Keys, please

There will be a dramatic surge in home repossessions this year. Banks will move “distressed” borrowers, already struggling to make ends meet, from affordable tracker mortgages on to costly variable rates. These greedy institutions have been let off the leash by a Government desperate to resolve a mortgage crisis that has seen 100,000 homeowners fall into long-term arrears.

No, wait. What we are going to see is the introduction of a range of sensible measures aimed at tackling that crisis by helping banks engage with borrowers meaningfully, sympathetically and sustainably. This is the fairest way to tackle a debt crisis caused by feckless borrowing, and the best way to collectively move into a new era of fiscal responsibility.

Or maybe it’s a little of both.

The battle lines were drawn two weeks ago, when Minister for Finance Michael Noonan and the deputy governor of the Central Bank of Ireland, Matthew Elderfield, announced a new strategy for dealing with the Republic's mortgage-debt mountain. Advocacy groups for holders of distressed mortgages insisted nothing was being done to help those most in need, while bankers congratulated the Government on its latest moves and called for more power to act tough.

The Government is not just paying lip service. Tackling mortgage debt is an important step in resolving the economic crisis, and not just because the troika is breathing down its neck.

Under the new proposals, the Central Bank has set six of the State’s 16 mortgage lenders targets to offer borrowers “sustainable” restructured loan arrangements. These banks have until the end of the year to offer sustainable debt solutions to half of people in arrears. Banks that do not meet the targets will be penalised.

A restriction that has prevented banks making more than three unsolicited calls a month to borrowers in arrears will be lifted. Legislation is to be rushed through the Oireachtas, circumventing a legal judgment that effectively halted repossessions more than two years ago.

Banks will also be able to take people in arrears off tracker rates once they offer an alternative deal that is said to be more advantageous to the borrower in the long term.

The word “sustainable” has been repeatedly used by Ministers and regulators in recent days. But what does it mean?

"The banks have been told they have to offer sustainable arrangements, but there is no definition of what sustainable is," says Brendan Burgess of the financial advice website askaboutmoney.com. "That is a big flaw with the new arrangements."

Burgess says a bank might make an offer that it claims is sustainable but that the borrower sees as impossible. And there is no referee to make a final call. That is not to say there is no appeals process. Each of the banks has an appeals board, but they are staffed by bank employees, whose impartiality is questionable.

Going after homes with equity

Burgess is gloomy about what lies ahead for tens of thousands of people.

“First, the banks will go after those who still have equity in their house,” he says. “If someone who bought in 2002 has a mortgage they are struggling to pay, there is a real incentive for the banks to pursue them. They can repossess that house and sell it at a profit.

“They are also going to go after trackers,” he says. “They will want to push as many people off trackers as they can, and they will be able to say they have targets set by the Central Bank. They can say they have been ordered to restructure or repossess.”

The phones ring steadily in the offices of the Irish Mortgage Holders Organisation, off Capel Street in Dublin, this week. Scribbled in red marker on a whiteboard are the times of more than a dozen pending court actions. Behind each of those names is a heartbreaking story, says David Hall, a director of the advocacy group.

Hall says the banks have been given the moral authority to turf people out of their homes. He says that the new arrangements are riddled with holes and that sustainability hasn’t been defined. “Affordable hasn’t been defined. And Noonan said homes would be repossessed only as a last resort. But what does ‘last resort’ actually mean? That hasn’t been defined.”

Suite of solutions
Noonan has also claimed that a "suite of solutions" is available to holders of distressed mortgages. They include mortgage-to-rent deals that would see homeowners surrender their houses to the lenders but continue to live in them as tenants; split mortgages, which would see a portion of a mortgage warehoused, allowing homeowners to pay the interest and capital on the remainder; and debt-for-equity deals, whereby banks would take a share in a home and realise that equity only when the house was sold.

Hall does not believe such deals are options for most people. “Where are they?” he says. “Only two of the six covered banks currently offer split mortgages, and only two offer mortgage-to-rent, so what is the Minister talking about? The reality is that most lenders are not offering the main solutions. We are five years into this crisis, and so far there have been 52 split mortgages offered, six trade-down mortgages and eight mortgage-to-rent deals. That is 66 arrangements out of more than 100,000 people who are in trouble.”

He does not believe the changes announced last week will fix the problem, and he anticipates that “all hell is going to break loose when it comes to repossessions” in the next six months.

Karl Deeter of Irish Mortgage Brokers agrees, at least in part. "There will be a lot of repossessions, and the buy-to-let sector in particular is going to be hammered," he says.

Deeter is more sanguine than Hall, and points out that many of the properties that will be taken “should have been repossessed over the past four years”. He believes people who are two years in arrears will be dealt with first, with most set to lose their property. “They will also be getting away from unsustainable debt, and those people’s credit rating has already been destroyed.

