Relief for borrowers
One measure of the scale of the Irish financial crisis has been the dramatic collapse in house prices. They have halved since their peak and largely contributed to a 38 per cent fall in the net worth of households - the largest decline in the European Union. This has left Ireland with one of the highest levels of household debt in the world with many carrying an unsustainable debt burden. Some 16 per cent of all residential mortgage loans are in arrears of more than 90 days, with the outstanding loan balance owed by borrowers amounting to €17.5 billion. But now some help for distressed borrowers is in sight.
A major reform of insolvency laws has seen a new insolvency service established. It should start next month. In addition, the Central Bank last week launched a pilot scheme on debt restructuring to help those borrowers in financial difficulty who may not qualify for the insolvency process. If the scheme proves successful, those owing sizeable sums to different lenders could reach some accommodation with their creditors and so hope to find a pathway out of debt. However, much now depends on whether a cross section of 750 borrowers in arrears can – within a three-month deadline – agree debt settlement terms with their various lenders.
The Central Bank has got the agreement of secured and unsecured creditors – including banks, credit unions and credit card companies – to participate in the pilot project. This could result in either a write-down or a write-off of some of the debt owed by borrowers in financial difficulty. The aim of the new scheme is to see whether a sustainable and fair outcome, acceptable to both borrowers and lenders, can be achieved. And if it can, the pilot project could later serve as the model for wider national application, settling distressed debt cases more rapidly and at less cost. The scheme offers debtors and creditors every incentive to reach agreement without recourse to the insolvency process. Banks in particular are under increased pressure from the Central Bank to achieve mortgage resolution targets by specific dates, by addressing the long-standing problem of their non-performing loans.
Under the terms of the pilot scheme, the proposed framework will offer a range of solutions suited to the financial circumstances of each debtor: from a best case scenario where borrowers are given a grace period on their loans; to a worst case one where the only option may be for the debtor to opt for the insolvency process. Too much time has already been lost in tackling the problem of high levels of distressed debt. Hopefully, the Central Bank’s pilot scheme and the start next month of a new insolvency regime will help to expedite matters, and lift some of the large burden of debt that weighs heavily on the shoulders of too many Irish households.