To pretend that there is no cost associated with ignoring the problem of mortgage arrears is a fantasy that needs to be confronted, writes Brian Hayes.
The strength of our insolvency system and the accommodating approach of our courts process are among the factors referenced publicly around recent outcomes in a number of high-profile cases of long-term mortgage arrears.
There is no disputing the role of the insolvency system and the courts in helping to keep people in their homes. Nor indeed the role of banks and other lenders in this regard: As reflected, for example, in the 94,000 owner-occupied mortgage accounts that were in arrears and which have been restructured; and the fact the level of home repossessions by lenders in Ireland is very low by international standards.
All of this evidence suggests that speculation about a ‘tsunami of repossessions’ is extremely wide of the mark. What is open to question, however, is the notion that this accommodating approach provides for “winners all round”.
Notwithstanding the merits of this accommodating approach, we are fooling ourselves as a country to believe that these decisions do not have a cost: A cost borne by over 95% of all mortgage holders who have paid their mortgage in full and on time. It is more than mere coincidence that average mortgage rates in Ireland are among the highest in Europe. Why is this?
It’s because the Irish mortgage market is regarded as presenting a higher risk than most other mortgage markets across the EU. That perceived higher risk stems from the legacy of mortgage arrears — we have one of the highest levels in Europe. As a result, mortgage lenders here are required to set aside more capital than their European peers against their mortgage loans.
In effect, this means that they have to hold €50 for every €1,000 they lend out in mortgages compared to a European average of €16. Crucially, this applies to new market entrants just as it does to existing providers. The more capital a lender has to hold, the more it costs lenders to make those loans and the more borrowers have to pay for them.
Well it certainly isn’t helped by the fact that the Irish market has one of Europe’s most elongated timelines for repossession through the courts. It can typically take a lender 42 months to repossess a property through our courts process. This compares to 18 months in the UK, Denmark, Norway, and Sweden, 24 months in Finland and the Netherlands, and 30 months in Austria and Germany.
Secured lending is based on the idea that an asset underlies each new loan. If that loan cannot be serviced by the borrower there must be recourse for the lender to secure the asset. Without that secured lending has no meaning. In effect, the cost of providing a loan, where a bank can rarely get access to the asset under the loan, should be much higher in source and service. It’s the difference between secured and unsecured lending.
Mortgage lenders here are required to manage their mortgage arrears through a range of legislative provisions and Central Bank codes of conduct which is considered by some independent, informed observers to be very extensive by international standards.
Could it be that potential market entrants view the Irish market as inherently risky? That is certainly our sense. And could this explain why we’ve seen so few new mortgage market entrants over recent years?
As the representative body for firms licensed to provide financial services in Ireland — domestic and international — we support open and effective competition in the marketplace. It is not in the interest of Irish consumers or the reputation of the country that Ireland be seen as a place where debt can be simply ignored.
We openly welcome new players to this marketplace who can further enhance competition to the benefit of borrowers and lenders alike. But why is it that hardly any new lender wants to enter the Irish market? We need to honestly answer this question.
The retail banks in Ireland have a fundamental responsibility to work with all stakeholders, from the Central Bank to borrower advocacy and representative groups, to address as effectively as possible the blight that is mortgage arrears. Our working relationship with the State-sponsored Money Advice and Budgeting Service (MABS) is particularly strong and of long-standing.
By this means we have, on behalf of our members, developed and agreed with MABS various protocols which aim to facilitate and support constructive borrower-lender engagement. This work is contributing significantly to keeping as many people as possible in their homes.
Our message to people in mortgage arrears is simple — please engage with your lender. Solutions in a great many cases can be found. We need a balanced debate in this area that reflects the concerns of lenders and borrowers. But to pretend that there is no cost for borrowers, no cost to lenders, no cost to competition policy in Ireland in ignoring the problem of mortgage arrears is a fantasy that needs to be confronted.
Banks made huge mistakes in the past. That is certain. But what is not credible is for Ireland to become some kind of outlier when it comes to having an efficient, competitive and open approach to retail bank lending. The basic rules that apply to credit formation across the increasingly integrated eurozone banking system need to apply to everyone, lenders and borrowers.
Without that certainty Ireland will not be able to realise the full potential of new investments, especially in the critical area of housing and mortgage financing.
Brian Hayes is chief executive of the Banking and Payments Federation of Ireland, the representative body for the banking, payments, and fintech sectors.