After 18 months of "engagement" with the banks and some political persuasion, the Central Bank of Ireland yesterday issued the "targets" that it expects the Republic's main lenders to hit in a bid to tackle the mortgage arrears crisis.
There was lots of talk about how the number of repossessions would have to rise significantly for the crisis in mortgage arrears to be tackled meaningfully.
Minister for Finance Michael Noonan reiterated his view that you can't have 100,000 people not participating in the growth of the economy because they are burdened with mortgage arrears.
Without doubt, mortgage arrears is a very real problem in Ireland. At the end of December 2012, 94,488 or 11.9 per cent of private residential mortgage accounts were in arrears of more than 90 days.
Of this cohort, roughly one-quarter are in arrears of two years or more. That’s 23,500 mortgages and those borrowers are the ones who are surely most in the firing line.
On the buy-to-let side of the equation, 28,421 residential mortgages are in arrears for more than 90 days.
The positive news, if it can be so described, is that the level of new arrears is slowing.
Nonetheless, a significant problem remains and almost five years into the financial crisis, the Central Bank and Government have decided to act. There are many cross-currents involved in dealing with this personal debt issue. Those in mortgage arrears typically have unsecured debt.
How will this plan affect unsecured lenders, such as credit unions and credit card companies?
The Central Bank and the various credit institutions are involved in discussions to agree a framework on this thorny issue.
There is also the potential impact of the Personal Insolvency Act, which reforms the bankruptcy laws and will come into play shortly.
And what of the strategic defaulters? These are the mortgage holders who won’t pay rather than can’t pay and are playing a game of chicken with the banks on the basis that they will get a write-off on their debts.
Remarkably, there are no statistics on the number of strategic defaulters in the system.
The proposals set out by the Central Bank yesterday also exclude mortgages with Bank of Scotland, Danske, IBRC (Irish Nationwide home loans) and subprime lenders. These arguably have the highest arrears levels.
No prescriptive solution
There was no prescriptive solution provided yesterday by the Central Bank on how to resolve this issue. Instead, a series of targets have been set for the banks to agree a "sustainable solution" with borrowers.
The Central Bank wants the lenders to have provided proposals to 20 per cent of those in arrears by the end of June, 30 per cent by the end of September and 50 per cent by the end of December.
These will ratchet up further in 2014.
In July, it will tell us the targets that have been set for deals to be concluded with those in arrears.
The regulator wants the terms of these agreements to be adhered to in 75 per cent of cases throughout 2014. Otherwise, the big stick will come out.
A failure to comply comes with the threat from the regulator that it will impose additional capital requirements and/or force them to make provisions in their financial accounts against impaired loans.
In the cases of AIB and Permanent TSB, this could have implications for the State as their only source of such capital is likely to be the exchequer.
Noonan made it clear yesterday that if such a scenario were to come to pass, he would be looking to replace the senior management teams at both banks.
AIB's David Duffy and PTSB's Jeremy Masding have been put on notice.
The Central Bank is also proposing changes to the code of conduct on mortgage arrears.
The two main changes involve lifting the three-calls-a-month cap on lenders contacting customers and a proposal that borrowers could be moved off tracker rates if the bank provides an “advantageous” alternative arrangement such as a debt write-off.
The regulator is seeking submissions on this by April 10th.
The narrative yesterday was that more repossessions are inevitable.
But people will only be thrown out of their homes as an absolute last resort.
Buy-to-lets are the low-hanging fruit in this debate and it seems certain that they will be targeted more aggressively than home loans, at least in the first wave of this battle against arrears.
A resolution of the arrears problem will depend on how far the public authorities are willing to push the lenders on the issue.
