Key Post Central Bank no longer insists that mortgages in distress must be repaid by age 70

[Brendan Burgess]

The Central Bank has updated its

Internal Guideline - Sustainable Mortgage Arrears Solutions

This arose in response to a request from Ciarán Lynch T.D. to the Central Bank Governor that they revise their guidelines in accordance with his comments to the Oireachtas Finance Committee. Central Bank Governor agrees that long interest-only is a sustainable solution

Here is the context which is unchanged:

[FONT=&quot]1[/FONT][FONT=&quot]. Executive Summary[/FONT]


[FONT=&quot]This paper has been prepared based on internal dialogue and discussion at Financial Stability Committee and provides internal guidance to supervisors as to the important factors to consider when assessing if the modifications provided by lenders are sustainable solutions for mortgage arrears cases[/FONT]

[FONT=&quot]2.4 The Central Bank will typically consider a term extension or capitalisation solution (or combination of both) to be sustainable only where:[/FONT]

• [FONT=&quot]For a term extension, the borrower’s age has been taken into account. In this regard, if the borrower is subject to a compulsory retirement age, for a mortgage extension beyond that term such extension will only considered sustainable where the lender has assessed and can demonstrate and evidence that the borrower can, through pension or other sources of verified income, service the revised loan repayments to maturity on an affordable basis. An overall ceiling of 70 years of age will apply for the Central Bank to consider a term extension sustainable unless there is firm evidence that an older age limit can apply;[/FONT]

Here is the updated bit:

[FONT=&quot]2.[/FONT][FONT=&quot]8 Mortgage Solutions beyond retirement (updated 13 June 2014)[/FONT]

[FONT=&quot]On 13 June 2014 the Central Bank provided a clarification to the banks covered by the Mortgage Arrears Resolution Targets that there are instances in which sustainable mortgage arrears solutions may extend into the borrower’s retirement.[/FONT]

[FONT=&quot]Furthermore, borrowers and banks may agree, on a case by case basis, to lifetime tenure of the home in instances in which the anticipated proceeds from the estate are sufficient to pay off the outstanding debt[/FONT].

[FONT=&quot]In recent audits of banks mortgage restructuring solutions, the Central Bank noted variations in the interpretation of the guidelines provided by the Central Bank insofar as:[/FONT]

[FONT=&quot]1. Most banks apply an upper age limit ‘rule’ of 70 on term extensions in accordance with guidelines published by the Central Bank. The guidelines set out the circumstances in which evidence of affordability to service repayments to maturity will be considered sustainable. An older age limit can apply to restructure arrangements in cases where there is appropriate evidence to support it[/FONT].

[FONT=&quot]2. Banks have been reluctant to consider solutions which involve recovery of residual loan balances after the death of a borrower from his/ her estate. The Central Bank is of the view that, where the borrower wishes to remain in his/ her home, long-term payment arrangements with lifetime tenure may be sustainable where the sale of the property provides sufficient surplus funds on death to redeem the outstanding mortgage balance[/FONT].

[FONT=&quot]This guidance is issued in the limited context of the resolution of distressed loans, where the Central Bank recognises that, in many instances, banks and borrowers are striving to solve very difficult situations. Moreover, the Central Bank considers that, even in that context, these solutions will apply only in limited circumstances.[/FONT]

[FONT=&quot]The Central Bank requires transparency to be provided to the borrower in relation to the terms and conditions at the outset of any such solutions and borrowers must be treated in accordance with the Central Bank’s Consumer Protection Code and the Code of Conduct on Mortgage Arrears where applicable. The implications of the solution in terms of payment schedules, stressed interest rate increases, additional interest and charges (above the original loan terms) and future redemption obligations must be clearly communicated in a new contract with the borrower in order for it to be considered sustainable. The lender must also explain the advantages and disadvantages of the offer made by reference to the circumstances of the individual borrower[/FONT][FONT=&quot]4[/FONT][FONT=&quot].[/FONT]

 

[Brendan Burgess]

What does this mean for borrowers in distress?

Many lenders have classified mortgages as unsustainable because the borrower would not be in a position to pay off the loan by age 70. They claimed that this was the Central Bank's definition.

Now the Central Bank has removed this requirement.

This will be of particular interest to borrowers in their 50s and 60s who are in positive equity who can pay the interest on their loan, but who are unable to repay any capital.

Their lender will now be able to offer them long-term interest only.
From the lender's point of view, this will now count as a long-term solution and so help them to achiever their Mortgage Arrears Resolution Targets

Any borrower in this position who has received the unsustainable mortgage letter from their lender, can now quote this clarification in their appeal.

 

[Brendan Burgess]

What more should the Central Bank do?

I have been campaigning for this change for some time now, so it's particularly welcome.

But the Central Bank needs to go further:

1) The Central Bank should issue a definition of a sustainable mortgage from the borrower's point of view.
2) This definition should specify that, while a borrower can pay the SVR interest on their loan, that loan is sustainable.
3) The definition needs to be adapted to negative equity loans
4) The definition needs to be adapted to tracker mortgages


Adapting the definition to negative equity loans

"[FONT=&quot] where the sale of the property provides sufficient surplus funds on death to redeem the outstanding mortgage balance[/FONT]." I would argue that this should read "where the lender agrees that the mortgage will be non-recourse on the death of the borrower".

If a borrower can pay the interest on their mortgage, leave them in their house, even if they are in negative equity. That might not be regarded as "sustainable" from the borrower's point of view, but if they can't afford the interest on their mortgage, they will not be able to afford to rent a similar property either.

Adapting the definition to tracker mortgages

It's clear now that someone who has a €200k SVR mortgage on a house worth €300k and who can afford to pay the interest, has a sustainable mortgage, even if they can't repay the capital by age 70.

But what if they have a €200k tracker mortgage? This is not sustainable for the lender and so the lender will seek to repossess the home. The definition needs to be adapted to this situation. There are a few possible solutions:

• If the borrower makes repayments equivalent to the SVR, then the mortgage is sustainable. They would be left on their tracker, but would be repaying capital.
• They could be converted to SVR while they are unable to afford repayments
• They could be charged SVR on the arrears element of their mortgage

 

[110quests]

Brendan, this is an important development for a minority of mortgage holders ie those in 60s and 70s who still have a mortgage to service on unexpected reduced pensions.

Mortgage lenders now need to include this on their list of sustainable solutions. Let us hope they have the wit to engage with their customers and present it as a resolution where there is equity, age consideration, and sufficient income to service interest only.

 

[paddy19]

This is coming up for me.
Bank have talked in the past about extending to over 70 but I wary that things change.

Big question for me is will the tracker continue for the period after 70.

I'd be interested in hearing from anyone who has gone through the process and what it has been like
particularly with the Ulster Bank.