Tools for dealing with mortgage crisis are in place
Opinion:The figures published by the Central Bank yesterday concerning homeowners in arrears of mortgage accounts are astonishing: at the end of December 2012, there were 792,000 home mortgage accounts in Ireland with a value of €110.8 billion. Of these, almost 18.2 per cent were in arrears.
The overall money balance owing on mortgages in arrears was almost €26.6 billion. Looking forward, the average or blended quarterly rate of increase of arrears is in the region of 6.5-7 per cent. This leaves the realistic possibility that by December 2013 about 155,360, or almost 20 per cent, of all mortgage accounts in the State will be in arrears.
The size and weight of the problem dictate that solutions alternative to repossession be adopted. In simple terms, what would the banks do with such a huge stock of repossessed homes? How and where would the dispossessed be housed?
Arising from these difficulties, in July 2010 the Cooney report on mortgage arrears and personal debt recommended both revision of the Central Bank code of conduct on mortgage arrears and the creation of a mortgage arrears resolution process with the geeky-sounding acronym of Marp (mortgage arrears resolution process). When applied, these amounted to a low-profile but high-impact change to the normal manner in which a bank can deal with its mortgage customers in arrears.
Given the size of the problem, both Government and governor of the Central Bank Patrick Honohan have recently engaged in megaphone diplomacy, publicly urging the banks to speed up their handling of mortgage arrears on family homes under Marp. Honohan has said that for the majority of co-operating homeowners a “debt modification that enables them to stay in their home will often be the best solution all round”.
On the basis of the latest Central Bank figures, the lending banks’ restructuring of arrears cases is slow: only 28 per cent of accounts in arrears have been restructured.
However, the Central Bank, as regulator, also bears responsibility for the delay. Since 2011, the Central Bank has had in place both the code and Marp.
Despite this there is no evidence of active enforcement of code provisions by the Central Bank although it has recently prioritised “inspections” in respect of banks’ compliance with the code of conduct, but only with the express purpose of reviewing the current code.
The code and Marp, if consistently and fairly applied, may be far more useful in resolving the mortgage arrears problem than their use so far suggests.
Firstly, and as a consequence of a High Court ruling in January, the legal effectiveness of the code has been enhanced.
The court, having stressed the constitutional concepts of “safety and security of the dwelling”, found that where a bank has not complied with the code it would not be appropriate for a court to grant that bank an order for possession in respect of the borrower’s home.
This takes the code beyond its former perceived status as “soft law” to a step that a bank is legally obliged to take if it wishes to exercise its security to the point of repossession. Although further legal challenge to this position can be anticipated, the legal incentive for banks to comply fully with the code is currently in place.
Secondly, the lending bank operating under the code is obliged to consider all alternative repayment options, including those specified in the code. If the bank decides a mortgage is “unsustainable” and an alternative repayment option is not suitable the reasons for this must be given by the bank.
The major question turns on when a is mortgage sustainable and when is it unsustainable? I agree with solicitor Declan Black (Irish Times Business, February 25th) that guidance should be given on this point.
I am suggesting a method as to how this could be achieved. The code obliges banks to explain why a given mortgage is not sustainable. In turn, the banks must document their internal considerations on this issue for inspection by the Central Bank.
The Central Bank is therefore in the ideal position to assemble the data on sustainability of mortgages. Once the data is assembled and considered, the Central Bank could then formulate policy and guidance as to how banks ought to decide whether a particular mortgage is sustainable or not.
To those practising in this area, it seems that until this type of policy and guidance are put in place homeowners in arrears will not be treated in a fair, consistent and transparent manner.
The tools for reaching a solution for 140,000 homeowners in arrears are available, they need only be used.
PATRICK O'REILLYis a senior counsel