TDs and Senators get reality check on mortgage arrears

For the best part of five years, Irish banks have been accused of kicking the can down the road on their mortgage arrears. Not any more.

This week’s marathon sessions between the Oireachtas Joint Committee on Finance and our leading bankers dealt with the targets set earlier this year by the Central Bank for lenders to provide sustainable solutions to those customers with mortgage arrears of 90 days or more.

The first milestone was to provide 20 per cent of customers in arrears with a solution before the end of June.

It is fair to say that the large number of TDs and senators who turned out for the near-13 hours of hearings didn’t expect that these solutions would involve so many people being put on the path towards losing their home.

“It became abundantly clear during the committee hearings that the banks are heavily relying on voluntary surrender, threatening letters and legal proceedings for forced repossession to achieve the mortgage arrears resolution targets set last March,” said Fianna Fáil’s spokesman on finance Michael McGrath.

He reckons that, in a bid to meet their targets, the banks took the easy way out and simply fired off of a large number of legal letters to their arrears customers rather than exhausting the various “forbearance measures” available to them.

Mr McGrath, and many of the other committee members, placed the blame for this at the door of the Central Bank for allowing the taking of a family home to be classified as a “sustainable solution”.

Governor Patrick Honohan will get the opportunity to answer that charge when he appears before the committee on September 25th.

Sinn Féin's Pearse Doherty expressed his "shock" that 14,271 legal letters had been issued by AIB, Bank of Ireland, Ulster Bank and Permanent TSB and that an additional 2,439 requests for voluntary surrender were issued.

The regulator’s targets have forced the banks to face up to the mortgage arrears problem, which has festered since 2008. That’s what we all have wanted for some time. The unfortunate but inevitable outcome of this is the reality that thousands of mortgage-holders will have to leave their home, either by way of assisted voluntary sale or repossession.

TDs and senators argue that this does not have to be the case, that the banks could write off debt and allow people to remain in their family homes by using the capital provided by taxpayers exactly for this purpose.

Exhausting every avenue
All of the bank chiefs acknowledged that there will be some mortgage write-offs but it will only be after they have exhausted every avenue of repayment. There will be no blanket debt forgiveness.

Write-offs threaten their capital buffers and, with a fresh round of prudential stress tests to take place in the first half of next year, all are wary of taking any actions that will require them to raise new funds. In the case of AIB and Permo, this could only involve more taxpayer funding.

Richie Boucher, the chief executive of Bank of Ireland, which is 15 per cent owned by the State, told the committee that write-offs were not part of his recovery plan as this would involve his shareholders having to bear the cost.

“Fairness is a broad term and involves all of my stakeholders,” Boucher told the committee. “If we do not recover the cost [of a loan] then we do not have the capital to lend into the economy. We don’t have the income to reward the taxpayers. All of these things have to be taken into consideration.”

Boucher’s hardline stance extends to Bank of Ireland’s treatment of split mortgages. This involves part of the mortgage being warehoused to be dealt with at a later date to allow the borrower get back on track with their repayments. Bank of Ireland is the only one of the main banks to continue to charge the full interest rate on the parked element of the loan. Other lenders apply a zero interest rate to the portion that is warehoused.

Ulster Bank has come up with its own solution, called an “economic concession”. This involves the interest rate being reduced to 0.5 per cent to all of the outstanding amount of the loan.

Ulster Bank chief executive Jim Brown said this is a more attractive solution for its customers than a split mortgage and argued that the total cost to the customer is lower with an economic concession.

Large bullet payment
It could be that Ulster Bank believes it is preferable for customers in arrears to continue to pay off part of the capital each month rather than storing up a problem for 10 or 20 years down the road that would probably involve a large bullet payment to clear the warehoused portion of the loan, or more years paying down the mortgage at a time when a person's earning capacity has probably diminished through age.

What emerged from the hearings is that – with the exception of Permo which had offered split mortgages to 3,500 customers by last Tuesday – the banks seem to be lukewarm about split mortgages. This seems to be at odds with what Mr Honohan wants.

It remains to be seen if the banks have deliberately front-loaded their worst arrears cases, those involving legal letters. You got the sense from AIB that it wanted to flush out the 20 per cent of strategic defaulters that its believes are out there.

If this is not the case, the number of assisted voluntary sales or cases involving legal proceedings is likely to rise as the banks strive to meet the ever stiffer targets set by the regulator.

They must provide 30 per cent of customers with solutions by the end of this month and 50 per cent by the year end.

Committee chairman Ciarán Lynch closed the three days of hearings by offering his best wishes to Permanent TSB chief executive Jeremy Masding in meeting the higher targets in the months ahead.

"I don't," barked Fianna Fáil Senator Thomas Byrne from the wings, "because it'll mean more people will be put out of their homes".

A number of his colleagues on the committee mumbled in agreement. They are probably right. Like it or not, this is the reality the State faces.