On 29 July 2011 an Inter-Departmental Working Group (the "Group") formally commenced work to consider further actions to alleviate the increasing problem of mortgage arrears in Ireland at the request of the Government's Economic Management Council. The Group reported its findings on 30 September 2011 and its report (the "Report") was recently published following consideration by the Government. The Report sets out the Group's conclusions in respect of debt forgiveness and other measures. It focuses solely on home owner mortgages and does not address the buy-to-let market.

Background to the Report

The Report is the latest Government publication to address the issues facing the ever increasing numbers of borrowers in mortgage arrears. In February 2010, the previous Government established the Mortgage Arrears and Personal Debt Expert Group (the "2010 Expert Group") which made a number of recommendations in relation to the treatment of borrowers in mortgage arrears. The recommendations of the 2010 Expert Group were largely adopted in the revised Central Bank of Ireland Code of Conduct on Mortgage Arrears ("CCMA"). The CCMA established the requirement for:

  • a formal mortgage arrears resolution process ("MARP");
  • a twelve month moratorium on repossession of a borrower's primary residence; and
  • mortgage lenders to make every reasonable effort to agree an alternative repayment arrangement (i.e. forbearance) with the borrower prior to applying to court for repossession.

While the 2010 Expert Group recommended against the introduction of debt forgiveness, precipitating the Report has been the regular publication of statistics highlighting a steady increase in arrears over the last two years and a public debate around the issue of debt forgiveness or restructuring has been taking place over the last year or so. According to the Report, approximately 45,000 households are currently in 90 days plus arrears on their homeloan and approximately 32,000 of those are in 180 days plus arrears.

Key Findings

Sustainable solutions

The Report identifies that to date the collective approach has been to buy time and "wait and see" if a borrower's situation improves. Currently many borrowers are sheltering behind existing protections and, with their problems increasing, the Report calls for a broader range of solutions. The Report notes the need to move beyond the "wait and see" approach and ensure more sustainable solutions are agreed between borrowers and their lenders.

Debt forgiveness

The Group recommends this to be considered on a case-by-case basis and does not recommend a blanket debt or negative equity forgiveness scheme. Amongst the underlying themes to the Report is that the majority of mortgage holders must continue to meet their mortgage obligations - those who can pay, must pay - and that it is inevitable that some people will lose their homes. According to the Report a blanket or negative equity forgiveness scheme "would not be an effective use of State resources and would not solve the problem". It is noted in the Report that 50% of all arrears cases are held with banks that are not part of the eligible liabilities guarantee scheme, all of which have already received State support.

The Group's conclusions on debt forgiveness are founded on the:

i. Group's finding that it would cost approximately €14 billion to clear the negative equity in Irish mortgages;

ii. Group's view that affordability is the reason for mortgage arrears not negative equity; and

iii. Central Bank of Ireland ("Central Bank") estimate that only 10-13% of those in negative equity are in arrears.

Forbearance

While it was acknowledged by the Group that forbearance will, and does have, a role to play, forbearance is not appropriate in all circumstances and is not the solution for long term unsustainable mortgages. Moreover the Report notes that the long term position needs to kept under review. This may ensure that only those borrowers who will be able to pay at some point in the future remain on forbearance arrangements for prolonged periods.

It was noted by the Group that it is too early to assess the effectiveness of the voluntary deferred interest scheme ("DIS"). The DIS allows borrowers who can afford a certain amount of interest on their mortgage to defer the payment of the balance of the interest for a period of up to five years if certain conditions apply. The Report states that lenders representing approximately 70% of the mortgage market have indicated they will offer a DIS.

Suggested Strategy

To curtail the problem of increasing mortgage arrears the Group recommends the following strategy:

New bankruptcy legislation

Under current legislation many mortgage holders in difficult mortgages could face permanent bankruptcy.

The Group does not envisage a resolution to the mortgage arrears problem without the enactment of new legislation governing judicial bankruptcy. The legislation must take into account the corresponding needs of debtors and creditors, and must strike a balance between the two and avoid incentivising behaviour to cease paying debts.

