Ireland: Resolving The Mortgage Arrears Crisis

On 13 March 2013, the Government issued its statement on "Resolving the Mortgage Arrears Crisis". This coincided with the publication, by the Central Bank of Ireland (the "Central Bank"), of: (a) a "Review of the Code of Conduct on Mortgage Arrears" (Consultation Paper CP 63, which will lead to a revised Code of Conduct on Mortgage Arrears (the "New CCMA")) and (b) its "Mortgage Arrears Resolution Targets".

These developments follow various steps taken by the Government and the Central Bank in the areas of mortgage arrears and bankruptcy, including a revision of the previous Code of Conduct on Mortgage Arrears (the "CCMA") in January 2011, the publication of the report of the Inter-Departmental Mortgage Arrears Working Group (the "Keane Report") in October 2011, the signing into law of the Personal Insolvency Act 2012 (the "PIA 2012") on 26 December 2012, the establishment of the Insolvency Service of Ireland (the "ISI") on 1 March 2013 and the development by the leading banks (in conjunction with the Central Bank) of Mortgage Arrears Resolution Strategies ("MARS").

Statistics published by the Central Bank on 7 March 2013 indicated that, of the 792,096 mortgages over primary residences in Ireland, 143,851 were in arrears on 31 December 2012, with 94,488 (11.9%) being over 90 days in arrears (the 90+ days figure being an 11.5% increase since the end of Q3 2012). A further 28,421 mortgage loans secured on buy-to-let properties were also 90+ days in arrears on 31 December 2012, representing 18.9% of all residential mortgage loans secured on buy-to-let properties. Further, the types of mortgage restructuring arrangements agreed to date by banks with distressed borrowers have largely been of a short-term nature, with almost half being 'interest-only' or 'less than interest only'.

Publication of draft legislation intended to remedy the legal issues surrounding the ability of banks to seek Court Orders for Possession in respect of registered land which came to light as a result of the decision of Dunne J. in Start Mortgages Ltd & Ors v Gunn & Ors [2011] IEHC 275 is also expected very shortly.

The developments of 13 March 2013 represent the Government's and Central Bank's latest proposals to address the issue of mortgage arrears. The intention is that there will then be a comprehensive legal and regulatory regime in place to facilitate resolution of the mortgage arrears crisis in Ireland.

The New Mortgage Arrears Resolution Targets

The Central Bank has highlighted its concerns regarding whether, due to (a) the lack of sustainable solutions, (b) the cost of supporting substantial mortgage arrears and (c) possible deficiencies in lenders' credit risk management processes, the requirements of Regulation 16 of the European Communities (Licensing and Supervision of Credit Institutions) Regulations 1992 (the "1992 Regulations") are being met by the lenders (Regulation 16 implements the risk management and internal control requirements of the Capital Requirements Directive). As a result, it has published its new Mortgage Arrears Resolution Targets (the "Targets").

Application of the Targets

• Lenders: ACC, AIB (including AIB Mortgage Bank, EBS and EBS Mortgage Finance), Bank of Ireland (including Bank of Ireland Mortgage Bank and ICS Building Society), KBC, Permanent TSB and Ulster Bank (the "Affected Lenders").
• Properties: primary residences and buy-to-let properties. The Affected Lenders are being set both common public targets and institution-specific targets. The public targets will include quarterly targets for the number of sustainable solutions they must propose to distressed borrowers (20% by the end of Q2 2013, 30% by the end of Q3 2013 and 50% by the end of Q4 2013), quarterly targets for the number of sustainable solutions they conclude with distressed borrowers (yet to be set), and targets in relation to the subsequent performance of those solutions (75% by the end of each quarter of 2014). The institution-specific targets will be notified to each Affected Bank, and adjusted quarterly.

