Limited benefit to bank hoops

Yesterday, the Oireachtas finance committee issued its report in relation to the mortgage arrears resolution processes. It contained no fewer than 47 recommendations, a factor no doubt of trying to accommodate the ideas and wishes of the committee’s 27 members.

Why we need so many members on the committee is anyone’s guess. The United Nations Security Council only has 15 members and it’s charged with trying to maintain international peace and security.

One reporter asked for the top three recommendations from the report. Independent TD Stephen Donnelly replied by citing numbers 1, 2, 5, 7, 17, 20, 23, 27, 33, 34, 35, 46 and 47. To be fair, he was smiling when he read them out.

And Donnelly has been one of the better performers on the committee when grilling the banks, along with chairman Ciarán Lynch, Fianna Fáil's Michael McGrath and Sinn Féin's Pearse Doherty.

There are a number of good proposals in this report. The committee has called for the mortgage-to-rent scheme to be reviewed. The small take-up to date suggests that the committee is right to say that it is not “fit for purpose”.

It has also recommended that retired people should be able to continue their repayment schedule into old age, on a case-by-case basis. This might seem strange given that retired people are on fixed incomes that at best are only about half of what they were earning at work.

Continue repayments

But in many cases it would be cheaper for the retiree to continue to meet the mortgage repayments than to sell up and move into rented accommodation or seek housing from the State. And it would apply in cases where the sale of the property on the death of the owner or owners was likely to cover the residual loan.

Many of the other recommendations will play well with those in arrears.

For example, lenders found to have breached the code of conduct on mortgage arrears should “face disciplinary action by the Central Bank”.

People in mortgage arrears, who meet certain criteria, should have a right to a resolution process. Michael McGrath suggested that this should be a statutory right.

The committee calls for a “national plan” to assess both the risks and potential supports for families at risk of repossession. It also calls for a review of the insolvency and bankruptcy regimes, which have only recently been restructured, to reduce costs.

A "consistency of approach" in the way the various banks – AIB, Bank of Ireland, Permanent TSB and Ulster Bank – deal with customers in mortgage arrears is sought.

The committee probably has Bank of Ireland in mind with this issue. Unlike AIB or PTSB, Richie Boucher insists that interest will have to be paid on the warehoused portion of a split mortgage. In addition, he's not willing to simply write off the residual debt in cases where people have handed back their keys.

The committee said there’s no “justification” for a family to continue to be burdened by this debt once they’ve surrendered their home.

Boucher’s stance is that somebody has to pay for any debt write down and he’d rather it wasn’t his shareholders, who include the State.

The reality is that there’s probably no uniform solution to this problem that can be applied. The arrears problem differs from bank to bank.

For example, about 62 per cent of PTSB’s mortgage book is loss-making trackers. It’s a bigger problem for PTSB than for say Bank of Ireland.

The committee has also recommended more oversight of the banks in the arrears process, to achieve a fairer balance between borrower and lender.

Stress testing

This includes stress testing the current sustainable solutions. It also wants standard financial statements to be independently stress tested, and for the appeals process applied by banks to be independently adjudicated.

In addition, the banks should provide in writing the rationale for their solutions to those in arrears, and they should be required to set out, in written detail, why the alternative resolution options are “not appropriate”.

By forcing the institutions to jump through more hoops and by adding more layers of oversight and administration, they are effectively making it more difficult for the banks to enforce their security. That’s fine if your aim is to protect those in arrears from sharp practice by the lenders and to minimise repossessions.

But it has two potential consequences. First, it makes it more problematic for the banks to repay their exchequer-funded bailouts, particularly AIB’s €20.8 billion and PTSB’s €2.7 billion.

Second, it affects the ability of the aforementioned banks to attract private capital.

The reason why mortgage rates are much lower than for term lending or credit cards is not only because of the duration of the loans but because of the security involved. If you dilute the ability of the banks to enforce that security then you risk making them less attractive to private capital. In turn, this could limit the amount of funding they make available into the economy, which would be a problem for those seeking new mortgages. Be careful what you wish for.