Dealing with the debt legacy
05 Sep 2010
New regulations have been proposed for lenders in dealing with those in mortgage arrears, writes Emma Kennedy
Una and James live in a modest home which they bought five years ago in a 100-house estate in Meath. James lost his job six months ago and Una has taken a 10 per cent pay cut. Repaying their once-affordable mortgage is now a major problem and the couple face growing arrears.
They are not alone. Almost one in 20 Irish homeowners is in arrears for more than 90 days, according to the latest figures from the Financial Regulator. That means five families in Una and James’s estate are likely to have been in arrears for three months, not to mention the other families who are just about making repayments.
This situation is mirrored in many housing estates and apartment blocks across the country. Of the 789,000 private residential mortgages in Ireland, almost 36,500 have been in arrears for more than 90 days. This figure increased by close to 13 per cent between the end of March and the end of June. Just over 3 per cent of all mortgage accounts are now more than six months in arrears.
According to the Financial Regulator’s figures, mortgage lenders began legal proceedings in 170 cases in the three months to the end of June. These cases related to arrears of €8.1 million on loans of €41.3 million.
During the same period, court proceedings concluded in a further 215 cases. Some 101 of these resulted in repossession orders, while 85 cases were settled by renegotiating the conditions of the mortgage. The remainder were concluded by voluntary surrender of the property or on other terms.
A total of 387 properties were repossessed in the year to June 30.Of these, 86 were repossessed between the end of March and the end of June, 20 of them on foot of court orders and the remainder following voluntary surrender or abandonment.
Brokers say that the figures indicate a very worrying trend for homeowners in difficulty, and for the wider economy. Rachel Doyle, director of mortgage services for broker group PIBA, said the number of people in arrears had more than trebled in three years. ‘‘The figures have gone from 11,252, some 1.21 per cent, in December 2006 to 36,438, some 4.6 per cent, now,” she said.
However, the Irish Banking Federation (IBF) said that while the overall percentage of mortgages in arrears had increased, the level of home repossessions by mainstream lenders remained low.
Pat Farrell, chief executive of the IBF, said the latest figures confirmed that the ‘‘focus of mainstream lenders remains firmly on forbearance’’.
‘‘IBF mainstream lenders remain committed to doing everything possible to help people with genuine repayment problems. Early, constructive engagement between the borrower and lender is key to this,’’ Farrell said.
The IBF is just one of a number of bodies that made a submission to the Financial Regulator’s latest consultation on mortgage arrears, which closed last Friday. Last month’s consultation paper on the statutory code of conduct proposed new regulations for lenders in dealing with those in mortgage arrears.
This is the latest in a number of moves designed to address Ireland’s indebtedness problem.
The statutory mortgage code - which applies to all regulated mortgage lenders, except credit unions - was introduced in February 2009 and replaced a voluntary code on arrears. The statutory code included a requirement that mortgage lenders wait six months after arrears first arose before commencing enforcement of legal proceedings for repossession.
Last February, the moratorium was increased to 12 months. At the same time, the government established an expert group to consider the problem. This group issued its interim report in July, making suggestions for dealing with mortgage arrears and recommendations in relation to the statutory code.
The Financial Regulator’s most recent consultation paper (see panel) included the recommendations from the expert group’s interim report, as well as additional suggestions. According to a spokeswoman, the Financial Regulator intends to implement the revised statutory mortgage code in November, based on these recommendations and the consultation process.
‘‘It’s a major transformation, and imposes a high bar for lenders,” said a spokesman for the IBF, the representative body for lenders. He said the proposals were designed to bring consistency to the market, since lenders have already introduced individual processes to address arrears.
However, while the IBF welcomed the proposals, its submission to the consultation process raised a number of issues.
‘‘These issues are not regarding the fundamental thrust of the revised code,” the spokesman said.
‘‘The issues relate more to the processes and the system changes. We are just seeking clarity on what exactly is required.” He added that the IBF had also sought clarification on the timeline for the proposed changes.
PIBA also submitted a formal paper to the Financial Regulator as part of the consultation process. Doyle said that PIBA had called for arrears not to begin to be counted until 30 days after a missed payment.
‘‘We also believe that the period in which partial payments are being made should not be included within the definition of an arrears period, provided the borrower is making a genuine effort to pay,” she said. She added that both measures would delay the start of the lender’s moratorium, giving extra protection to borrowers.
While mortgages represent a sizeable chunk of the debt for most households, other types of personal debt - such as arrears on utilities bills and personal loans - are an increasing problem for many Irish families.
Tackling mortgage arrears is just one prong of the government’s broader response to Ireland’s debt problem.
Earlier this year, the Law Reform Commission (LRC) published its interim report on personal debt, including a 14-point action plan on immediate steps which could be taken to help alleviate the pressure of personal debt. The LRC’s final report should be completed by the end of the year.
Meanwhile, Minister for Justice Dermot Ahern last week proposed to halve the bankruptcy period in Ireland so that bankrupts could apply to be discharged after six years, rather than 12 as at present.
Barry O’Neill, a partner in the corporate recovery group at solicitors firm Eugene F Collins said the proposed changes were ‘‘very welcome indeed’’.
‘‘Ireland has been lagging seriously behind other countries in relation to insolvency reform,” he said. ‘‘The changes will have positive effects, both domestically and internationally.”
However, he said further changes were still required to address out-of-date debt laws.
‘‘The most obvious change is the introduction of a system of debt agreement which does not involve a court process,” O’Neill said. ‘‘Irish society is crying out for this. At the moment, the only practical process involves the High Court. This leads to significant cost and is not flexible enough for the problems created by the current economic crisis.
‘‘Another possible change is to increase the amount of the base on which someone can be made bankrupt. The current figure is €1,900, but this is far too low and needs to be addressed. A figure in the region of €10,000 would be more realistic.”
O’Neill said the government needed to focus on changing the message on debt. ‘‘Bankruptcy is a relief system, not a punishment,” he said.
Proposed new requirements
Last month, the Financial Regulator published a consultation paper on the statutory code of conduct on mortgage arrears, outlining proposed new rules for lenders dealing with people in arrears. The paper includes recommendations from the interim report of the expert group on mortgage arrears and personal debt, published in July.
Under the proposals, mortgage lenders face new statutory requirements:
* Lenders must have a mortgage arrears resolution process (MARP) as a framework for handling arrears cases.
* Specific information must be provided to borrowers in arrears in a clear, customer-friendly manner.
* A standard financial statement must be used by all lenders to obtain financial information from borrowers in arrears or those at risk of going into arrears.
* Lenders must engage with borrowers who are at risk of going into arrears.
* Lenders must explore all viable options with borrowers and examine alternative repayment measures.
* Borrowers must not be required to change from a tracker mortgage to another mortgage type.
* Where borrowers are cooperating reasonably and honestly with lenders, lenders must wait at least 12 months before applying to court to repossess a primary residence.
* Lenders must establish a centralised, dedicated arrears support unit to deal with borrowers in arrears, or at risk of arrears.
* Training must be provided for staff dealing with borrowers experiencing arrears.
* Lenders must establish an appeals process for borrowers.
* An information booklet in plain English must be made available to borrowers, giving details of the lender’s MARP process.
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