IRELAND HAS A mortgage arrears mess – what has happened here simply would not have been tolerated in other countries.

Research from the Central Bank has shown that at the end of 2016, the five main mortgage lenders had 12,500 owner-occupier mortgages that were more than five years in arrears.

Considering the time since then, and adding in the accounts in long-term arrears held by non-bank entities such as investment funds, it is possible that there are something approaching 20,000 mortgage accounts more than five years in arrears.

This does not mean that it is more than five years since payment difficulties arose with these accounts; it means the borrower has missed the equivalent of at least five years of payments.

If the required monthly payment is, say, €1,500 then these borrowers would be at least €90,000 behind on their mortgage payments – at least.

It would be useful if the Central Bank would include a category for accounts more than five years in arrears in their quarterly statistics. It is extraordinary that we need such data to be published.

In many cases of arrears, borrowers are able to get back on track with a modified payment arrangement. The latest figures show that almost 120,000 owner-occupier mortgage accounts have been restructured by lenders. Of these, nearly 90% of borrowers are meeting the terms of the restructure.

Source: Sam Boal/Rollingnews.ie

Some of the changes are very modest and involve little more than a rescheduling of the payments required to repay the loan, while others involve much greater forbearance such as reductions in interest rates or the warehousing of part of the debt via a split mortgage. Almost 30,000 accounts are subject to split mortgage arrangements.

There are some loans where no viable alternative can be agreed. The blame for this can arise from the lender not being willing to take a sufficiently large loss from a restructure or from a lack of repayments or engagement from the borrower.

The solution to this impasse in all other countries is the same: the mortgage would be ended and the collateral would be used to repay the mortgage. This would occur either through a sale or voluntary surrender of the property or the lender would pursue a court-order to take possession of the property.

In all other countries they would be successful once the borrower has built up a few months of arrears. In Ireland, we have borrowers building up years of arrears and the clock continues to tick.

‘Tsunami’ of repossessions

For a variety of reasons, Irish banks are now seeking to sell these loans to remove them from their balance sheets. The new owners of the loans will face the same impediments to taking possession of the loan collateral that the Irish banks have faced over the past decade.

Investment funds have little interest in pursuing costly, and what may be ineffective, legal proceedings. A tsunami of repossessions has been touted since 2010, but there has been a dearth of evidence to support the wild claims.

It is true that the investment funds are not interested in a long-term play so the range of resolutions they are interested in offering differs to what the banks are prepared to offer.

They are interested in having a performing loan to sell on, but if the borrower can’t meet the required repayments the funds will offer resolutions but almost all of these involve ending the mortgage.

Some borrowers may be able to get back on track or refinance their debts with an alternative lender and it is likely that the funds will sell on those loans or accept a reduced amount to clear the loan.

However, given the type of loans that are being sold to these funds, the ability of these borrowers to make the required repayments or source alternative finance is unlikely to be the typical scenario.

Source: Shutterstock/Marbury

Much more likely are resolutions that involve ending the mortgage and also the borrower forgoing ownership of the property. And in most of these cases this is what should happen.

If there is some repayment capacity then the borrowers should avail of Ireland’s much-improved personal insolvency system. Indeed, the head of the Insolvency Service of Ireland has said “funds are easier to do business with because they are more willing to do a deal”.

To date, 90% of people who have completed a personal insolvency arrangement have maintained ownership of their primary residence.

By the start of 2018, unregulated loan owners, what are figuratively referred to as “vulture funds”, held 5,500 owner-occupier mortgages that were more than two years in arrears. Figures from the Central Bank show that, on average, these accounts have almost €175,000 of missed payments.

These loans are larger than average, likely have higher interest rates so could have a required monthly payment of €2,000. This means these have accounts of around seven years of missed payments, on average.

There have been breathless warnings that selling such loans to vulture funds will lead to an increase in repossessions. Unless some form of agreement can be reached this is something that should happen. These mortgages should be ended.

If the borrower has not been able to enter a split mortgage arrangement with their original lender they are not missing out by having their loan sold. The banks have agreed to almost 30,000 split mortgages so if it possible the banks will do it.

A borrower who delays until after their loan is sold to agree or adhere to a split mortgage arrangement has little grounds for complaint.

Mortgage-to-rent

In some instances it is possible the mortgage could be ended in relatively benign circumstances. One way of achieving this is through a mortgage-to-rent resolution. This sees the house sold to a housing body and the borrower becoming a social housing tenant in the original property.

One issue with this is that the application of social housing guidelines for income, house value and accommodation needs mean that only some borrowers will satisfy the qualification criteria.

However, if an eligible borrower would like to pursue a mortgage-to-rent resolution then the evidence to date is that they would be better off having their loan sold to a vulture fund rather than sticking with their original lender.

Source: Sam Boal/RollingNews.ie

Up to the middle of 2018, there have been 357 completed mortgage-to-rent agreements. This is a small amount but of these, just 40% were completed by the mainstream banks. The rest were completed by non-bank entities.

There was a degree of uproar recently when Ulster Bank announced that it was selling some non-performing mortgages. Figures from the Housing Agency show that Ulster Bank has been involved in just two completed mortgage-to-rent agreements. Between them Pepper, Start and Shoreline have completed 195.

Why are vulture funds more likely to do mortgage-to-rent agreements? One possibility is that they are more willing to accept the amounts offered by housing bodies to purchase the property. Yes, there will be a shortfall when this is set against the loan, but the vulture funds will be much more likely to write that off and move on.

Unless borrowers can get their repayments back on track, refinancing and mortgage-to-rent are probably the only scenarios where borrowers with loans sold to vulture funds will be able to remain in the property.

In the majority of cases it is likely that the proceeds from the sale or repossession of the house will be used to offset the mortgage with any shortfalls likely to be written off relatively quickly.

This is what should happen with secured lending and is what happens right around the world. This can be incredibly difficult for those involved but it cannot be avoided forever. And these borrowers already have a hugely valuable break.

They have made little or no mortgage payments for years. They have availed of housing services worth tens of thousands for virtually free. It is not the role of the banks to provide social or affordable housing.

There are plenty of people out there looking for housing who are either on local authority waiting lists or willing to pay for it. If a borrower can’t, or is unwilling to, pay for those services, then the mortgage should be ended and possession foregone with someone else using the property.

If the borrower wants to maintain ownership of a particular house the requirement is simple: pay the mortgage. We shouldn’t have needed the arrival of vulture funds to force us to confront this reality.

Seamus Coffey is a lecturer in economics at University College Cork.

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