As more and more mortgage holders run into arrears, reports of banks agreeing settlements or offering debt write-downs are on the increase. Whats the reality, and what does it take for the banks to offer such recourse?
IT MUST have come as welcome news to the nearly 78,000 mortgage holders in arrears when the insurance broker body PIBA released a survey which found that the banks are negotiating with distressed mortgage holders.
The survey found that around 60 per cent of its brokers said banks are coming to “arrangements” with consumers who are in difficulty with their mortgages.
What it didn’t say is that these “arrangements” are in most cases short term forbearance measures which according to David Hall of New Beginning, the organisation set up to help people struggling with debts, are in the long term “torturing people and serving nobody any good. Short term forbearance doesn’t work”.
He believes what is needed urgently is a more structured long-term approach to debt: “The problem has been a lack of creativity on the part of the banks.”
The most common arrangements being offered to consumers include increased loan terms, deferred payments, fixed-period moratoriums, and interest-only periods, the latter Hall likens to “trying to pedal a bicycle with no chain. The banks have pussyfooted around and people’s debt is accumulating.”
As regards PIBA’s finding that the banks are negotiating, he says: “Since Marp was introduced the banks have no choice but to give short-term forbearance, there are no gold stars for brokers negotiating any of this.”
Struggling mortgageholders were given hope in a landmark case last month when the Bank of Ireland decided to write off €152,000 of mortgage debt owed by Dublin nurse Laura White. White, with the help of New Beginning, agreed a deal with Bank of Ireland to repay €18,000 of it in a settlement similar to the new out-of-court personal insolvency arrangements proposed by the Government. But none of this happened until after the bank sat on the house for two years before selling it and pursuing her through the courts for the balance.
The Personal Insolvency legislation, the publication of which has been postponed to the end of June, contains three voluntary debt-settlement systems and reduces the period of bankruptcy from 12 years to three years.The Personal Insolvency Arrangement caters for secured and unsecured creditors from €20,000 up to €3 million.
For example if a person’s mortgage is in negative equity, some or all of this amount could be written off under a Personal Insolvency Arrangement, (eg if a person has a mortgage of €500,000, their house is worth just €300,000 and they can only afford to pay a maximum mortgage of €400,000, the debtor and their trustee might propose a debt reduction of €100,000). If a person has investment properties, these will be put up for sale and a percentage of the outstanding amount will need to be paid off over six years. For the Personal Insolvency Arrangement to be effective, at least 55 per cent of the unsecured creditors and 75 per cent of secured creditors must agree to the arrangement.
Hall says part of the problem is lack of creativity on the part of the banks. “They have IT infrastructure challenges in terms of adopting new products and are very restricted in what they can do.” It is unclear whether a number of controversial elements will remain, including that the bank doesn’t have to agree to a settlement arrangement even if a personal insolvency trustee has assisted in its preparation.
A number of financial products have been been proposed by the banks to the Central Bank and some have yet to be approved.
The first is the mortgage to rent scheme, which is being piloted, and is designed for those in desperate straits. The lender sells the property to a housing agency which lets it to the former owner. The current value of a property has to be under €220,000 and a family will not qualify if their income is more than €42,000 between three adults and four children. The banks will then come to an arrangement about how to deal with the balance of the debt. “Our recommendation is write-down,” says Hall.
The product likely to be the most popular is the split mortgage, where the debt is divided up and an affordable amount is paid off a portion of it every month.The remainder is put on the shelf and paid off later. It’s unclear whether the balance would be interest-bearing but New Beginning says this would not work.
The third product is the negative equity mortgage, already being offered in limited form by a few banks, which allows people to trade up or down, and take the balance with them.
Frank Conway of moneycoach.iesays at the moment the most common short term arrangement is for the mortgage to be changed to interest free or interest free with part payment.
PIBA says the banks most inclined to negotiate arrangements are KBC (38 per cent), Bank of Ireland/ICS (20 per cent) and Permanent TSB (16 per cent).
However Conway isn’t inclined to agree. “All banks and even their departments can have varying positions. For example, Bank of Scotland was one of the most flexible when all of the other banks were inflexible. They are no longer lending. AIB has also been flexible, but I believe they are still developing their processes. Permanent TSB was one of the least flexible with their buy-to-let customers (as well as their interest rates), but this has shifted since the State took a more active role in that lender.”
Eugene McDarby of debt restructuring agency Moneyvillage.iesays that now, with nearly 78,000 people in mortgage arrears, the banks are awash with debt "and don't have the staff to deal with the administration to put arrangements in place for people who are indebted".
McDarby says the problem with interest-only periods and other short term measures is that a large percentage of people are breaking these arrangements because they can’t afford to make full payments. “So I would say to people that they should be extremely realistic when filling out Standard Financial Statements (designed to assist people to set out their current financial circumstances). They might think, ‘We’re cutting back, we shop in Lidl, we don’t go to the doctor anymore’, but they leave themselves with no emergency fund, something happens and they miss payments and psychologically it gets harder the more you are in arrears.”
At the moment, write-downs generally only happen when the bank sees no hope of recovering the mortgage. “You might see it, for example, where a couple in negative equity separates, they both move abroad and no-one is paying the mortgage. The bank will sell the property and chase the balance but ultimately write off the debt if they can’t get the individuals,” says McDarby.
Partial write-downs happen more frequently. This is where the banks write down part of the balance eventually. After a property is sold, the amount written down will depend on ability to pay.
“We have voting on the Stability Referendum today but stability and growth will only happen when the Government deals with the personal debt situation,” says David Hall.
