Banks under pressure to use split mortgages to tackle arrears
Central Bank governor Patrick Honohan sees split mortgages as playing a critical role
Central Bank of Ireland governor Patrick Honohan has made it crystal clear that he sees split mortgages as playing a central role in resolving the large level of arrears that have accumulated
To split or not to split mortgages.That is the decision facing banks in Ireland and those in arrears with their home loans.
Central Bank of Ireland governor Patrick Honohan has made it crystal clear that he sees split mortgages as playing a central role in resolving the large level of arrears that have accumulated here since the economy crashed in 2008.
At the end of March, 95,554, or 12.3 per cent, of residential mortgages were in arrears of 90 days or more.
Between them, they owed €18.1 billion to their lenders, which is 16 per cent of the outstanding balance on all mortgage accounts here.
Solving this problem has become something of a political hot potato. The banks reckon they can resolve the issue given time and left to their own devices. They assure us they have no desire to put people out of homes.
The Government believes the banks have let this drag on too long and wants action now. It’s under pressure from voters to keep the banks in their box and to stop letting them dictate the game.
The Central Bank also wants our banks to get moving on mortgage arrears but, given their still fragile financial state, it has to be careful not to impose a solution that would derail their recovery. It’s a delicate balancing act.
The regulator sees split mortgages as a key part of the resolution targets it set in March. It has told the banks it wants “sustainable solutions” to be provided to half of those in arrears by the end of this year, with the terms of the restructured mortgages being met in 75 per cent of cases by the end of March 2014.
The banks would have preferred if the effect of the Dunne judgment, which has blocked repossessions in recent years, had been reversed first. They also argue that time should have been given for the new personal insolvency regime to take effect and for the results of a pilot scheme between secured and unsecured lenders to emerge before setting such targets. All of these boxes have yet to be ticked.
Split mortgages are one solution the banks will use to meet their targets. In simple terms, they involve splitting a mortgage into two parts for a borrower in arrears. The bank assesses what a borrower can afford to pay and warehouses the balance to be dealt with at a later date, typically when the term of the mortgage expires.
Each bank has its own view on how they should operate.
Bank of Ireland charges interest on the warehoused portion of the mortgage. So this debt continues to grow over the term of the loan.