Cliff Taylor: We are getting to the harder mortgage arrears cases

Sparked by the proposed sale of €3.7 billion in mortgage loans by Permanent TSB, this week's hot political issue has been what this will mean for borrowers, and whether we might be facing the long-forecast "wave of repossessions" of homes.

Moves under discussion to change regulation of the sector are not going to solve this, though they might allow politicians to be seen to be “doing something.” There is no easy fix for a situation where the banks – as in the tracker mortgage controversy – have shown themselves to be spectacularly inept in sorting things out, aided by a political system happy enough to allow all this to drag on. And now the crunch is coming.

Ten years after the crash we are left with some 50,000 residential mortgage accounts in arrears of over three months, and another 20,000 buy-to-let mortgages in a similar position. The funds or banks who buy many of these loans are going to want to sort them out one way or another, and sell them on at a profit.

There may always have been an inevitability about the economics of this – people with no hope of ever servicing a mortgage were never going to hold on to their home in the long term. But the politics is toxic. Those losing their homes will face into a housing and rental shortage. And as well as dealing with owner-occupiers, the funds will be dealing with tenants as they take on buy-to-let mortgages.

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There are regulatory protections here too. But the funds will take a more active approach than the previous owners.

Biggest regret

The spectacular property and economic crash led to an explosion of non-performing loans, peaking in late 2013 at just under 32 per cent of the total. Progress has been made in dealing with this – the total is now down to 10 per cent of loans – but it has been slow.When he left office at the end of 2015, outgoing Central Bank governor Patrick Honohan said the slow pace of dealing with arrears was the biggest regret of his term.

After the crisis broke, deals were offered to some borrowers, but they tended to be temporary “extend and pretend” arrangements. Debt was parked, not written off. Loans went to interest-only, or payments were reduced for a period. There was a failure to put borrowers in a sustainable position.

And action against those who were never going to be able to afford to pay has also been slow, with delay caused first by legal uncertainty – later dealt with by legislation – and by the slow trundling of the legal system.

State ownership of much of the banking system has also been a silent factor.

Now a mixed batch of non-performing borrowers are left on the bank loans books: those who have not been able to keep up, even with restructured loans; people who have not engaged with their bank for years; buy-to-let owners in deep arrears and so on.Some of the detail is remarkable. PTSB said some borrowers in arrears have not engaged with them for seven years. How has this been allowed to happen?

Economist Séamus Coffey points out that the average amount of cumulative missed payments on residential mortgages more than two years in arrears has risen from €40,000 per account to almost €80,000 per account over the past five years. While the overall numbers in arrears have been falling, the difficult cases have been slipping into deeper waters.

Regulation

With AIB and Ulster Bank lining up to follow PTSB in selling off books of non-performing loans, this is not a once-off problem.

Fianna Fáil is pushing for the extension of Central Bank regulation to include the investment or "vulture" funds who are the most likely buyers of the loans, and has put forward draft legislation on the issue. Currently those who manage the loans in Ireland on behalf of the funds are regulated, but not the funds themselves.

It is worth looking at whether there are regulatory gaps – though it is not clear whether Fianna Fáil and Fine Gael can reach a deal here. But this is not the crux of the issue. Borrowers in Ireland already have high levels of legal and regulatory protection.What is happening is that we are getting to the harder cases to deal with in terms of mortgage arrears – those who either can't pay or won't. Even operating within the rules many of these cases will inevitably move towards repossession.

There are some solutions for cases where people simply can’t afford to pay, such as the mortgage-to-rent scheme, under which the home is sold by the lender to a housing association and rented back to the occupier. But the availability of such options are limited, and our crocked housing market won’t help in dealing with this.

In his comments when he departed Honohan spoke of the need for a kind of “triage” process in banks , as seen in emergency departments, with the more difficult arrears cases sorted into those capable of restructuring and those which were not and where repossessions were inevitable. There were probably fewer repossessions here than elsewhere, he said, but there was also a cost in taking so long after the crisis to sort it all out. The cases also need to be divided into borrowers who have tried to sort it out and done their best, and those who have been gaming the system.

More deals

Now the harder cases remain, and we are not clear whether the triage has even been done. Under pressure from the European regulator the banks are now accepting a loss and selling on the loans. They surely should have been able to do this process themselves – including doing more deals with borrowers. But they couldn’t – and they didn’t.

Like a sequel to a bad horror movie, the tracker mortgage affair is now being followed by the non-performing loan sell-off. With the vulture funds as the baddies, this one will run and run at the political box office.