Banks 'could take stake in homes'

Fri, Sep 2, 2011, 01:00

Central Bank governor Patrick Honohan has ruled out a blanket debt forgiveness scheme, but said banks were looking at shared equity arrangements with stressed mortgage holders.

Appearing before the Oireachtas Committee on Finance, Public Expenditure and Reform with the head of financial regulation Matthew Elderfield this morning, Mr Honohan said the problem of mortgage arrears was severe, and banks had been slow to deal with the issue.

He warned that the problem could only be dealt with on a case by case basis, saying there was no "silver bullet or one size fits all approach" that would solve the problem.

"It may be possible to arrange that, even very stressed, owner-occupier borrowers who have to surrender ownership could stay in their house on a rental basis; and there could be intermediate shared equity type solutions," he said.

"All of this would need to be on a case-by-case basis without imposing avoidable costs on the State, which has, after all, provided the necessary capital."

He said banks were considering ideas along these lines, and they would not require legislative or regulatory action.

Prof Honohan told the committee that some distressed bank customers have had the size of the mortgages reduced, negotiating contracts with their lenders where the overall level of debt was reduced. This had occurred in a small number of cases and it was part of a process that the Central Bank was supportive of, he said.

Prof Honohan told Deputy Michael McGrath that banks had to establish a realistic, comprehensive picture of the debtor's situation and a "modification" could be introduced by the bank if that was necessary.

He said it was important for banks and customers that they had a "realistic" approach to debt.

However, Prof Honohan said he was not satisfied with the level of resources the banks were devoting to dealing with customers who were having difficulty servicing their debts. "We think they are behind the curve," he said.

Mr Elderfield said some banks were allowing new mortgages to people who were in negative equity situations but it was not suitable for most people. Negative equity mortgages are designed to allow people move home and bring their negative equity with them.

Prof Honohan said the Central Bank is about to undertake a major thematic review of banks’ compliance with the code governing mortgage arrears.

“We will visit the banks to examine very closely how they are handling distressed mortgage holders and to check that they have the appropriate framework and adequate resources in place to look after their distressed customers properly and to meet their statutory requirements under the code.”

He said he would advise bank chief executives to examine very carefully their compliance with the code on mortgage arrears and to ensure their processes and resources are up to the task.

Irish banks are now financially sound, he told the committee.

Mr Honohan's comments this morning fit in with the views of the Minister for Finance Michael Noonan, who yesterday categorically ruled out a universal debt forgiveness scheme for struggling mortgage borrowers, saying it was “not a realistic option”.

“If there is some kind of free-for-all debt forgiveness, there are a lot of people going to be in the queue,” Mr Noonan told the TDs and senators. “You are all practising and practical politicians and you will be fairly aware of the clientele in every constituency, and you will have a queue down in the clinic looking for write-offs on Monday morning if there is any announcement of universal write-offs.” 

The Minister said measures suggested by a group appointed by the Government to consider solutions for distressed borrowers would be implemented before the budget.

The issue of debt forgiveness has become the subject of growing debate as Central Bank figures released this week showed that more than 55,000 homeowners were more than three months behind on repayments.

The Minister said he intended to push for losses to be imposed on senior unguaranteed bondholders at Anglo Irish Bank, putting him on a collision course with the European Central Bank. He did concede though that this would be “a difficult argument”. 

Ruling out an early budget, he said he may seek savings beyond the targeted €3.6 billion if global economic turmoil leads to weaker domestic growth in 2012.

It was “too soon to call” the exact level of savings to be sought but a decision will be made by next month. There would be no tax increases, such as on income tax, that would create further unemployment problems, he said.

This morning, Prof Honohan told the committee that growth in the economy is "somewhat weaker", though only slightly than when the country's international bailout program started.

"That means that the fiscal goals can be broadly achieved" with same size of budgetary measures as planned, he said. He also suggested that the Government consider a faster approach for dealing with its deficit as part of a full range of policies.