likely reduced value they will receive for the loans compared to the value on their balance sheets.

These announcements mark the unravelling of the Government’s approach to resolving the decade-old mortgage arrears crisis.

Mr Noonan’s case-by-case approach for individual debt resolution enabled the banks to set their face against any solution that involved the writing down of the value of the loan on their balance sheets.

This week the immovable object of “no write down” has met the irresistible force of ECB prudential requirements.

It appears that in order to bring NPL levels back into line the only option for banks is to sell sections of their impaired loan books in bulk to vulture funds at a discount.

The irony is that had this discount been applied on an individual case-by-case basis then sustainable long-term solutions would have been available to help resolve many of the cases that appear in Mr Honohan’s court.

The strategy of keeping defaulting borrowers in limbo with interim and partial solutions that do not involve the actual writing down of the debt has resulted in this impasse.

From a prudential point of view, the ECB is exactly right.

It is not sustainable for banks to continue to operate with these extended levels of non-performing loans and the sooner the situation is resolved the better.

It was surprising that the Department of Finance’s response to this impasse is to lobby the ECB to change the rules.

No matter what arguments may be made about the perils of selling mortgages to vulture funds, the solution to that problem is unlikely to be found by the department challenging the ECB’s definition of what constitutes a performing loan.

A better course would be to consider Mr Honohan’s proposals, which appear to involve practical solutions.

Instead of selling to vulture funds, the loans could be purchased by a State-funded “friendly vulture” co-operative scheme that would take over the non-performing loans and remove them from the banks books.

Mr Honohan noted that because there is no public money available for mortgage-to-rent, ethical co-operative funding “should be allowed to come in and take up where the State has abysmally failed”.

This proposal would have the added advantage of not requiring any deviation from the ECB’s prudential requirements.

In any event, let’s hope that we can work towards a new policy such as Mr Honohan’s that avoids the vulture funds repossessing too many Irish homes.

Eugene McErlean is an expert on corporate governance and the banking industry.

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