Are the banks finally facing up to the mortgage mess?

Maybe that beginning is beginning. Last week, the mostly State-owned Allied Irish Banks said it would ease the terms on 2,000 mortgages a month over the course of this year. It currently has 33,000 home loans in forbearance, where repayments have been reduced or suspended, but its chief executive, David Duffy, said the problem would be largely resolved before the end of 2013. He said the arrears would be tackled by splitting mortgages so that part of the loan repayments would be put on hold until borrowers’ circumstances improved. “All the arrears book will have long-term restructuring in place by the end of the year, bar a small percentage,” he said.

The second biggest player in the market, Bank of Ireland, is also tackling the crisis. Or it says it is. Before Christmas, bank executives told an Oireachtas committee it was offering mortgage restructuring options to between 400 and 500 customers per week. The committee heard that the bank, which controls about 20 per cent of the Irish mortgage market, had restructured 16,000 mortgages, and more than 86 per cent of customers whose mortgages had been restructured were meting their contracted payments.

Some experts are less than convinced. “We don’t know how many deals are being done,” says mortgage adviser and commentator Karl Deeter. “I have asked AIB how many split mortgages they have agreed and I can not get an answer. I suspect it is only a handful.”

Deeter points out that we are six years into this crisis and “AIB has only managed to deal with a handful of distressed mortgages. Now we are being told that the bank is going to plough through 33,000 mortgages in the next 40 weeks. Maybe AIB will be able to process and resolve 800 mortgages a week until the end of the year, maybe they have invested in some incredible new technology that will help them achieve this goal.” He is not convinced.

The most common restructuring Deeter has seen – and the one he believes is most effective for people who are struggling – is the interest-only option. He says these make “more sense than the split mortgages”.

Here is why. If you have a €300,000 mortgage over 30 years at a tracker rate of 2 per cent capital and interest, you will be paying about €1,100 a month. Take on a split mortgage which will see half that loan warehoused and the repayments will fall to €740 a month compared to a monthly repayment of €550 on interest only.

“Let’s be honest here,” says Deeter. “If repaying a mortgage is a serious problem then which is better, repayments of €550 or repayments of €740? When people fall into arrears, it is not about the absolute terms of the mortgage but about immediate and everyday cash flow.” Deeter is not convinced that any of the offers on the table from the banks will work long term.

“If you found out you had cancer, would you want chemotherapy or green tea? You would want what works best, and what works best is debt write-down, but we have yet to see that being offered in any meaningful way.”