Key Post Ulster Bank's Stephen Bell's very frank speech on strategic default; CB targets; PIAs

I attach a copy of Stephen Bell's speech to the IBF conference recently. The whole speech is worth reading but here are some extracts.
The headings in bold are mine
I have put my comments in italics

Arrears in the Republic are 4 times the level in the North
[FONT=&quot]B[/FONT][FONT=&quot]ut if you compare the Ulster Bank 90+ figure for Northern Ireland - which has been buffeted by similar if not exactly the same winds – you see it is around a quarter of what we see here in the Republic of Ireland.[/FONT]

[FONT=&quot]Why would that be?
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• [FONT=&quot]T[/FONT][FONT=&quot]he inability of banks to contact customers. [/FONT][FONT=&quot]I[/FONT][FONT=&quot]n the month after we were allowed to set aside this “three contacts” rule, the direct result of our better engagement was that we had a 10 fold increase in inbound calls.[/FONT]
• The lack of a credible “threat” (of repossession) where customers don’t co-operate. [FONT=&quot]t[/FONT][FONT=&quot]he latest figures from RBS in the UK confirm that 70% of customers meaningfully re-engage when credible legal action is commenced with the majority agreeing a solution that allows them to remain in their home.[/FONT]
• [FONT=&quot]T[/FONT][FONT=&quot]he commentary about debt forgiveness relative to home loans with no reference to credit unions and other unsecured lenders and no reference to household expenditure created “moral hazard”. p[/FONT][FONT=&quot]roblem...[/FONT][FONT=&quot]t[/FONT][FONT=&quot]he correlation between unemployment and flows into serious arrears from early 2011. It had been over 80% but is now 40%.[/FONT]
• [FONT=&quot]Debt Management skills were missing.
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[FONT=&quot]S[/FONT][FONT=&quot]o yes, the “90+” number is high but perhaps it’s not surprising that if you turn the bath taps on to full and leave the plug firmly in the hole, the water level will rise quickly.
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This suggests that there is a very high level of strategic default in the arrears figure. Much higher than my original estimates of it.

The difference between arrears levels in NI and the Republic would be well worth a systematic academic study. Greg Connor suggested that Irish strategic default rates were 35% based on a comparison with America. A comparison with rates in Northern Ireland would be much more relevant.

The cost of renting is a lot more than the average capital and interes repayment for someone in arrears
[FONT=&quot]it shouldn’t be a shock that a place to live comes at a cost to be borne by the occupier, other than for the most socially needy. I have to say that an effective collection tools we use right now is the daft.ie web site which allows us to explain to the customer while we have them on the phone what a comparable property to the one they’re living in would cost to rent. Specifically, anything in Dublin today is likely to cost €1,000 or[/FONT]
[FONT=&quot]€1,200 compared to a full capital and interest repayment on our average loan in arrears of less than €700.[/FONT]
We will be offering "Economic Concessions"
[FONT=&quot]A[/FONT][FONT=&quot]s part of our MARS developments we added three more [solutions] - Economic Concession, Mortgage to Rent and the Split Mortgage. [/FONT]

I thought this very interesting, although I have no idea what it means. I suspect that they will reduce the rate of interest for a period for certain customers.

The Central Bank's Target regime is wrong and will encourage us to repossess more often that we would otherwise have
[FONT=&quot]However, just as we were getting traction with the expanded solutions and our increased capability, along came the target regime. I will be candid here - and[/FONT][FONT=&quot]apologies in advance - but my personal view is that targets are not the answer. I have no issues with mortgage lenders being required to publish their progress against pre-determined measures. My concern is that in setting a target where failure to meet it results in swingeing financial penalties, everyone does whatever it takes to hit that target and not what’s right for the customer.

[/FONT][FONT=&quot][FONT=&quot][FONT=&quot]The truth is that many of the arrears cases we see every day could be solved by customers addressing their expenditure choices and prioritising secured over unsecured borrowing. Best practice is to encourage that process to take place. However with a requirement for 50% of all 90+ cases to be on a sustainable arrangement by year end, the potential reaction could be to “go legal” whenever we suspect a reasonable payment won’t be forthcoming at a very early stage in the conversation

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[FONT=&quot][FONT=&quot][FONT=&quot]I fully agree and have said this elsewhere. Banks will be able to achieve targets by repossessing people, even if that is not the right solution.


Arrears is not a meaningful measure of the problem
[/FONT][/FONT][/FONT][FONT=&quot]M[/FONT][FONT=&quot]uch is made of the gross balances in arrears across Ireland but that figure is meaningless. The key numbers are the monthly payment and the income level.[/FONT]

Stephen Bell must be reading Askaboutmoney, or Séamus Coffey Mortgage arrears as a measure of distress


A medium term solution is not "kicking the can down the road". It is appropriate in the context of a 35 year mortgage
[FONT=&quot]... we may agree a solution with a customer even though we can’t be certain that they will get back to full repayment at the end of the arrangement. Some say that is “kicking the can”. I disagree. Absent a crystal ball I believe it’s a reasonable course. What is important is that the moral contract between borrower and lender is re-established. Furthermore the Irish government itself rightly talks of the green shoots of recovery and this will result in a return of employment which ought to underpin some confidence. In that context falling in to the trap of irresponsible collecting - by treating 35 year loans for home purchase as if they are 4 year unsecured loans to support domestic consumption – is as bad as the irresponsible lending we are regularly accused of.

