Central Bank urges more proactive approach to mortgage arrears

on 14/02/2013 00:00:00

The governor of the Central Bank, Patrick Honohan, said the scale of the problem was highlighted by the extraordinary rate of arrears on mortgages for owner-occupied homes.

However, he argued debt forgiveness should only be considered in cases of over-indebtedness "involving or bordering on insolvency".

Mr Honohan also accused banks of being "behind the curve" in tackling the issue of mortgage arrears on a sustainable basis.

Addressing a Central Bank conference entitled 'How to Fix Distressed Property Markets' in Dublin yesterday, Mr Honohan said many people's view on what the priority should be in dealing with the problem was coloured by their direct experience of their family or friends.

The most recent Central Bank figures showed that 86,146 owner-occupier mortgages, representing 11.3% of the total, were in arrears by 90 days or more at the end of Sept 2012. A further 81,683 owner-occupier mortgages were classified as restructured. In addition, 26,770 buy-to-let mortgages, almost 18% of the total, were in arrears for upwards of 90 days and another 22,553 had been restructured.

The conference heard that most people still subscribed to the view that borrowers should fulfil their obligations to repay debts and that debt forgiveness should only be used as a last resort.

Mr Honohan said banks had largely dealt with the problem of mortgage arrears to date through capitalisation of arrears and temporary moves to an interest-only payment schedule. "Such temporary forbearance measures do provide cashflow relief to the borrower and have the considerable merit of brining their payments back onto a schedule and avoiding the arrears spiral," he said.

However, Mr Honohan claimed such an arrangement failed to deal with the situation where the bank was realistically unlikely to ever recover the full amount of the loan.

He said the offer of permanent debt relief should be limited to those who are truly over-indebted or close to insolvency.

Owner-occupiers in mortgage arrears will be comforted by the observation of the Central Bank governor that repossession should be avoidable in the majority of such cases: "A debt modification that enables them to stay in their home will often be the best solution all round."

However, he conceded that repossession was probably "inevitable" for many investment properties. Any unco-operative borrower refusing to reasonably try to make repayments would suffer consequences, he said.

Mr Honohan said the new Personal Insolvency Act would provide new avenues of recourse for over-indebted borrowers, especially through the personal insolvency arrangement which would allow insolvent mortgage holders to earn a "fresh start" through being subject to an onerous payment plan but not being forced to surrender their family home.

As a result of the new legislation, Mr Honohan said banks would have to act more proactively and liberally in tackling the problem of mortgage holders who cannot realistically meet repayments. He noted that such an option was also in the banks' own interests as a means of avoiding unnecessary costs and inefficiencies.

"Given how little is often recovered by creditors from payment plans - in many, if not most, cases - a well-designed loan modification bilaterally arranged between borrower and insolvent debtor can be better for both than the net outcome of a personal insolvency arrangement or bankruptcy," he said.