Mortgage arrears: hard necks and hard cases still to be sorted

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.

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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.

Tougher approach

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.