Noonan says more capital not needed

BANK FUNDING:MINISTER FOR Finance Michael Noonan says that Ireland's banks will not need extra capital as a result of the new proposals on dealing with home loans – an assurance that no doubt will assuage market watchers.

Although lenders are key protagonists in the ongoing drama of mortgage arrears, yesterday’s proposals are likely to have minimal impact on their balance sheets.

This is mainly because the number of mortgages affected by the proposals is relatively small. Only owner-occupied, rather than buy-to-let mortgages, are covered by this scheme (roughly three-quarters of the State’s 777,000 residential mortgages relate to owner-occupied properties).

More significantly, the proposals will only apply to home- owners who are deemed eligible for social housing.

The other major issue is that there will be no obligation on the banks to engage with the process.

“Short of prescriptive legislation, the Government is not in a position to force solutions on the market,” the report states, noting that 50 per cent of existing arrears are outside the “covered banks”.

So, what incentive is there for banks to embrace these proposals?

One issue for banks will be that under one of the mortgage-to-rent schemes being proposed, the owner would sell the house to the approved housing body at a discount to the current market value, which would leave a mortgage shortfall.

While the Government says this is a matter for the lender and borrower to work out, the very fact that the mortgage holder is eligible for this scheme implies that they will have some difficulty, at least in the short term, repaying it.

The fact that banks may prefer not to crystallise their losses immediately – which would be inevitable if they engage with this scheme on a case by case basis – might be another deterrent.

On the other hand, the Department of Finance points out that the proposals will allow lenders to avoid repossession and its associated costs (repossessing and selling a house in the current climate is obviously not an ideal prospect for bank).

It will also guarantee the banks some repayment on their most distressed loans which they may never have a chance to recover.

The real issue for the banking sector will be how to deal with the swathe of loans which do not fit into the narrow category covered by the proposals. Already, banks have restructured 70,000 loans. The level of writedown they may have to incur in the future is the real question, one which may have a material effect on their balance sheets.

The imminent change to bankruptcy laws, which could lead to an increase in the number of bankruptcy cases, may force banks to face up to future losses, as they are obliged to take the hit as creditors.