FF questions viability of split mortgages after court ruling

Fianna Fáil has raised questions about the future of up to €1.5 billion of warehoused mortgage debt following a recent High Court ruling rejecting a proposal from KBC Bank Ireland to "warehouse" almost half of an insolvent couple's debt instead of writing it off.

In a judgment last month Ms Justice Marie Baker ruled against the bank's proposal to "freeze" €135,000 of a couple's €285,000 mortgage to be repaid at some future date.

The personal insolvency arrangement agreed by the court meant Colm and Paula Callaghan from Drogheda, Co Louth, could write off about €242,000 worth of debt, including €165,000 due to KBC. The bank had appealed an earlier ruling by the Circuit Court granting the couple this deal.

"This judgment potentially has very significant implications for the use of the split mortgage method of restructuring a mortgage in arrears," Fianna Fáil's finance spokesman Michael McGrath said. "Under the most recent Central Bank mortgage arrears report, the split mortgage option has been used in 27,079 family home mortgages and 2,037 buy-to-let mortgages with a combined mortgage debt of just over €3 billion.

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Parked mortages

In response to a parliamentary question put to him by Mr McGrath, Minister for Finance Michael Noonan confirmed "that something below half of that €3 billion has been warehoused, meaning that up to €1.5 billion of mortgage debt has been parked to some future date".

This equates to an average of up to €50,000 of parked mortgage debt in each case.

Mr McGrath said the court ruling was “essentially asking the valid question as to whether it is better to agree a restructuring that makes a mortgage sustainable today rather than putting aside a chunk of the mortgage for repayment in the future”.

He said that 29,000 mortgage holders who have signed up to a split mortgage option are facing a “substantial bullet payment at some point in the future. Many of them have no idea how they will make this bullet payment in 10 or 15 years time and face the prospect of selling their home at that stage”.

He called on the Central Bank to address whether the banks should continue to be encouraged to use this method of restructuring a distressed mortgage.

Owen Callan, a financial analyst with Investec, acknowledged that the court ruling could have an impact on how banks deal with distressed borrowers.

However, he cast doubt on whether it would be retrospective. “I don’t think it will make any difference for mortgages which have already been restructured with portions warehoused,” he said.