‘Irish legal system’ to blame for high number of long-term mortgage arrears

The Irish legal system is to blame for the persistence of long-term mortgage arrears so long after the financial crisis, a new study published by the Central Bank has suggested.

The report said cases involving long-term arrears (those with missed payments stretching over two years), were rare internationally because repossession proceedings were usually shorter.

“The current legal system makes it difficult for banks to repossess collateral to resolve these loans, and so long-term mortgage arrears are the product of a long repossession process,” it said.

As of March this year some 29,000 residential mortgages were classified as being in long-term arrears.

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The study said that while there had been an overall decline in mortgage arrears in recent years, those in long-term arrears have increased and now form “the largest component” of Irish mortgage arrears, comprising 41 per cent of all arrears cases.

It also noted that while the number of loans entering long-term mortgage arrears had slowed to its lowest level since the crisis began, the number of loans exiting has also slowed.

As of December last year, the average amount of missed payments on these mortgages was €66,409, while 10 per cent of the loans had accumulated more than €129,148 worth of missed payments. The average loan in this category also had outstanding arrears worth around 23 per cent of the underlying property’s value.

The study found that long-term arrears cases tended to have received a smaller number of modifications (where the terms of the contract are changed) and were less likely to be currently modified.

Loans that go through the current Mortgage Arrears Resolution Process (devised by the Central Bank) are twice as likely to end up in a lower arrears state six months later than if the borrowers had not engaged. “This demonstrates the importance of borrower engagement with the arrears resolution process,” it said.

Non-performing loans

The study by Central Bank researcher Terry O’Malley was published as a financial stability note along with another report which examined the balance of non-performing loans (NPLs) in the Irish banking system. These stood at about €25 billion last year, down from €85 billion in 2013.

The research considers the main driver of NPL reductions in different lending segments over the past five years.

It found that “loan cures” – the return of defaulted loan balances to performing loan status – was the principal driver of NPL reduction in the residential mortgage market, particularly in the case of owner-occupier mortgages, where loan restructuring has played a pivotal role.

This reflects the importance of the Mortgage Arrears Resolution Process to support homeowners in arrears, it said.

In contrast, loan exit – through liquidations, write-offs and sales – accounts for the large majority of NPL reduction in the commercial real estate market.

Buy-to-let mortgage resolutions were a product of both loan exits and loan cures.