How do you protect your home from repossession?

MORTGAGE ARREARS:MORE AND more Irish people have been putting their homes on the line in recent months by falling into arrears on their mortgages after being caught out by the bursting property bubble. With interest rates rising and house prices falling, it is a problem that is only going to get worse in the year ahead.

Last September, over 26,000 homeowners found themselves in arrears. The number of people in negative equity stood at 116,000 at the end of last year. That number looks set to rise to 196,000 by the end of 2010 with the average shortfall between the value of the house and the size of the mortgage standing at around €40,000. Despite recent hikes in variable mortgage rates by some lenders, interest rates overall are still very low, but they will rise which will see more homeowners struggling to make their monthly repayments. The problem is further compounded by banks, such as AIB, clamping down on switchers and others, such as Halifax, leaving the Irish market entirely

The State has taken several steps to protect cash-strapped homeowners from losing their homes. Last year, as part of the Government’s bank recapitalisation, AIB and Bank of Ireland agreed to a 12-month moratorium on repossessions, while last month the Financial Regulator imposed a new rule which means that all banks and building societies, including sub-prime lenders, must now wait at least 12 months from the date arrears first appear before they can look to repossess a borrower’s primary residence.

Borrowers are also protected, to some extent, by the reluctance of banks to exacerbate their losses. Moving for a repossession would likely result in a loss for the bank, given the likelihood that it would be unable to sell the property at a price that would clear the mortgage.

A desire to clean up their balance sheets also means that banks have a vested interest in reducing the number of mortgages on their books which are in arrears.

In the US, “jingle mail” has become a reality with people reneging on their mortgage by sending the keys to their home back to their bank in the post, but Irish bankruptcy laws make this very unattractive. If you were to hand back the keys, then your lender could still pursue you for the money outstanding on the mortgage, so voluntary surrenders should be avoided.

If you fear you are going to run into difficulties repaying your mortgage, or you have already fallen into arrears, the very first and the most important step should be to meet your bank manager. While it may be the last thing you want to do, coming to an arrangement with your lender is the only viable option.

But don’t go in expecting the bank to offer you a cup of sweet tea and listen to your tales of woe. That won’t happen. Prepare for the meeting and have a clear perspective on your current financial situation.

An AIB spokesman told Pricewatchthat the purpose of such a meeting is "to put together a solution through which borrowers manage their financial difficulties as best they can rather than allowing them to grow in the future".

It is likely that the bank will offer you one of three possible resolutions: An extension of the term; a switch to interest-only repayments; or a moratorium, or break, on repayments altogether.

While any of these options will help in the short-term, you will end up paying for the relief over the course of the mortgage.

If you have come to an agreement to make your repayments more affordable, along the lines mentioned above, you may still be stuck with the burden of arrears. If, say, you are €10,000 in arrears and you only pay €100 off every month (on top of your standard repayment) it will take you over eight years to clear the arrears, which may be an uncomfortable position to be in.

As such, you could try and get your lender to “capitalise” your arrears, provided that you meet repayments for a certain period of time.

Given that the lender is likely to want to clear its mortgage books of arrears, it may be willing to add the arrears to your outstanding balance, thereby giving you a new monthly mortgage repayment – so there will be no worry from the arrears hanging over you. However, you should note that doing this will add to the overall interest costs on the mortgage.

Given the limited possibilities, other options are needed to deal with the twin problems of mortgage affordability and negative equity. Such alternative options may be on the way following the establishment last month by the Government of an “expert group” which will look at ways to assist homeowners struggling to pay their mortgages. But what measures might they introduce?

Other countries have already started dealing with the problem. In the US, the “Making Home Affordable Program” offers two different potential solutions for borrowers – refinancing mortgage loans and modifying mortgage loans.

In the UK, where an estimated 900,000 people are in negative equity, last year’s budget introduced a “Mortgage Rescue Scheme” and “Mortgage Support Scheme”. These schemes include options such as an equity loan enabling mortgage repayments to be reduced or, alternatively, the debt is cleared completely and the applicant pays rent at a level they can afford; or the deferral of borrowers’ interest payments for up to two years, with the UK government guaranteeing a proportion of the deferred interest.

Solutions are also coming from the private sector in the UK. The Nationwide Building Society, for example, last year launched a 125 per cent mortgage for existing customers who are stuck in negative equity but want to move. Other options for Ireland might include extending 100 per cent mortgage interest relief for a fixed period of time, or shared ownership schemes. Under such a scheme, the lender would take a percentage share in the property, which would result in a reduced mortgage burden for the borrower.