Mort­gage ar­rears hard cases need to be sorted – and quickly

The Irish Times - Business - - BUSINESS PROPERTY - Cliff Tay­lor

You can choose ei­ther to be up­set or out­raged at the lat­est Cen­tral Bank re­port on mort­gage ar­rears. Up­set, be­cause those in deep ar­rears are, on av­er­age, slip­ping deeper into the mire. Out­raged, be­cause some peo­ple in ar­rears are not pay­ing and have not en­gaged with their banks for years – and so far have faced no cen­sure.

Some peo­ple are fo­cus­ing on the fig­ures show­ing that 60 per cent of the al­most-29,000 house­holds in long-term mort­gage ar­rears have en­gaged with their bank to try to find a so­lu­tion. Oth­ers are point­ing to the 40 per cent who haven’t en­gaged with their bank, many for years.

The com­pli­cated bit is that any so­lu­tion to this needs to take a dif­fer­ent ap­proach to the two groups.

Let’s stand back for a minute and try to put this is per­spec­tive. Two things have hap­pened since the cri­sis broke. There has been a steady re­duc­tion in the num­ber of peo­ple in mort­gage ar­rears as 120,000 loans have been re­struc­tured.

But for a small group in long-term ar­rears it is go­ing from bad to worse. Some 44 per cent of the loans counted as be­ing in ar­rears for over two years or more are, in fact, now in ar­rears for up­wards of five years. That fig­ure is up from 34 per cent a year ago. As econ­o­mist Séa­mus Cof­fey pointed out in a tweet yes­ter­day, it is im­pos­si­ble to com­pare these in­ter­na­tion­ally be­cause this du­ra­tion of ar­rears sim­ply does not oc­cur in other mar­kets.

Fes­ter­ing

Just as the Cen­tral Bank and the banks must be given some credit for, be­lat­edly, get­ting mov­ing in the last few years in deal­ing with ar­rears, they should also be crit­i­cised for let­ting the re­ally hard cases fes­ter.

Now, pressed by the Euro­pean reg­u­la­tor, Ir­ish banks are un­der pres­sure to deal with this. But as we have seen from the de­bate on sell­ing loans to vul­ture funds, which­ever way they turn lies con­tro­versy.

The hard­est cases have been left to the end, pre­cisely be­cause they are the trick­i­est to deal with. More re­pos­ses­sions are threat­ened . This brings us to the am­bi­gu­ity of the Ir­ish home loans mar­ket. Mort­gages are se­cured, but ex­er­cis­ing this se­cu­rity through re­pos­ses­sions is dif­fi­cult and lengthy for lenders, and they can face pub­lic and po­lit­i­cal crit­i­cism.

Draft leg­is­la­tion put for­ward by Fianna Fáil and oth­ers sug­gests it should be made even more dif­fi­cult to re­pos­sess.

The reck­on­ing is com­ing for the hard cases, though given the pace of the le­gal sys­tem, it will be more drip-drip than tsunami. The Cen­tral Bank cal­cu­lates that 14,000 homes are at risk of be­ing re­pos­sessed. To put this in con­text, since the third quar­ter of June 2009, 8,195 homes have been re­pos­sessed, with 2,722 com­ing via a court or­der and the rest vol­un­tary re­pos­ses­sions. Given the scale of the eco­nomic col­lapse, you would have ex­pected a much higher fig­ure. Re­pos­ses­sions are low here by in­ter­na­tional stan­dards.

But where do we go from here? The tricky bit is that there is no “one size fits all” so­lu­tion. In par­tic­u­lar, there is a need to dis­tin­guish be­tween bor­row­ers try­ing to find a so­lu­tion and those who are not. On the Cen­tral Bank es­ti­mates, there are more than 11,000 bor­row­ers in long-term ar­rears who have not en­gaged with their bank for at least a cou­ple of years – and in some cases longer. There are un­doubt­edly some hard luck cases in here. But it is ex­tra­or­di­nary that this non-en­gage­ment has been al­lowed to drag on.

Some banks have pre­vi­ously sug­gested that they should be al­lowed to ap­ply for a sus­pended re­pos­ses­sion or­der for those who do not en­gage – one set at a fu­ture date, which gives the bor­rower time to en­gage and work to­wards another so­lu­tion. What­ever pre­cise mech­a­nism is used, we need a dif­fer­ent – and tougher – ap­proach to deal­ing with those who won’t en­gage.

Those who have en­gaged with the bank but are still in dif­fi­culty will get more sym­pa­thy. In many cases, tem­po­rary so­lu­tions were of­fered – in­ter­est only pe­ri­ods, for ex­am­ple – which only kicked the can down the road. In some cases, the fi­nan­cial dis­tress of the bor­rower means even re­struc­tured re­pay­ment plans are not af­ford­able.

Banks, reg­u­la­tors and the last cou­ple of gov­ern­ments have al­lowed this to drag on. Some so­lu­tions are start­ing to emerge. Mort­gage to rent, with a hous­ing as­so­ci­a­tion or other non-for-profit body tak­ing own­er­ship and rent­ing the houses back to the oc­cu­pants, is an ap­pro­pri­ate so­lu­tion for many and need to be de­vel­oped fur­ther as a scheme . The in­sol­vency leg­is­la­tion, mean­while, will be ap­pro­pri­ate for those in real dis­tress and we need to be sure it is work­ing as it should.

Dis­cour­ag­ing com­pe­ti­tion

Mort­gages are a rel­a­tively cheap form of lend­ing, in part be­cause the house is of­fered for se­cu­rity. One rea­son – and there are oth­ers – why mort­gages are more ex­pen­sive here than else­where in the EU is that ex­er­cis­ing this se­cu­rity is a much length­ier, more ex­pen­sive and less cer­tain process. This also dis­cour­ages other banks from en­ter­ing the Ir­ish mar­ket and pro­vid­ing more com­pe­ti­tion.

In find­ing a so­lu­tion to the cur­rent cri­sis, we will also be mak­ing de­ci­sions with longer-term im­pli­ca­tions. If we want to weaken the se­cu­rity banks have on mort­gage lend­ing fur­ther – and move to a kind of semi-se­cu­rity – this has con­se­quences.

Kick­ing the banks around is now a na­tional sport – and they have had to be pushed to deal with mort­gage ar­rears. But this is a com­pli­cated and knotty prob­lem and there is no point pre­tend­ing that, five years on from the 2013 peak in mort­gage ar­rears, there are easy so­lu­tions to the re­main­ing hard cases.

The banks were way too slow in get­ting real in deal­ing with ar­rears, but now some progress has been made

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