Property Investor

Bankers seem to be finally realising that a softly, softly approach is the most effective way to recover their cold hard cash

THE AMERICAN venture capitalist Wilbur Ross may well have opened a hornet’s nest by suggesting that the Educational Building Society might have to write down the value of mortgages held by customers in negative equity.

The comments were probably designed to help the Cardinal syndicate, of which his company is part, to take control of the building society. Whether or not it succeeds, his intervention will prompt a debate on how to deal with the ever increasing number of residential mortgage holders in negative equity or currently unable to meet their monthly commitments.

Because Ireland is essentially a recourse lending country, it follows that, for example, someone owing €300,000 on a mortgage but only managing to sell the property for €200,000 will still have to repay the additional €100,000.

A study by the Central Bank has shown that at the end of June about 5 per cent of all mortgages – 36,438 – were in arrears of 90 days or more. Worse still, two-thirds of them (24,797) were more than six months in arrears. And that does not take into account the increasing number of buyers in negative equity following the collapse of values over the past two years.

While there is little chance of lenders as a whole committing themselves to a debt forgiveness programme for borrowers out on a limb, the reality is that some institutions are quietly making concessions to customers in need of help. One building society, for example, recently agreed a settlement with a couple who were separating and whose home was in negative equity. The forced sale of their house threw up a shortfall of €140,000.

The society agreed to allow the couple to pay off this unsecured element of the loan at an attractive tracker rate over the remaining period of the original mortgage. Bank of Scotland, shortly to exit the Irish market, is also showing considerable flexibility in dealing with customers selling investment properties at a loss.

The conciliatory approach being adopted by some Irish lenders may well have been prompted by the realisation that the taxpayers are, after all, bailing them out after their foolish escapades landed the country in dire straits.

One expert, Frank Conway of the Irish Mortgage Corporation, says he has been hearing more and more anecdotes from customers in which banks appear to be exercising a much greater degree of flexibility than previously thought possible.

Based on those conversations, it would appear that some lenders were prepared to offer favourable repayment terms in order to get their capital repaid, including options such as below-cost or zero interest loans. It also seems that lenders may be accepting that those loans will be repaid over 25 or 30 years, or more.

Conway has suggested that mortgage write-downs should be offered in cases where a mortgage holder is ill and can no longer work, or in the case of family breakdown, particularly where income has been reduced as a result of both parties going their separate ways.

Debt forgiveness should also be available, he says, to people emigrating to find a job and who cannot clear a mortgage because their property is in negative equity.

With lending institutions continuously looking at ways of keeping mortgage repayments flowing and reducing their exposure to a ghastly property market, an increasing number of their clients are seeking professional advice on how to respond to what they contend are unfair demands by the banks in the present climate.

Many borrowers paying interest only on mortgages run the risk of defaulting if they are forced to pay principal as well after a series of pay cuts. In most cases, borrowers are striving to service other loans as well as mortgages.

There is a limit to what they can do. An over zealous banker can foolishly undermine a functioning mortgage.