After a broadside from the Central Bank, the banks need to start resolving the situation of the many thousands who are hopelessly overborrowed on their mortgages

THE ROCKET OF a speech the Central Bank’s head of banking supervision fired at bankers at their conference on Tuesday confirmed what many customers suspect – banks are not tackling the mortgage crisis fast enough.

Fiona Muldoon, the director of credit institutions and insurance supervision who is just six months in charge of banking, castigated the bankers for wallowing in humility for past mistakes and for not focusing on fixing them.

She said at the start of her speech to the Irish Banking Federation on Tuesday that even though she was there as an invited guest of the bankers, she hoped to “provoke” them a little, “maybe even vex you”. This she did in spades with a 20-minute speech. She compared the banks to troublesome teenagers, saying they had waited to be told what to do and didn’t like it when the Central Bank did the telling.

They had paid “lip service” to the idea they were dealing with troubled mortgages and they had to “get busy fixing”, she said.

“What is needed now is authentic leadership not humility; some courage to act. No one is arguing for an overnight avalanche of available resolution options offered to thousands and thousands of borrowers,” she said. “There just needs to be a proper beginning – step by measured step.”

This all wasn’t just rhetoric. Muldoon gave detailed figures showing inaction by the banks.

Of the 169,000 home loans consisting of €31 billion in debt in arrears at the end of June, no arrangements were in place for 84,000 mortgages, consisting of €15.4 billion in debt. This was out of a total of 762,000 mortgages and €112 billion in debt.

More frightening than the state of the home loans were the new figures showing an even more distressed picture on the country’s 150,000 buy-to-let mortgages, comprising debts of €32 billion.

Arrears of 90 days or more, reflecting the greatest distress on non-performing loans, were running at 20 per cent or 37,000 mortgages and an eye-watering 29 per cent by value or €11 billion.

No formal arrangements were in place on €8.3 billion worth of buy-to-let mortgages on 27,000 accounts which were in arrears.

Muldoon’s host, Irish Banking Federation chief executive Pat Farrell, said the banks had to turn themselves “inside out”, from being lenders to debt collectors.

“It is a huge cultural shift and a huge operational shift,” he said. Bankers have also had to deal with “a schizophrenic message” where they were initially told not to repossess houses but “do whatever you have to of a short-term nature to keep people in their homes”.

John Moran, secretary general of the Department of Finance, said that there were situations where repossessions had to take place and that people might have to “trade down” if they had unreasonable expectations around their standard of living.

“I don’t quite accept that there has been a pressure on banks not to repossess properties,” he said.

He told the conference earlier that there would have to be a “dramatic write-off of debt” for households with unsustainable debt that they could not pay.

Privately, bankers were flummoxed by Muldoon’s comments as they felt they weren’t in sync with what the Central Bank had been telling them in meetings. They say they are working through the problems case by case – in line with the Central Bank’s timetable – and they have already agreed short- to medium-term forbearance such as interest-only payments and term extensions for 85,000 customers.

But Muldoon’s views were supported by debt advisers who are desperately trying to agree long-term deals for customers.

“Find me someone who has received one of these long-term forbearance products and I will give an award,” said David Hall, director of Irish Mortgage Holders Organisation, which advises borrowers in difficulty.

“The banks have ticked the boxes with the Central Bank that they have the products but they aren’t offering them.”

Hall believes the banks will force mortgage holders into the new personal insolvency and bankruptcy route when it comes into effect next year by avoiding formal arrangements first.

Ryan Stewart, a director of Frost Debt Solutions in Buncrana, Co Donegal, says the banks have a backlog of cases and are carrying out “a sort of triage” on long-term cases where mortgages have not been paid for two years.

“There are some cases where we are proposing longer-term solutions where they don’t fall under the banks’ options. They will once the insolvency bill is on the table next year,” he says.

Michael Dowling, spokesman for the Independent Mortgage Advisers’ Federation, hopes Muldoon’s comments will lead to action and make the banks accept that debt must be forgiven.

“We have to have debt write-downs in certain scenarios and the banks have been procrastinating,” he said. “They aren’t really addressing the issue but hopefully with the reprimand they got and the new personal insolvency law, they will move to help people who really need help on their mortgages.”

The banks maintain they have also been busy beefing up their collection teams from a time when arrears were almost non-existent and training staff on arrears teams and in branches.

Jeremy Masding, chief executive of Permanent TSB, once Ireland’s biggest mortgage lender, said there had been “a chronic lack of investment” in its collections and recoveries team.

