Are the banks finally facing up to the mortgage mess?

The big banks claim that they are getting serious about engaging with customers in mortgage arrears - but the signs so far aren't good, CONOR POPE,Consumer Affairs Correspondent

When it comes to restructuring debt, the Government can move pretty fast if it wants to. A couple of weeks ago, on Prom Night, the Dáil stayed up well past it’s bedtime to rubberstamp a bill aimed at liquidating the bank formerly known as Anglo.

The late night paid off and within 24 hours a deal (kind of) had seen it restructure a €30 billion promissory note into a long-term bond which, we were told, would save us a billion euro a year over the next 20 years.

While the sums owed by more than 100,000 Irish homeowners who can’t afford to meet their mortgage repayments is much smaller, the pain that debt is causing to individuals and families is, arguably, greater, but the pace at which the Government, the regulators and the banks have been moving at since the crisis began has been glacial.

According to the Central Bank, there were 135,628 residential mortgages in arrears at the end of last September, with 86,146 of them behind for more than 90 days. Today, that figure is almost certainly higher. There is much talk of the personal debt crisis – and at the highest levels – but for many people, respite seems a long way off.

It is more than a year since Minister for Justice Alan Shatter published details of new personal insolvency legislation which he described as the “most radical reform of insolvency law since the foundation of the State”. Almost 14 months ago, he promised to expedite its passage into law. It is not yet up and running.

When it does finally get going, it will help people deal with debts they will never be able to repay. The bankruptcy term will fall from 12 years to three, and an out-of-court debt-settlement system – where mortgage debt of up to €3 million can be written down to affordable levels – will be set up.

The regulators are also on the case. Kind of. Earlier this month, Central Bank governor Patrick Honohan said it was “ramping up” its engagement with banks, as they were “behind the curve” in dealing with mortgage arrears. “Banks will have to act more proactively and liberally in respect of those who cannot realistically pay, if they are to avoid the costs and inefficiencies of having to respond to PIA [personal insolvency arrangement] proposals or bankruptcy cases,” Honohan told a conference of bankers.

Stern words, but ones he has uttered to little effect in the past. Speaking to a handful of students who gathered in Limerick on cold, dreary night last March, Honohan said it was “surely now past time for the banks to be dealing more proactively with the situation of over-indebted buy-to-let borrowers no longer able to service the debts they assumed in order to take investment positions – now loss-making – in property”.

' Authentic leadership'

Last October Honohan’s colleague Fiona Muldoon had a go at rousing the banks. Speaking at a dinner attended by the great and good of the Irish banking industry, she told her audience that they had paid “lip service” to the notion they were dealing with troubled mortgages. She said banks needed “authentic leadership not humility; some courage to act”. She went on to say that she was not looking for “an overnight avalanche of available resolution options offered to thousands and thousands of borrowers”, just a “proper beginning”.

Maybe that beginning is beginning. Last week, the mostly State-owned Allied Irish Banks said it would ease the terms on 2,000 mortgages a month over the course of this year. It currently has 33,000 home loans in forbearance, where repayments have been reduced or suspended, but its chief executive, David Duffy, said the problem would be largely resolved before the end of 2013. He said the arrears would be tackled by splitting mortgages so that part of the loan repayments would be put on hold until borrowers’ circumstances improved. “All the arrears book will have long-term restructuring in place by the end of the year, bar a small percentage,” he said.

The second biggest player in the market, Bank of Ireland, is also tackling the crisis. Or it says it is. Before Christmas, bank executives told an Oireachtas committee it was offering mortgage restructuring options to between 400 and 500 customers per week. The committee heard that the bank, which controls about 20 per cent of the Irish mortgage market, had restructured 16,000 mortgages, and more than 86 per cent of customers whose mortgages had been restructured were meting their contracted payments.

Some experts are less than convinced. “We don’t know how many deals are being done,” says mortgage adviser and commentator Karl Deeter. “I have asked AIB how many split mortgages they have agreed and I can not get an answer. I suspect it is only a handful.”

Deeter points out that we are six years into this crisis and “AIB has only managed to deal with a handful of distressed mortgages. Now we are being told that the bank is going to plough through 33,000 mortgages in the next 40 weeks. Maybe AIB will be able to process and resolve 800 mortgages a week until the end of the year, maybe they have invested in some incredible new technology that will help them achieve this goal.” He is not convinced.

The most common restructuring Deeter has seen – and the one he believes is most effective for people who are struggling – is the interest-only option. He says these make “more sense than the split mortgages”.

Here is why. If you have a €300,000 mortgage over 30 years at a tracker rate of 2 per cent capital and interest, you will be paying about €1,100 a month. Take on a split mortgage which will see half that loan warehoused and the repayments will fall to €740 a month compared to a monthly repayment of €550 on interest only.

“Let’s be honest here,” says Deeter. “If repaying a mortgage is a serious problem then which is better, repayments of €550 or repayments of €740? When people fall into arrears, it is not about the absolute terms of the mortgage but about immediate and everyday cash flow.” Deeter is not convinced that any of the offers on the table from the banks will work long term.

“If you found out you had cancer, would you want chemotherapy or green tea? You would want what works best, and what works best is debt write-down, but we have yet to see that being offered in any meaningful way.”