Radical rethinking and a little cop-on needed to solve mortgage arrears crisis

When it comes to home loan arrears, the Irish Mortgage Holders’ Organisation (IMHO) has been an effective advocate for those who are behind with their payments.

From a standing start in 2012, the IMHO has established joint ventures with AIB and KBC Bank Ireland to assist arrears customers in their dealings with the banks, and last year it processed 2,556 arrangements.

So when it makes a submission to Government suggesting a number of reforms to the seemingly intractable problem of mortgage arrears, it deserves careful consideration.

In a six-page document to the Department of Finance, dated April 3rd, the IMHO has proposed a number of radical changes to address the risk of significant home repossessions, and the non-functioning of both the current insolvency legislation and the mortgage-to-rent scheme.

Last week, figures from the Central Bank focused minds on the issue of repossession. According to the regulator, some 30,904 solutions proposed by banks to owner-occupiers in arrears would involve "loss of ownership" or repossession. That represented 40 per cent of the total.

In terms of concluded solutions, loss of ownership was the outcome in 16,683 cases at the end of the fourth quarter of 2014. That represented one-third of the total.

The “concluded” figures are a sub-set of the “proposed” numbers. In fact, concluded means anything but in terms of the Central Bank’s Mortgage Arrears Resolution Targets (Mart).

The minimum threshold for loans categorised as involving a potential loss of ownership is the lodging of a civil bill with the courts. In many cases (we don’t know the precise number), banks have declared repossession as the concluded solution because arrears customers simply won’t engage with them.

So they threaten court action in the hope that customers will engage and an arrangement can be worked out.

The IMHO estimates that 25,000 repossessions are on the cards under the current regime.

The Mart statistics apply to six institutions: AIB/EBS, Bank of Ireland, KBC Bank Ireland, Permanent TSB, Ulster Bank and ACC.

The IMHO is seeking three major reforms. The first is a State-sponsored split mortgage that would involve a council supplementing mortgage payments to allow a family to remain in their home.

Mortgage-to-lease

The IMHO argues that this would be cheaper to the local authority than having to pay a family the full rent supplement on losing their home or having to re-house them.

An affordability test could be carried out by the lender or an independent third party with a Certificate of Affordability produced that would be valid for 24 months. There would be regular reviews of a family’s means and an “expedited repossession” process to take possession of the home in the event that the family weren’t making their repayments.

The council would get a charge on the property to protect its interests.

Looks good on paper but you'd have to imagine the European Commission would investigate it for potential state aid issues in a scenario where county councils would be subsidising mortgage repayments to banks that are majority or part-owned by the Government.

It’s also hard to imagine that the banks would be enthusiastic about such a scheme if it waters down their charge over a property.

Reform number two is the introduction of a mortgage-to-lease scheme to replace the mortgage-to-rent one that has failed miserably, with less than 100 arrangements concluded to date.

A special purpose vehicle (SPV) – called BankLease – would be set up to purchase non-performing loans from the banks at a discount.

Ownership of the dwellings would pass this the SPV, either by voluntary surrender or repossession.

An approved housing board would be appointed to manage the properties and the former owners would become tenants. This arrangement would be available to those with “no realistic possibility of . . . making significant repayments in the future”.

Finally, the IMHO wants reforms to the insolvency regime, including an appeal panel to review arrangements rejected by creditors, Vat to be waived, and the bankruptcy term to be reduced to one year.

A number of questions remain unanswered, namely the cost of these reforms to the State. It would also require incredible solidarity from the vast majority of the State’s citizens who are not in arrears with their mortgage payments – some 85.5 per cent of owner occupiers are up to date with their payments – for such reforms to work.

David Hall, the public face of the IMHO and a co-author of the submission, argues that there is no "magic wand" that will make this problem go away.

Even by adopting the IMHO’s proposals, Halls expects about 10,000 homes to be repossessed.

It needs “radical thinking” and “some cop-on”, he argues. “We don’t have a choice here.”

The IMHO’s proposals will probably prove too radical for the Government but changes will be made. Expect an announcement next week. Twitter: @CiaranHancock1