Banks' approach to fixing mortgages in arrears may lead to future problems

Banks may be storing up problems for borrowers and themselves under the most popular method they use to restructure mortgages in arrears, according to the head of the country’s insolvency service.

At the end of December, 28 per cent of the almost 121,000 troubled owner-occupier mortgages that had been restructured by banks were made up of solutions where the amount owed in arrears had been added to the principal of the loan, according to Central Bank data – so-called arrears capitalisation.

"I'd have an issue with arrears capitalisation being the largest category of restructures," said Lorcan O'Connor, director of the Insolvency Service of Ireland, which was set up in 2013 to help insolvent borrowers who are having difficulty reaching a deal with their lender.

“This solution may work for a very small number of cases where, let’s say, you’re a landscape gardener and you break your arm and are out of work for six months. Dealing with someone’s problem loan by making it bigger is not really sustainable [in most cases].”

The latest Central Bank figures showed customers who had had their arrears capitalised as part of a plan to make their debt sustainable were most likely to default again.

Some 24 per cent of owner-occupier accounts that have been restructured in this way had “redefaulted”.

New obligations

The redefault rate among buy- to-let mortgages where past arrears have been added to the loan principal was even higher, at more than 40 per cent.

More than 85 per cent of all restructured mortgages – both owner-occupier and buy-to-let – were meeting their new obligations at the end of December.

Split mortgages, the second- most popular solution where a portion of the debt is warehoused until the borrower’s circumstances improve, has one of the highest levels of being adhered to, at about 95 per cent for both private and buy-to-let loans.

AIB stands out among the country’s surviving bailed-out banks as using the highest proportion of arrears capitalisation, which accounted for over half of its 29,514 forbearance cases at the end of last year.

A spokeswoman for the bank said 94 per cent of its restructuring arrangements were meeting their terms of their agreement at the end of last year.

While she declined to break this down by categories of forbearance, the bank has said in the past that it only formalises restructuring arrangements once a borrower has demonstrated they can meet the new terms for at least six months. They are then put on a further six months probation.

Fallen

The bank’s overall owner-occupier arrears cases have fallen by 29 per cent from 2014, it said during the week.

At Bank of Ireland, arrears capitalisation accounted for 19 per cent of all owner-occupier mortgage restructures at the end of December, while the figure was 11.2 per cent at Permanent TSB.