Negative equity mortgages approved

The Central Bank has said it intends to make it easier for  homeowners to obtain negative equity mortgages.

In a speech this afternoon, Central Bank deputy governor Matthew Elderfield said negative equity was likely to remain an "unpleasant reality" for many borrowers for years to come.

Addressing the Harvard Business School Alumni Club of Ireland in Dublin, Mr Elderfield said he supported moves to help those in negative equity and who could afford to service a bigger mortgage.

"Frankly, the Irish taxpayer does not have the financial resources to somehow eliminate or reduce negative equity in the mortgage market, either directly or through the banking system, but it does not need to do so in order to tackle arrears," he said.

Although an estimated 40 per cent of homeowners are in negative equity, Mr Elderfield said 93 per cent of such borrowers were not in arrears. He said it was encouraging that the majority of homeowners were paying their mortgages.

Last month, Bank of Ireland and Permanent TSB confirmed it had been given permission by the Central Bank to offer negative equity mortgages in limited circumstances since the middle of 2011.

Mr Elderfield said while negative equity mortgages posed consumer protection issues, because they involve borrowers taking on increased debt, the Central Bank had decided to make it easier for financial institutions to offer them.

He said in light of the limited take up of negative equity mortgages so far, and because of the potential benefits for facilitating moves and generating transactions in the housing market, the Central Bank has decided to "adapt its approach to make provision of negative equity mortgages easier".

He said: "We will not set prescriptive standards in these areas but will look to see that lenders are taking a reasonable and controlled approach."

Mr Elderfield added any such negative equity mortgage agreements would also have to comply with the affordability and suitability provisions set out in the Consumer Protection Code.

House prices have experienced a 48.2 per cent fall from the height of the boom, according to the most recent CSO data.

The Central Bank has forecast that mortgage arrears are likely to rise throughout 2012 and Mr Elderfield said this would have an obvious impact on the economy.

"It will take some time before the stock of arrears cases in the unsustainable category are resolved through loan modification, bankruptcy or non-judicial settlement mechanisms," he said. "This is not a problem susceptible to quick fixes or silver bullets but is going to take more time before the exact scale of the problem becomes clearer and certainly many years before it is resolved."

The latest figures show that 70,911 mortgages had fallen behind by three months or more at the end of December 2011. The increase to over 9 per cent in the number of repayments in arrears recorded was the largest increase since Central Bank records began nearly two years ago.

Mr Elderfield said the Central Bank is "pressing hard" for operational improvements at the banks so that arrears cases are handled in a way that meets consumer protection concerns and faces up to the unsustainable mortgage problem.

"The link between the mortgage arrears problem and the prospects of overall financial recovery and stability are obvious. It means that the borderline insolvent homeowners who genuinely can’t afford to pay back all their mortgage should get help," he said.

"But it also means that those who can afford to pay continue to do so. And it means that those who can afford to pay but won’t - thereby unfairly adding to the costs to the taxpayer by taking advantage of the current situation - they need to face up to their responsibilities."