It is widely accepted that buy-to-let borrowers will be first against the wall, but family homes might be taken too. Anyone who thinks they will be able to surrender their house and walk away debt-free if their mortgage is in arrears is mistaken, says Burgess.

The plans do not mention legacy debt or debt forgiveness. Lenders may not actively pursue borrowers for unsecured debt. "But do you want that hanging over you for the rest of your life?" asks Burgess.

Restoring the power of banks

The Irish Bankers’ Federation has a very different perspective. It has welcomed the proposed lifting of restrictions that cap the number of unsolicited calls banks can make to borrowers to three a month.

“Among lenders there is huge frustration at not being able to constructively engage with borrowers in arrears,” says Felix O’Regan of the federation.

“There are customers who are strategically playing the system, and banks are being forced to do their job with one, if not both, arms tied behind their back.”

O’Regan says banks have to be able to threaten repossession to bring some people to the table.

"It is this threat that focuses minds. Both inside and outside the banking sector, there is a belief that restoring the powers of banks to do that will most likely give rise to a change in behaviour among a certain category of borrower."

Strategic defaulters
The category O'Regan is referring to is the so-called strategic defaulter, who can pay off debt but chooses not to. "All our members are concerned about certain trends where they see no apparent change in a borrower's circumstances but a very serious change in repayment behaviour." He describes the level of strategic default as significant.

Brendan Burgess estimates that about 10 per cent of people in long-term arrears are strategic defaulters, having chosen to be “because they have realised the banks cannot do anything”.

Some people are taking advantage of the system to escape debt. One financial adviser outlines one of the methods such people use. “Let’s say you have a family home and five investment properties on which you have mortgages of €200,000 each. You get a monthly rental income of €1,000 on each of these apartments. This covers the rent, but you want rid of them.

“In the first month you don’t pay the mortgages on the investment properties and put the money into an account the bank will never be able to access . . . You do the same in the second month and ignore the letter from the bank warning you that you are now in arrears.” For the rest of the year, make sporadic payments, feign illness and make life difficult for the bank. By the 12th month, legal proceedings will have begun, but the strategic defaulter will have siphoned off more than €50,000. The bank may seek to repossess the family home, he says. “It is most unlikely to be able to repossess that. Even if it does, you can declare yourself bankrupt, wait three years and use the cash reserve to start again.”

David Hall does not believe that 10 per cent of those in arrears are strategic defaulters or resort to such cynical methods. In his experience, most of the people in trouble have no plan and are simply being punished by the banks.

“It is very hard to understand the impact being in serious debt can have on people,” he says. “It strips them down to the bone and tears away their defences. We deal with people from all walks of life, but the one thing they all have in common is incredible stress and fear.

“And it is so unnecessary. The banks are putting people through this because they have these outdated processes and they are dysfunctional and broken. The new rules do not address the problem. They don’t change the process.”

Some banks are doing deals, albeit secret ones that require borrowers to sign nondisclosure agreements; others are much more bullish. How the conversations between distressed borrowers and their lenders end depends on which bank you talk to. "AIB and Permanent TSB are more open to negotiate," and KBC is the easiest of all, says Hall. "Ulster Bank is the most aggressive."

The problem of mortgage arrears is not unique to Ireland. Property bubbles have burst before, and in the recent past Sweden, Norway and France have coped well with similar situations.

Following Norway's example
Norway had a huge property bubble that burst in 1987. By 1993, houses had lost up to 60 per cent of their peak value. As the number of evictions increased the government introduced a debt-settlement act. If a person was found to be incapable of paying their mortgage in the short to medium term, a deal was struck.

If borrower and bank failed to to reach a voluntary settlement, the state stepped in. Mortgages were split in two. The first part was secured debt and put at the current value of the property plus 10 per cent. The rest was unsecured debt. For five years, only the interest was paid on the first part of the debt. At the end of the five-year process, the unsecured balance got written off.

Within five years Norway’s property market had bounced back. Those who had taken advantage of the system still had their houses, and manageable mortgages too, but everyone, including those who had struggled through and continued to pay their debts, was better off because the market had rebounded and the economy had started to function.

Such regulatory muscle is missing here, says David Hall. “The Central Bank should have given prescriptive solutions. It should have said you can’t charge interest on the warehoused portions of a mortgage, and it should have said the splits would have to be 50/50, or the debt-for-equity deals would have to be at least 60/40.

“Instead it has left it in the hands of the banks, and they will cherry-pick where they will go first. There will be a big increase in repossession procedures, and we will have a very difficult six months. There will be repossessions coupled with confusion, and at the end of the 12 months I think very little will have changed,” says Hall.

So what happens next? The threat of repossession may see strategic defaulters come to heel. Actual repossessions might allow people escape debts they will never pay. They might also allow the banks to maximise their returns on bad loans and return to profitability, which will in turn help the economy return to an even keel. People might end up homeless, and on the social-housing list as a result of losing their homes, while banks desperate to sell thousands of repossessed homes could further depress the market.

Or maybe nothing will change.