Central Bank study looks at home arrears

Lenders are more willing to strike new permanent deals with troubled mortgage borrowers, if they are less distressed in the first place, Central Bank research has shown.

Central Bank study looks at home arrears

The research by Christian Danne and Anne McGuinness set out to determine the circumstances in which lenders strike deals with distressed home loan borrowers.

The latest figures on mortgage arrears for the end of March showed 85,989, or 11% of residential home loan accounts were in arrears.

A huge number of all accounts - 120,447 mortgages - have so far been restructured since the financial crisis, and 87% of these account holders are meeting the new terms of their deals, including arrears capitalisation and permanent split mortgages.

Critics of the current restructuring regime say the number of people failing to meet the new terms of their new loans is too high and shows that the banks need to offer debt writedowns.

The new research finds households carrying a large amount of non-mortgage debt and who have a relatively high level of mortgage debt to the value of their home lessens their likelihood of meeting the terms of the new modified loans, in full.

“This suggests affordability, employment status, housing equity and indebtedness are all important factors of successful modification,” according to the researchers.

The research, called ‘Mortgage modifications and loan performance,’ is the first to examine why lenders offer modifications and the success of borrowers have in meeting the new terms.

It finds having a job boosts the likelihood borrowers will meet their new agreements, while filing for a divorce ahead of agreeing a modification lessens the likelihood that the homeowner meeting the new terms after 12 months.

“Our findings suggest that permanent modifications are typically applied to less distressed borrowers.

"These borrowers are deemed by banks to be more viable in the long term, especially given that most are granted arrears capitalisations which is the most expensive permanent modification,” the research finds.

“Further, loans classified as successful in our methodology will not necessarily result in full repayment of the interest and capital due on the mortgage.

"Therefore these loans continue to pose a risk to the health of the Irish banking sector and require continuous monitoring,” they say.

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