The Report also recommends that new non-judicial debt settlement arrangements be introduced at the same time as the new bankruptcy legislation. This, according to the Report, will prevent and discourage the overuse of bankruptcy which could potentially give rise to a volume of cases that the courts would be unable to deal with.

The Group advocates a "three tiered debt settlement process" with the introduction of:

  • a revised judicial process involving the reform of bankruptcy legislation and in particular a move away from the current 12 year automatic discharge period1;
  • a non-judicial debt settlement process, which may include secured debt. This process would normally involve a non-judicial debt settlement period of five years. Difficulties may arise where there are secured and unsecured creditors (see further below); and
  • a Debt Relief Order to settle lower value bankruptcy cases. Where a person has no assets and no income, this order would facilitate the write off of unsecured debt within a short period of time.

It is noted in the Report that there is no precedence for non-judicial settlements to include secured lending and that it would be difficult to obtain approval from unsecured creditors if they saw that it improved the security position of the mortgage lender. It is observed in the Report that in Ireland the situation is more complicated than in other jurisdictions as the level of negative equity means that secured loans essentially contain significant amounts of unsecured debt. The Report states that mortgage lenders will need to make allowances within solutions on a case by case basis to make some funds available to facilitate unsecured debt settlement.

The Troika of the European Commission, European Central Bank and International Monetary Fund have recently delivered the update for the third quarter of 2011 on Ireland's adherence to the terms of its bail-out. It was reported that the decision to include mortgage debt in voluntary personal debt settlements was debated among the Troika, the banks, Government and the Central Bank.

It was also reported that the Troika questioned what effect debt settlements would have on the capital position of Irish banks.

Separately in a Dáil debate on 18 October 2011 the Minister for Justice and Equality stated his concerns that if a debt settlement arrangement scheme is introduced that "does not deal with secured credit in some way, it may overly incline debtors or creditors towards bankruptcy as the most practical application for a full resolution of their position".

Mortgage Interest Supplement ("MIS")

The MIS was introduced and designed as short term State support to help certain eligible persons make mortgage interest repayments.2 The Report states that it is now supporting people for significantly longer than originally intended and that long-term MIS acts as a State subsidy to banks. In line with the 2010 Expert Group, the Group recommends MIS be time limited and curtailed once mortgage to rent schemes (outlined below), which could provide a "more sustainable solution", are available.

Further solutions aimed at mortgage holders in arrears

The Group set out a range of suggested solutions based on certain key principles. The principles include ensuring that borrowers who can, should pay and requiring compliance with the MARP. It is acknowledged that borrowers are not entitled to any particular solution, availability is dependent on individual circumstances and any solution will have consequences. The Report recommends the use of a "decision tree" in the assessment of the solutions to be offered to borrowers.

  • CCMA - Mortgage arrears resolution process

The Group acknowledges the importance of MARP as the "foundation to the individual case by case assessment approach". The Group recommends the continued compliance by mortgage lenders with MARP.

  • Mortgage to rent schemes

The Group recommends the introduction of two mortgage to rent schemes. To qualify for such schemes a mortgage must first be assessed as unsustainable. The mortgage holder must then show that they would qualify for social housing if they lost their home and finally, their house must be appropriate to social housing. Advantages and disadvantage of the schemes are provided in the Report.

i. Mortgage to rent - approved housing body ("AHB")

Under the AHB scheme the house is bought from the mortgage holder by AHB, with the mortgage lender providing a 75% long term loan to AHB secured on the property. The Department of Environment Community and Local Government (the "DECLG") would provide the remaining 25% equity to AHB, secured by a second charge on the property. The mortgage holder continues to live in their house but now as a social housing tenant paying rent at an agreed means tested rate to AHB, with the DECLG paying the balance of up to 80% of current market rent.

ii. Mortgage to rent - leasing

In this instance the mortgage holder's house is surrendered to the mortgage lender (voluntarily). The mortgage lender in turn provides a long term lease to the Local Authority (the "LA"). The original mortgage holder then rents the house from the LA at an agreed means tested rate. The DECLG would pay rent up to 80% of the market rental to the LA.

