Fianna Fáil motion likely to stall solution for mortgage arrears

Last Sunday, Governor of the Central Bank of Ireland Patrick Honohan made it clear that the number one issue for the regulator at present is resolving the mortgage arrears crisis.

It shouldn’t come as a surprise. At the end of March, 95,554, or 12.3 per cent, of mortgages here were in arrears of 90 days or more. Roughly 54,000 are 12 months or more behind on their payments.

A key tool in Honohan’s box of solutions is the use of split mortgages, which involve warehousing part of a loan for a period of time to give the borrower some breathing space and the ability to make repayments on the balance.

It might or might not be repaid, depending on the circumstances of the borrower as the term of the mortgage rolls on.

Just 144 split mortgages have been put in place to date out of 142,000 mortgages in arrears and it’s fair to say that some banks are lukewarm on the idea. Nevertheless, Honohan wants to see a greater use of them in resolving this thorny issue.

Private members' motion
Yesterday, Fianna Fáil tabled a private members' motion seeking to row back on some of the recent changes made to the code of conduct on mortgage arrears.

The changes lifted the ceiling on the number of calls that banks could make to customers in mortgage arrears and the 12-month moratorium on them initiating repossession proceedings.

Fianna Fáil, the lead party in government when this crisis blew up in 2008 and under whose watch the 2010 version of the code of conduct was framed, wants an independent mortgage-resolution office that would mandate what offers banks must make in certain circumstances.

Specifically, it calls for the reinstatement of a maximum number of successful contacts that a bank is allowed to have in any one month, and the 12-month moratorium on repossession proceedings.

For those facing an offer to surrender their tracker mortgages, Fianna Fáil wants a third party to verify if the offer from the bank is in their best interests.

In addition, it wants the Central Bank to require that banks record all calls with borrowers and store them so that the regulator’s staff can access them if it get a complaint.

It also wants an obligation on a bank seeking an order for repossession to first obtain written confirmation from the Central Bank that it has exhausted every other course of action available to keep a family in their home.

Similarly, it wants the Central Bank to pass a verdict on whether a borrower can be properly classified as “unco-operative”.

“I don’t trust the banks,” Fianna Fáil’s spokesman on finance Michael McGrath told me yesterday when discussing the Bill.

Most Irish people don’t trust them either, especially after bailing out the sector to the tune of €64 billion over the past five years.

However, the motion raises a number of issues.

Banks in Ireland have been criticised for kicking the can down the road on their loan arrears problems over the past five years.

But Fianna Fáil’s solutions would require them to jump through a number of time-consuming procedural hoops with the Central Bank before they could move towards repossession proceedings.

In turn, this would place a greater burden on the regulator, which would probably have to hire and train additional staff to fulfil these requirements.

Additional burden
This would hardly speed up the resolution of this problem, which is not just weighing down the banking sector but Ireland Inc too.

Imposing an independent mortgage-resolution office on the sector could also be counter-productive. Institutional investors might be less willing to provide funding to retail banks here if they think their security over mortgages – which is supposed to be absolutely watertight – is in someway compromised.

There is also evidence to suggest that borrowers are part of the problem.

Strategic defaulters are believed to account for anything between 15 and 25 per cent of those in arrears. These are people who won’t pay rather than can’t pay, and who are taking cover behind the legions of genuine cases in the hope that they’ll be cut a deal on their debts.

In a speech last month to a conference organised by the Irish Banking Federation, Stephen Bell, the man charged with managing Ulster Bank's arrears support unit, said that when the code of conduct on mortgage arrears restriction on contacting customers was effectively lifted at the start of this year, the bank experienced a tenfold increase in the number of inbound calls from customers relating to arrears.

The limit on contacts with customers, coupled with the 12-month moratorium, meant there was no credible threat the banks could use with customers.

Strategic default clampdown
The new rules mean that banks can begin to flush out the strategic defaulters.

And banks are entitled to seek the repayment of their loans.

Fianna Fáil’s motion will chime well with the views of borrowers under stress.

But with the code of conduct on mortgage arrears rules amended and the Dunne judgment that has prevented repossessions for the past few years set to be reversed by legislation, the banks should now be allowed to deal with the arrears issue themselves.

Isn’t that what we’ve wanted from them all along?