Banks using cynical legal manoeuvres to avoid mortgage write-downs

You think the tracker mortgage scandal is bad? Wander down to the Four Courts in Dublin some Monday and pop up to Court 11 to witness banks not facing up to reality on a near weekly basis.

The list of personal insolvency cases coming before Ms Justice Marie Baker is as good a place as any to observe cynical manoeuvres by our banks. It is five years since the 2012 Personal Insolvency Act was passed to deal with bad mortgage debt along with any other personal loans, credit card or other bad unsecured debt up to the value of €3 million, yet the majority of the worst cases remain unresolved.

Central Bank figures show that in June there were still 32,169 mortgages in arrears of 720 days or more with outstanding debt of €7.2 billion and €2.5 billion in arrears. Compare that with four years ago – there were 31,834 mortgages in arrears of 720 days or more with debts of €6.6 billion and €1.3 billion in September 2013 – and you can see just how deeply the banks have heads buried in the sand.

And this is only the worst part of the country’s problem with unpaid mortgages. Overall, more than 70,000 mortgages – about one in 10 – are in arrears with borrowers shouldering debts of €13 billion.

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Procrastination

The 720-day cases are the most difficult to resolve as they invariably involve people in homes they can no longer afford and resolving these cases may involve people realising they need to leave those properties so they are complex to resolve quickly given the protections afforded to keep people in their homes.

But there is due process and then there is procrastination.

Despite the introduction of legislation designed specifically to fix the problem, banks are still dragging their heels and putting up legal obstacles when it comes to writing down secured mortgage debt.

In an attempt to clear this logjam created by the banks, legislation was amended in 2015 to create an appeals process where a personal insolvency practitioner could argue in court that a bank unfairly rejected a personal insolvency arrangement – in essence, a financial rescue plan to give an insolvent individual a fresh start, debt free, over a six-year period.

Only a handful cases have led to precedent-setting rulings by Ms Justice Baker that could create a road map to establish a functioning personal insolvency regime that might deal with the vast backlog of cases without resorting to the courts.

In February, the “Re: JD” case dealt with the issue of the deserted spouse; the judge ruled that a lender cannot reject a rescue plan where a spouse is no longer around to help repay jointly owed debts.

Last May, in the Callaghan case, the judge rejected a bank’s proposal to “warehouse” almost half of an insolvent couple’s mortgage to be repaid at a later date because a personal insolvency arrangement should be a “once in a lifetime solution”. Then last week Ms Justice Baker ruled against a so-called vulture fund trying to stop a mortgage term being fixed at a lower interest rate for a 27-year mortgage term.

Negative equity

The common thread in these landmark cases was that the judge marked down the value of the mortgage, writing off the negative equity component of the mortgage, in effect treating it as unsecured debt (which it now is). Yet, rather than taking these cases and applying the rulings against the vast backlog, banks have continued to challenge proposed deals in court on legal or technical issues rather than on commercial terms.

In one recent case, the banks have even made an application that has the effect of slowing down the entire process by questioning whether personal insolvency practitioners – independent advisers with no skin in the debt game – should bear the cost of unsuccessful deals negotiated on behalf of their debtors.

Given the costs involved, this would likely scare off these practitioners and dispense with the 450-odd cases before the courts and avoid more rulings that could develop further that all-important road map.

While accepting their right to contest legal and technical points in court, Lorcan O'Connor, the director of Insolvency Service of Ireland, has described the attitudes of the banks in making these challenges "disappointing" saying that it amounts to a "pyrrhic victory" as the bad loans remain on their books.

As a consequence, the system is grinding to a halt. The rate at which banks are rejecting deals has risen from 30 per cent to 45 per cent in two years. O’Connor is right to call for a change in legislation to make it mandatory for banks to engage with borrowers in the 70-day standstill window when deals are negotiated. This would prevent the banks waiting until the costly and time-consuming court process to argue out their objections and force them to the negotiating table with the personal insolvency practitioners.

It is hard to assign a motive to what the banks are up to but one major benefit of dropping sand into the personal insolvency engine is that a rising property market is helping to resolve problem cases, decreasing the amount of negative equity out there and, in turn, reducing the potential for mortgage debt write-offs.

House prices rose 12.8 per cent in the year to September, the latest Central Statistics Office data shows. The average price of a house in Dublin was almost €420,000 so a similar increase over the next 12 months would wipe a further €53,760 off negative equity on an underwater mortgage. That amounts to a significant saving for a bank on a possible bill from a personal insolvency arrangement for an insolvent borrower.

It is little wonder that the banks are unwilling to recognise the unrepairable in a timely fashion.