Since last year a legal loophole has stopped banks from repossessing the homes of defaulting borrowers on loans taken out before 2009. The Government, under pressure from the troika, has agreed to close the loophole and to change the law. Next year banks will recover a legal right to seize property for non-payment of mortgage debt – an option it is to be hoped banks will exercise with restraint, and as a last resort. Before the new legislation is passed, the Personal Insolvency Bill will be in operation. And the debt resolution mechanisms it provides offers some protection to homeowners in arrears. However, Fianna Fáil’s finance spokesman, Michael McGrath, remains sceptical and claims the Bill’s current provisions are insufficient.
The latest Central Bank figures on mortgage debt present a worrying picture. Close to one in five mortgage accounts (167,000) – with €35 billion of outstanding debt – were in arrears last June. To date, fewer than 1,000 repossessions have taken place, a much lower rate than in other countries, like Spain, that are recovering from a major property crash. An obvious public fear raised by the restoration of the banks’ right of repossession is that it could lead to, as Mr McGrath has suggested, “a flood of family homes being repossessed”. That seems unlikely. A statement yesterday from Minister for Justice Alan Shatter provides reassurance.
Banks would not benefit financially from a wave of repossessions, while public opinion would not support such a reckless approach. Property prices have already fallen by 50 per cent from their peak and the sale of repossessed homes on a weak market would depress prices even further. Banks were recapitalised by Government to cover unavoidable loan losses, not to provide relief to borrowers who can service their loans. The challenge for the banks lies in drawing a clear distinction between these two classes of borrowers: those who can’t pay, where debt write-offs are inevitable and appropriate, and those who can pay – but claim otherwise – and refuse to do so.