Banks will eventually have to write down mortgages in arrears for more than 90 days to their repossession value as part of a comprehensive strategy to deal with the crisis.
The move is part of a plan laid down by the Central Bank to deal with the mounting crisis that will also see repossessions rise.
The Central Bank has given the six borrowers covered by this strategy — Bank of Ireland, Ulster Bank, AIB, PTSB, ACC, and KBC — targets for the banks to propose restructuring solutions over the course of this year and next.
The banks will have to have proposed solutions in place with 20% of distressed customers by the end of June, rising to 50% by the end of the year and the balance over 2014.
The banks will then have to meet a second set of targets, which includes agreeing revised repayment terms with distressed customers from the end of this year and over the course of 2014. The Central Bank will audit the banks throughout next year to ensure they are meeting their individual targets.
The third set of targets include ensuring that 75% of the revised mortgage terms are “sticking” and that mortgage holders are abiding with the new terms.
During the course of these audits, for any mortgage still in arrears over 90 days, the banks will be compelled to write down the value of the mortgage to the repossession value minus repossession costs.
If the Central Bank decides a restructured mortgage has not been put on a sustainable repayment schedule, the bank will also be forced to write down the value of that mortgage to repossession value.
Any bank that does not meet its targets will be obliged to increase its capital reserves. The banks will have to take these provisioning charges in their financial year 2014 accounts.
Finance Minister Michael Noonan, said he does not expect the banks will need to raise extra capital because of extra provisioning or additional capital charges.
However, if the banks have to raise fresh capital, then Mr Noonan would expect Bank of Ireland to tap private investors. If AIB and PTSB need another capital injection, he said he would look to change the management teams for allowing this to happen.
The Central Bank said it would not be prescriptive about what solutions the banks offer distressed customers. Potential solutions include interest-only mortgages and split mortgages.
If, at the end of the restructuring, the mortgage is still unsustainable, and the banks take the view that the position is untenable, then the option is to proceed towards personal insolvency arrangements. Then the issue of voluntary surrender of the house or a legal repossession comes into play.
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