  • Trade down mortgages

In certain circumstances the Group consider that it may make sense for a mortgage holder in mortgage difficulties to trade down to a lower value house and carry the negative equity with them. To determine whether this option should be available to a mortgage holder, the level of the mortgage holder's income and negative equity, and the scale of the trade down. Maximum loan to value and other parameters would need to be agreed between lenders and the Central Bank.

  • Split mortgages

The Group considers that the use of split mortgages is viable in certain instances. This process involves splitting a distressed mortgage into an affordable mortgage and warehousing the balance. The amount which the mortgage holder can pay towards the affordable mortgage is calculated pursuant to their net disposable income ("NDI") i.e. their household income after all relevant taxes and social insurance contributions are deducted. If the mortgage holder's NDI increases then the amount of the mortgage warehoused will reduce and will revert to the affordable mortgage. At the outset, both the mortgage lender and mortgage holder will need to come to an agreement as to how the balance remaining in the warehoused loan is to be paid at the end of the term. The advantages of this approach include keeping mortgage holders in their homes and the avoidance of unnecessary market transactions.

  • Sale by agreement

In certain circumstances the mortgage will be unsustainable and none of the above solutions will be viable. The only resolution may be for the mortgage holder and mortgage lender to agree to sell the property and to reach a reasonable agreement on the shortfall.

Independent Mortgage Advice Function

The Group recognises the need for support and advice for distressed mortgage holders if there is a movement away from the wait and see approach and that MABS is currently not an adequate recourse for such mortgage holders. Therefore, the Group recommends the establishment of a mortgage support and advice function. This function would offer advice to mortgage holders, review cases and act as a consumer advocate in this area. The Group recommends that the function should not encroach on the Central Bank's banking supervisory function nor on its consumer protection roles.

Next Steps

The Group's recommendations are being considered by Government. In announcing its publication the Minister for Finance, Michael Noonan, stated that work was already underway to implement the key elements of the Report.3 The Minister of State for Housing is expected to introduce two pilot mortgage-to-rent schemes in early course.

The reform of personal bankruptcy law is already underway. The Department of Justice and Equality are currently preparing a Personal Insolvency Bill due to be published in early 2012. The Bill will aim to provide "a comprehensive new framework for settlement and enforcement of debt and for personal insolvency".

In addition, the opposition to the Government have recently published proposals for a Debt Settlement and Mortgage Resolution Office Bill 2011. Amongst other things the Bill aims

to reform the law on personal insolvency, to provide for a non-judicial debt settlement and resolution mechanisms

and to provide for a debt settlement and mortgage resolution

office. The Minister for Justice and Equality, Alan Shatter, has indicated that the Government is not opposing the Bill in order to encourage debate on the issues.

Comment

For mortgage lenders and for those who own or service mortgage books in Ireland the Report should be welcomed.

It is hoped that the Report will spark a wider debate on the need to move from the "wait and see" approach set out in the CCMA to longer term solutions aimed at addressing the issue of unsustainable mortgages. The Report recognises the difficulties facing both borrowers and lenders and endorses the adoption of longer term solutions that, while difficult to implement in the short term, should enable lenders to manage their portfolios in a more decisive manner.

Footnotes

1 Section 85 of the Bankruptcy Act 1988 was amended on 10 October 2011

by the Civil Law (Miscellaneous Provisions) Act 2011. The amended section 85 provides that after 12 years, every bankruptcy will stand discharged. While amendment came into effect prior to the publication of the Report, the Report references the amended position.

2 The MIS does not provide any assistance in the repayment of capital or

insurance and is only available where certain conditions are met, including that the borrower could afford the repayments at the outset of the mortgage and that the amount of interest is reasonable based on the borrower's needs. Those in full-time employment (i.e. employment for 30 hours per week or more) and those in full time education do not generally qualify for the MIS. Borrowers are means tested to assess level of support, if any, that will be made available.

3 http://www.finance.gov.ie/viewdoc.asp?DocID=7006 .

This article contains a general summary of developments and is not a complete or definitive statement of the law. Specific legal advice should be obtained where appropriate.