A 'proposed sustainable solution' will be one of the following:

• an Affected Lender offering an 'alternative repayment arrangement' to a borrower under its Mortgage Arrears Resolution Process ("MARP")
• the appointment by the borrower of a 'Personal Insolvency Practitioner' under the PIA 2012
• if an 'alternative repayment arrangement' cannot be reached or is not appropriate after completion of the MARP process and the Affected Lender has advised the borrower that he should consider a voluntary surrender or voluntary sale of the property, or if the Affected Lender has begun repossession proceedings or if the Affected Lender has taken other steps to repossess the property

A 'concluded sustainable solution' will be one of the following:

• an 'alternative repayment arrangement' concluded under an Affected Lender's MARP
• a 'Personal Insolvency Arrangement' put in place under the PIA 2012
• (if an 'alternative repayment arrangement' cannot be reached or is not appropriate), a voluntary sale of the property, a voluntary surrender of the property or a Court-ordered repossession of the property

As regards when a 'sustainable solution' will be regarding as being performed:

• in the case of an 'alternative repayment arrangement', no payment is more than 60 days overdue and no payments have been missed without the agreement of the Affected Lender
• in the case of a 'Personal Insolvency Arrangement', the borrower is complying with his obligations
• in the case of surrender or repossession, the property has been voluntarily surrendered or repossessed pursuant to a Court order or otherwise

When determining whether a proposal is a 'sustainable solution', the Central Bank expects Affected Lenders to evaluate affordability for borrowers together with the capital implications for the Affected Lender. The Central Bank also expects Affected Lenders to have regard to certain 'fundamental principles' as follows:

• basing the affordability assessment on the current and prospective servicing capacity of the borrower
• applying realistic valuations to the borrower's assets
• using an appropriate interest rate when discounting future income flows (taking into account the Affected Lender's cost of funds)

The Affected Lenders will be required to report on whether they are meeting these targets to the Central Bank on an ongoing basis, and will be required to publish 'achievements against targets' as a disclosure.

Monitoring

The Central Bank will carry out regular audits (via a sampling of cases) to assess whether reported target results are being substantively met in practice, and whether accurate outputs are being produced by Affected Lenders' information systems and processes.

The Central Bank will also continue to examine whether capital requirements are appropriate in relation to mortgage arrears, and will consider requiring Affected Lenders to hold additional own funds where they have poor MARS, or their MARS are not well-executed.

The Central Bank has noted that it will have recourse to supervisory measures under the Regulation 70 of the 1992 Regulations where Affected Lenders are not seen to be complying with the new mortgage arrears regime.

Proposed Changes to the CCMA

The Central Bank, in CP 63, indicates that its proposals are designed to ensure that arrears situations are resolved appropriately, that lenders deal with borrowers in a 'fair and transparent' manner, that the engagement between lenders and borrowers is meaningful and that borrowers are aware of what may happen if they do not co-operate with their lender.

Key amendments

• clarification regarding when borrowers will be treated as 'not co-operating' and will lose the protections of the CCMA. To date, for so long as a distressed borrower responded to at least one communication from a lender in a three-month period, the borrower could (provided that it had provided any required information to the lender) avoid being classified as 'not co-operating'. This allowed well advised borrowers to "game the system" to some extent. CP 63 proposes a change whereby any such borrower response must be meaningful, i.e. the borrower must respond with a view to reaching an 'alternative repayment arrangement' and not simply to avoid being classified as 'not co-operating'. Lenders will also have to explain, in their MARP booklet, and in other communications, the consequences of a borrower being classified as 'not co-operating'
• removing the cap on the number of unsolicited communications that a lender may make to a borrower each month (to date, that number has been capped at three and had been the subject of significant criticism from the banking industry as an impediment to dealing with early arrears cases)
• requiring lenders to draw up and implement a policy on contact with distressed borrowers, and requiring that lenders keep recordings of all calls made to, or received from, borrowers in relation to arrears or pre-arrears
• enabling lenders to put in place temporary arrangements (for a maximum of three months) while the borrower is completing, and the lender is reviewing, the 'Standard Financial Statement'
• ensuring that lenders give borrowers information that will enable them to consider their options under the PIA 2012, including copies of ISI publications. Lenders will also be required to bring to the attention of distressed borrowers that a failure to co-operate may impact on the borrower's ability to successfully apply for a 'Personal Insolvency Arrangement' under the PIA 2012
• distinguishing between types of 'alternative repayment arrangement', and setting out a review period for each. Arrangements will be categorised as 'short-term' (< 3 years), 'medium-term' (3-5 years) or 'long-term' (5+ years). 'Short-term' arrangements must be reviewed every 12 months, 'medium-term' arrangements must be reviewed every 3 years and 'long-term' arrangements must be reviewed every 5 years. No review requirement will be imposed in relation to permanent restructuring arrangements
• expanding the obligation on lenders to provide information on various options to distressed borrowers
• expanding the list of types of 'alternative repayment arrangement' that a lender must consider to include equity participations, split mortgages, debt write-off, permanent interest-reductions and temporary interest-reductions – this is fundamental development
• where a borrower declines a lender's offer of an 'alternative repayment arrangement', requiring the lender to give the borrower 30 days' notice before it commences legal action for repossession

