Setting record straight on mortgage arrears

This article appeared in the [broken link removed] 29 May 2011

Contrary to some reports, there are support mechanisms in place for those who are struggling to meet mortgage repayments.

Edmund Honohan’s comments and the reaction to them convey the impression that ordinary Irish working people were being hounded out of their homes by the banks. Nothing could be further from the truth.

Contrary to the impression given by Edmund Honohan, the facts are

• In 2010, 102 people had their homes repossessed against their owners’ wishes.

• Only 71 of these were customers of the mainstream lenders, while 31 were customers of sub-prime lenders who probably should not have received the loans in the first place.

• More homes were either surrendered or abandoned than were repossessed against the owners’ wishes – 262 vs. 102

• There are far more borrowers who would like to surrender their homes than there are lenders trying to repossess homes against their owners’ wishes.

• In 2010, 838 court proceedings for repossession were issued, of which the mainstream lenders accounted for 498. Most of these will be settled without reaching the repossession stage.

• The lenders adhere to a Mortgage Arrears Code which obliges them to facilitate their borrowers as much as possible.

• Any borrower, no matter how awful their situation is, who engages with their bank should have no fear whatsoever of legal action, much less repossession.

• Despite 15% unemployment, despite major cuts in salaries, despite increases in taxes and despite the extraordinary high amounts borrowed at the peak of the market, almost 90% of borrowers are still paying their mortgages according to their original schedule.
• Most of the 90,000 borrowers who are in arrears or who have restructured their loans will get back on track, given enough time and forbearance from their lender.

The Expert Group on Mortgage Arrears, of which I was a member, produced a set of recommendations designed to give those in arrears every chance of getting back on track. These recommendations have been implemented already and are making a difference:

• Lenders cannot impose penalties on those in arrears.
• Lenders cannot exploit the arrears to get the borrower off a cheap tracker mortgage
• If the borrower can pay 66% of the interest on the mortgage, the lender must defer the balance for up to 5 years
• Lenders cannot contact borrowers in arrears more than three times a month

These measures will give those who are struggling at the moment the maximum chance of getting back on track even if it does take some of them 5 or 10 years.

The most important thing about the Mortgage Arrears Code is that borrowers who engage with their lender should have no fear of losing their homes.

Although most of those in arrears, will recover in time, there are as many as 20,000 borrowers who have no hope of getting back on track.

It is in the best interests of these borrowers to recognize this and deal with it as early as possible. It is not in their interest to struggle on for years with the balance of the loan ever increasing due to unpaid interest. Lenders and the government must develop a strategy to deal with these cases covering their housing needs and covering how the shortfall will be dealt with.

While it is inevitable that these people will lose their homes, it does not mean that they will be made homeless immediately. They and their lenders can agree a timeframe for selling the house. The lenders have agreed in principle that borrowers, who qualify for local authority housing, will be allowed to stay in the house for a reasonable period of time until the local authority finds them alternative accommodation.

The biggest issue to be dealt with in these cases is what to do with the debt left over when the sales proceeds are not enough to pay off the mortgage in full. As these borrowers had no hope of paying the mortgage, it is likely that they will have very limited means and will not be able to pay off much of the shortfall. They are effectively insolvent and the banks and the public should accept this. You can’t get blood out of a stone.

There is nothing to be gained by leaving these people excluded from economic activity with an unpayable debt hanging over them. Legislation is planned to introduce a debt settlement system where people with unsecured debts would pay off as much as they can afford over 5 years, after which time, the lender would write off the balance.

These insolvent borrowers cannot wait for the law to be changed. The government should tell the state owned banks to implement these changes immediately and encourage the other lenders to do likewise. Let me repeat, there is no additional cost to the banks or to the taxpayer in this. They are just facing up to the fact that this money is uncollectible anyway.

Conclusion
There are good measures in place to help as many people as possible to get back on track. A better solution is needed urgently for the hopeless cases. But it is unfair to those in serious arrears to suggest that there is an easy solution.

Brendan Burgess is a consumer activist and was a member of the Expert Group on Mortgage Arrears and Personal Debt

The media frequently does articles along the lines of "X no. of homeowners in arrears" and "Y no. of houses repossed", as if the values of X or Y are higher than in normal times. Sometimes they compare with a year or two ago, but I have yet to see any comparison with what would be considered the 'normal' rate of arrears/repossessions in a developed economy.

Is there anywhere we can see stats showing the rates of arrears/repossessions from past years - before the economic crisis kicked in. Without these stats, there is no way for the ordinary punter to judge whether or not arrears/repossessions are actually significantly higher than in the past OR to the rates of arrears/repossessions that banks typcially build into the 'risk' costs for such loans.

Hi CS

Sorry, I had meant to reply to this before. It's a very valid point.

The Financial Regulator started collecting the information only quite recently - I would say around June 2008. From memory, the percentage over 90 days was very low back then - around 1%. The Central Bank is generally very helpful on statistical issues, so give them a call and they will probably get it for you.

The Consumer Panel recommended back in 2007 that they should collect this data but they said that they could not do so for various reasons.