Blanket forgiveness of mortgage debt is rejected
THE INTRODUCTION of two “mortgage to rent” social housing schemes, a specialised mortgage advice service and a range of alternatives which banks should offer homeowners struggling to make mortgage repayments are among measures proposed by the Inter-Departmental Working Group on Mortgage Arrears.
However, there will be no blanket debt or negative equity forgiveness programme.
The group’s report, published yesterday, was broadly welcomed but rejected as inadequate by a number of lobby groups.
Details of a pilot scheme for two “mortgage to rent” social housing schemes will be announced by the junior minister for housing, Willie Penrose, next week.
This will see approved housing bodies taking ownership of houses in certain circumstances and the leasing of houses by banks to local authorities if that is deemed to be more appropriate.
The report, commissioned by the Government earlier this year, was drawn up by a group chaired by Declan Keane, from the Department of Finance.
It includes officials from his department and the departments of social protection and environment.
Although it took submissions from banks and advisory groups, none was asked for assistance in drafting the final report.
The report said the issue of mortgage difficulty could only be considered on a case-by-case basis. It said “mortgage forbearance measures are appropriate in many cases”, but warned that long-term forbearance would not be sufficient in all cases.
Defending the decision not to implement a blanket guarantee, the report states it would cost about €14 billion to clear the negative equity in Irish mortgage portfolios, while tackling mortgages taken out between 2006 and 2008 would cost about €10 billion.
It also notes that 50 per cent of the arrears to date are outside the covered banks.
It proposes a more specialised mortgage advice service be established – that could link into the Money Advice and Budgeting Service (Mabs) – to provide specialist advice and assistance to mortgage holders in difficulty to enable them to evaluate their options with mortgage lenders.
Underpinning possible solutions, the report also states reform of the bankruptcy and personal insolvency law is fundamental. Without it, the mortgage problem will not be resolved, it says.
AIB said it would implement pilot programmes to some of the proposals contained in the report, describing the recommendations as a comprehensive response to longer term challenges.
The solutions proposed within this report will enable all lenders to work towards a long term solution for customers in significant financial difficulty taking account of their specific circumstances, the bank said.
All solutions, short term or long term, will require the co-operation of the customer working with their lender to reach a resolution of their individual situation.
The Irish Banking Federation welcomed the publication of the report, saying although existing forbearance measures provided critical support for borrowers, further measures would be necessary for those in an unsustainable solution.
David Hall, businessman and co-founder of the New Beginnings group, which is lobbying for a balance of responsibility in mortgage debt solutions, branded the report absolutely pathetic.
What is this report all about?
An inter-departmental working group, chaired by Declan Keane, produced this report on tackling the State’s growing mortgage debt crisis.
How many people are now in difficulty?
The report says there has been a dramatic rise” in the level of mortgage arrears in the last two years and it expects “further deterioration.
It says about 45,000 households are in arrears of 90 days or more, with 32,000 of these households in arrears of more than 180 days. About 56,000 households have restructured their mortgages.
Another report? Have we not been here before?
Yes and no. This is the third report on the mortgage crisis in two years. This one is different in that it contains a number of concrete proposals aimed at resolving the crisis faced by up to 10,000 people with completely unsustainable mortgages.
It also proposes a number of approaches banks can take to help people who are just about managing to make their repayments, and gives people who want to sell at least some chance of doing so.
Does the report make any mention of debt forgiveness?
Yes, but only to rule it out. It says mortgage difficulty “can only be considered on a case-by-case basis having regard to the individual circumstances.
Mortgage forbearance measures are appropriate in many cases but the report warns that long-term forbearance will not work for everyone and it will have to be recognised by borrower and lender that some mortgages are unsustainable and that more viable solutions will have to be advanced for such cases.
What mortgages does it regard as unsustainable?
If someone is hopelessly in arrears, on social welfare and with no prospect of being able to service a mortgage, then, the report, suggests, forbearance is not an option.
Claiming the Mortgage Interest Supplement (MIS) indefinitely is to be ruled out. More than 6,000 people are claiming the the supplement for over a year.
Instead of long-term support, , the report proposes the introduction of two mortgage to rent social housing schemes that would see approved housing bodies taking ownership of houses in certain circumstances.
Households in extreme mortgage distress and eligible for social housing would remain in their homes as social housing tenants, with either the lending institution or a housing association taking ownership of the property. As many as 10,000 people could see ownership of their homes transferred to local authorities under this scheme.
What happens next?
The Minister for State with responsibility for housing Willie Penrose will announce details of pilot schemes next week.
If I qualify for the scheme, how much will the local authority pay for my house?
Houses will have to be independently valued, and the outline scheme envisions a small discount on current market value.
There is a problem with this plan. If a person has a mortgage of €400,000 and their house is now valued at €200,000, then that is the amount a local authority will pay.
This leaves €200,000 outstanding to the bank. As it stands, the homeowner will still owe the bank this shortfall. This issue will have to be tackled as part of the Personal Insolvency Bill, which is now being fast-tracked.
What are the proposals for dealing with people in negative equity?
There are none. The report says affordability of mortgages and not negative equity is the most pressing issue.
What options are on the table for people who do not want to surrender their homes or don’t qualify for the schemes but can’t service their debt?
The possible solutions that will need to be advanced by banks to address mortgage overindebtedness include trade-down mortgages, split mortgages, and sale by agreement.
Trade-down would allow people with higher value properties to trade down to a cheaper property and have any negative equity attached to their new mortgage.
A split mortgage would see a mortgage broken into two parts creating an affordable mortgage by “warehousing” a portion of the loan to a future point. At the end of the mortgage term, the borrower and lender would have to tackle the warehoused loan. A range of options is outlined for doing this.
The third option is sale by agreement, which would allow homeowners to sell up and “reach a reasonable and appropriate agreement” with the lender on how to deal with the shortfall.
The report is vague on what this “reasonable and appropriate” agreement might involve.