[/FONT]60% of customers were not paying anything last year
35% of customers are not paying anything now

[FONT=&quot]Our increased contact capabilities plus the broader range of solutions available, is beginning to show through. [/FONT][FONT=&quot]A[/FONT][FONT=&quot]s a result of our calling and intense engagement some 65% of our customers are paying something of consequence with the rest either in the legal process or going through the last efforts at contact before we commence legal action. That figure of 65% is important as it compares to around[/FONT] [FONT=&quot]40% last year and as a result,[/FONT][FONT=&quot]

This is very interesting. They have halved the level of strategic default since the restrictions on calling customers were reduced.


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[FONT=&quot]We will encourage our customers to reach agreement with us rather than go into a Personal Insolvency Arrangment
we have been working to “PIP-proof” our products. Given the timeframes a PIP will judge an insolvency arrangement over, we are extending the terms of what would have otherwise offered to our customers[/FONT][FONT=&quot]. As a result if we can see a customer would benefit from an option that goes beyond our current standard terms, we will extend the term of the offer.[/FONT]

[FONT=&quot]We strongly believe this is far more beneficial to our customers for several reasons[/FONT]

1. [FONT=&quot]First of all it means the customers payments to be made directly to repay their debt as opposed to paying the PIP fee[/FONT]
2. [FONT=&quot]S[/FONT][FONT=&quot]econdly we will allow living expenses that maybe up to 10% higher than those suggested by the IS – as long as the home loan is prioritised.[/FONT]
3. W[FONT=&quot]e can design a payment holiday into an arrangement to address where the customer can’t maintain the payment due to unforeseen circumstances – or even very much foreseeable circumstance like Christmas[/FONT]

We offer customers sustainable solutions, but they often are reluctant to accept them.

[FONT=&quot]...the barrier to a sustainable solution is not usually the mortgage lenders willingness to offer them but the reluctance of the customer to take them up.

Customers are prioritising unsecured debt and even taking out new loans while in mortgage arrears
For whatever reason we regularly come across a stubborn resistance to deal with unsecured lending and even examples where new unsecured lending is taken on despite mortgage arrears.[/FONT]


If a customer is paying at least the interest on their mortgage, no judge will grant a repossession order
[FONT=&quot]t[/FONT][FONT=&quot]here is the potential dislocation between what the courts deem to be an acceptable offer and what we are encouraged to view as a sustainable arrangement by the regulator. It is my firm view that whether or not any party to this debate views interest only as insufficient, no judge will grant an order for possession if a customer is paying that.[/FONT]


The negative equity bubble will dissipate over 7-10 years, well within the timeframe of most loans
[FONT=&quot]assuming stabilisation of house prices followed by even low single digit inflation, the combination of that and the resumption of capital and interest repayments would see the so-called negative equity bubble dissipate over a 7-10 years. That’s well within the term of most problem loans – 90% of which were originated between 2004 and 2008.[/FONT]

We will not be forgiving debt but we will do deals on the mortgage shortfall where borrowers work with us
[FONT=&quot]We will not be forgiving debt[/FONT][FONT=&quot]. However, it’s important to be clear what we mean by that. There may well be co-operating customers who genuinely can’t see any way to resume payments on their home and are [/FONT][FONT=&quot]w[/FONT][FONT=&quot]illing to work with us to achieve a consensual sale of the property but can’t realistically repay the shortfall in full. Those customers may find us willing to reach an accommodation.[/FONT][FONT=&quot]B[/FONT][FONT=&quot]ut that’s common sense. Avoiding 2-3 years of court process and cost plus the inevitable dilapidation of the property when we finally take possession is actually good management. But it’s not debt forgiveness.[/FONT]



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I think that the most important point coming out of this paper is that there is a much higher level of strategic default than previously thought and the Central Bank was absolutely right in changing the Mortgage Arrears Code to relax the restrictions on calls to borrowers in arrears.

• Arrears are 4 times higher in the Republic than in the North
• Since the three contact rule was relaxed, they have got much better engagement from their borrowers
• The correlation between unemployment and arrears has significantly reduced in the past few years which suggests that borrowers in jobs are going into arrears intentionally
• 35% of home owners are paying nothing towards their mortgage. This was as high as 60% a year ago.
• Customers are reluctant to accept sustainable solutions
• Some customers are taking out new loans while in arrears on their mortgage

Brendan Burgess said:

[*]Some customers are taking out new loans while in arrears on their mortgage
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This has to be 'wreckless lending' if true.

Do you think that the new code will force strategic defaulters with second homes, who are holding back repayments purposely, into fear of repossession?

These people are still, in some cases, receiving rent and pocketing the cash into savings whilst witholding repayments in the hope of some sort of write-off. They need to be outed. Ruining it for genuine distressed mortgage holders.

daftpunk said:

Ruining it for genuine distressed mortgage holders.

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This is the key point.

Distinguishing between genuine cases and stragegic defaulters is necessary, but a rough process on the borrowers. Banks tend to be suspicious of borrowers and have to investigate them to see if they are genuine.

If there were fewer defaulters, there would be a lot less pressure on the genuine cases.

It seems that their economic concessions are not just theoretical.

Ulster Bank has offered me 5 years at 1%. Should I take it or go bankrupt?

Brendan