Legal process makes mortgage arrears crisis far worse
Legal opinion:The governor of the Central Bank is frustrated by the banks’ lack of progress in dealing with mortgage arrears. Banks and borrowers share his frustration as those I deal with are keen to seek resolution of mortgage arrears – but on widely different terms.
What is causing this difficulty? One of the main contributors is the absence of clear and predictable outcomes in court if there is no agreed resolution. Successful negotiated solutions become much more probable when both parties are clear about the likely alternative outcomes if no agreement is reached. This is why clear law and a predicable approach by the courts leads to settlement of disputes.
But in Ireland legal proceedings for repossession of property are often complex, protracted and uncertain. The main beneficiaries of this are lawyers. Neither banks nor borrowers benefit as the debt increases and the security and incapacity to pay remain as before.
Since the decision in the Start Mortgages case in July 2011, summary legal proceedings seeking to recover possession of registered land where the mortgage was granted before December 1st, 2009 and the mortgage monies did not become due before that date, have been effectively stymied. Other court decisions, such as ILP v Duff in January, have added further uncertainty.
While the Government appears to accept that the Start Mortgages judgment arose as an unintended consequence of 2009 legislation, its response has been to do nothing until prodded into action by the troika. The Government has indicated that it will pass amending legislation, but only after the first applications for personal insolvency schemes have been received under recently passed personal insolvency legislation. This legislation gives the State a chance to bring certainty of outcome and efficiency of process to repossessions. If it does, it will be significant in resolving the mortgage arrears crisis.
There are a number of steps that the State can take to improve matters. First, there should be a distinction between the family home and investment properties. There is no policy reason why the holder of security over an investment property should not be able to enforce their security over that property quickly and cheaply.
Second, the legal process for all repossession actions should be simplified. There is rarely a true legal controversy between the bank and borrower in these situations. In the vast majority of cases, the money is due and the security is good.
What these cases are usually about is giving borrowers time to address arrears problems or to arrange a sale and alternative accommodation. The pinch is usually a disagreement between borrower and bank about whether a sale is necessary or when it should occur. A straightforward affidavit-based system in the circuit court could manage these issues with the judges having discretion to impose stays.
This is not an approach which lacks compassion or is legalistic. It’s one which focuses on personal circumstances and economic realities rather than those issues being the subtext in a contrived dispute about legal issues.
Third, the Code of Conduct on Mortgage Arrears and the Consumer Protection Code should be simplified and not apply to investment properties. Currently, they purport to require that a bank should act in the best interests of its customer. This suggests to some customers that the banks should do nothing about arrears and realising their security when the banks are subject to countervailing duties to their shareholders, including the State.
In addition, conflicts between the codes, which require communication with borrowers, and the personal insolvency legislation which, when a person is subject to a protective certificate, prohibits such communication, need to be resolved. If these codes are simplified and harmonised with other legislation and obligations, then there should be fewer disputes about compliance before the courts.
Lastly, the Central Bank and the newly created Insolvency Service could provide guidance in relation to what is an unsustainable mortgage so banks and borrowers are encouraged to a common view of sustainability. The Personal Insolvency Act provides a framework in this regard and it would be ironic to see banks pressurising people into personal insolvency arrangements to effect repossessions or restructurings due to a failure by the State to provide simple and predictable legal process for repossession actions.
* Declan Black is head of insolvency at Mason Hayes Curran ( mhc.ie)