The first part of Masding’s strategy has been to build a new “arrears support unit” supported by recruits from the UK with experience in “curing” arrears.

Masding said that, secondly, the bank had until September been focusing on preventing mortgage holders slipping into early arrears or into deeper trouble than that.

The third part of the plan is to work on the older arrears, most distressed cases, and this will happen from now until March.

The bank had 16,000 owner-occupier mortgages in forbearance at the end of June and it is expected that about a fifth of these cases will end up in the long-term mortgage fixes.

This is where Masding’s “nine plus three plus two” strategy is being applied. The bank has nine short-term fixes, three long-term treatments and two last-resort options – personal insolvency or bankruptcy. The nine included reduced payments, long-term extension of mortgage, trading down, agreed sales or repossession. The longer-term fixes are mortgage to rent, shared ownership and the split mortgage.

Masding says that short-term forbearance modifications work as many are not re-defaulting.

The number of long-term fixes agreed so far was still “very small” because the bank was still in the early stages of applying them, said a Permanent TSB spokesman.

Across the banks, affordability will determine what products suit particular customers. The solutions are designed to keep as many people as possible in homes they can afford. If borrowers re-default or the long-term fixes do not cure arrears, then that solution is the wrong option.

“If the treatments don’t work and customers default again, it is not a PTSB issue but a country issue where we have a hard residual form of debt that the industry will have to look at doing something about,” he said.

Masding says customers need to engage with the banks and be upfront on their finances if the banks are to engineer products to help them stay in their homes.

“I do sense that customers are very reticent because they feel that the bank is going to screw them over – I don’t want to repossess homes and put people out of their homes,” he says.

“I have repossessed houses in my previous life in the UK. I have been there with the bailiffs. I have seen the toys in the garden. It is not a place where we want to be. There is nothing macho about it. It can only be a last resort.”

AIB has been offering long-term forbearance products since the start of this month but has declined to say how many had been agreed with customers.

Bank of Ireland also declined to say how many of the eight long-term fixes within the bank’s 11 forbearance options have been approved.

AIB expects about a fifth of the 34,000 mortgage cases in forbearance measures in June to end up in longer-term solutions.

Bank of Ireland said it has forbearance arrangements in place for more than 16,000 accounts (which represent about 9 per cent of overall accounts) and that 86 per cent are working.

“We are accelerating the roll-out of longer term active solutions based on the experience with existing solutions (term extensions, etc) and the positive outcome of recent pilots of more recently designed solutions – eg, split mortgages,” the bank said.

Conor Daly, head of AIB’s mortgage arrears resolution strategy and arrears support unit, says it will take time to link the right products to customers and this can only be done after they compile the standard financial statement, outlining their income and expenditure, and show documentary proof of both.

The process could take six to nine months and the fixes may have to be revisited in a few years to see if the borrower’s finances had improved and to see if they could pay more of their debt.

“Customers are going to have to go on a journey. A lot of customers are learning about the changes in their own circumstances,” he says.

“You are not going to see at the end of this month a raft of split mortgages. It will take time.”

AIB’s head of mortgages Jim O’Keeffe says: “We do not want these customers to re-default – we are working with customers so the solutions are affordable and challenging for the bank. The short-term forbearance measures are working for the vast majority.”

Unsecured debt such as credit card debt poses a big obstacle towards long-term solutions.

“We have restructured the unsecured debt of many thousands of our customers, which has proven very helpful for our customers in managing their mortgage repayments and retaining their home,” said a spokesman for Bank of Ireland.

Where BoI has not provided the unsecured debt, the progress is slower, the bank said, and “has been an inhibitor in trying to put in place longer term solutions”.

Ryan Stewart of Frost Debt Solutions says customers prioritise unsecured debt over mortgage debt. “That is because people need their credit card to put food on the table,” he says.

The slow pace of action by banks may not just be down to the difficult task of agreeing the right long-term plans or working through loans case-by-case.

Bankers fear that if they move too quickly and are too lenient, it could change borrower behaviour and encourage those who can pay not to in the hope they can get the same write-offs being offered to the most distressed customers.

“From the banks’ perspective there is a lot of caution around anything that can be seen as debt forgiveness,” said one banker specialising on arrears cases. “They worry about a lot of people who can pay engineering ways that give them a let-off. They fear moral hazard and want to go no faster than the pace the Central Bank is pushing them to go.”

Judging by the tone of Muldoon’s speech this week, they will have to move much faster.