Other matters on which the Central Bank is consulting

whether there may be particular situations where full completion of the prescribed form of 'Standard Financial Statement' is not necessary

• whether the lenders' CCMA Appeals Boards should consider only appeals of decisions of Arrears Support Units, and whether appeals in relation to the lenders' compliance with the New CCMA and the lenders' treatment of borrower cases under their respective MARPs should instead be dealt with under the complaints procedure that lenders have in place under the Consumer Protection Code 2012
• whether, where an advantageous 'alternative repayment arrangement' is offered to a borrower (such as a debt write-off) the lender can move the borrower off a tracker rate (to date, lenders have been prevented from requiring distressed borrowers to move off tracker rates)
• whether, if a lender deems a borrower's mortgage to be unsustainable and does not offer an 'alternative repayment arrangement', the borrower should continue to benefit from the remainder of the applicable 12 month moratorium period, or whether the borrower should be given 30 days advance notice that the moratorium will cease

The consultation period will run for 4 weeks and the New CCMA is expected to be published by the end of May 2013. It remains to be seen whether any form of grandfathering arrangements will be put in place to allow banks to put in place new processes to reflect the requirements of the New CCMA given the very short period between the end of the consultation period and the publishing of the New CCMA.

NEXT STEPS IN 2013

(where target dates have been set)

COMMENT

The Government and the Central Bank clearly envisage the measures and proposals announced on 13 March 2013 as paving the way for a lasting resolution of the Irish mortgage arrears crisis. Different stakeholders will take different things from the measures. On one hand, borrowers in distress will see the measures as opening the possibility (and in some cases the probability) of debt write-downs and debt forgiveness. On the other hand, the banks will see the changes to the CCMA, the focus on distinguishing between borrowers who can't pay and borrowers who won't pay, and the expected legislation to address the decision of Dunne J. in Start Mortgages v Gunn as granting much needed flexibility in dealing with borrowers in arrears and reintroducing repossession as a possible option when all others have failed. Many of the changes to the CCMA are a belated recognition of the concerns raised by the banks in 2009/2010 on the CCMA, particularly in relation to borrower contact and the need for borrower engagement. The banks have been set stiff targets for dealing with distressed borrowers – and it remains to be seen whether those targets are feasible. For equity investors in Irish banks (and indeed the Irish taxpayer), a key concern will be the extent to which the tackling of mortgage arrears leads to a need for further capital within the Irish banking system.

Investors in Irish RMBS may have concerns about the possible impact on their securities, but the proposed steps bring more clarity regarding the length of time it may take to realise security in relation to the underlying assets. The focus on distinguishing between borrowers who can't pay and borrowers who won't pay should be viewed positively by investors. The commercial impact on any plans by the Irish banks to deleverage their residential mortgage books also remains to be seen.

In general, we are of the view that the new measures combined with previous initiatives (such as the Keane Report and the PIA) represents further progress towards the eventual resolution of the mortgage crisis which has led to considerable uncertainty for banks and borrowers and led to a considerable drag on the domestic economy.

Footnotes

1 It is expected that the changes made by the PIA 2012 to the Bankruptcy Act 1988 will be commenced at the same time.

* meaning borrowers who are 90+ days in arrears.

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.