Banks finally face reality with new mortgage deals
IT is seven years since house prices in Ireland began to fall. The housing market has gone through one of the biggest boom-bust cycles of modern generations and is now in the early stages of coming back around again. The market is moving on.
Yet the process of mopping up the mortgage crisis mess has been akin to a battle of Stalingrad between the lenders and their customers.
Complete 'head-in-the-sand' denial by banks prevailed for too long. Mortgage arrears customers have gone through a mixture of panic, frozen inaction or in some cases tactical default.
Progress is now being made as banks are forced to at least offer what they believe are sustainable solutions. The number of owner-occupiers in 90-day arrears continues to fall and is now at 12.2 per cent. Among the buy-to-let cases, the figures are actually growing, now at 21.5 per cent.
The issue is being slowly dealt with, but the big bazooka of large-scale repossessions has yet to be used. There are 35,314 owner-occupier mortgage accounts in arrears for over two years. Resolution of these people's problems will take a number of forms, including voluntary sale, repossession, restructure or partial debt write-off.
But it seems ridiculous to have so many people so hopelessly in arrears seven years after house prices started falling and six years after the country crashed into recession. The overall picture suggests that banks are complying with demands to do something, but still not engaging at the right level with those worst affected.
One of the most tortuous circumstances in which people have found themselves is where they are hopelessly underwater with the mortgage and negative equity, but they are afraid that if they sell the house they will still be pursued for the remaining debt.
A breakthrough deal between the Irish Mortgage Holders Organisation, and lenders AIB and KBC, has a real chance of providing those people with an out – a painful but controllable one.
If they enter a personal insolvency process, they could emerge from it within three months, instead of the six years that was contained in the recent legislation. David Hall of the Irish Mortgage Holders Organisation described the arrangement as "revolutionary" and a "game-changer".
It could be for those 4,000 or so people who have completely unsustainable mortgages with those lenders. It might make it easier for them to finally draw a line under the whole saga and actually move on quite quickly.
However, there are a number of things to bear in mind. Firstly, it doesn't apply to every bank. Secondly, customers will still have to go through the insolvency process, which includes a register. There has been a reluctance to do this up to now. Thirdly, the rules of personal insolvency still apply so the banks must approve it.
This gives the banks an important veto. However, it also enables these lenders to identify people who they believe will never be able to find the shortfall after selling the house and so there is absolutely no point in pursuing them. It would be utterly cruel of a bank to watch over their shoulders after they have paid what they can and lost their home.
It doesn't necessarily change the dynamics for the much greater number of people who are on the borderline between completely unsustainable mortgages and getting by if they work themselves to the bone for years to come.
This initiative is very good news for the most vulnerable but won't necessarily change the bank/borrower for all of the vulnerable.
Banks are getting through their mortgage arrears book in their own ways. Different approaches between banks, rather than a uniform model, will ultimately undermine the fairness of the resolution system. Bank of Ireland says it isn't doing write-offs. AIB says it is.
Mortgage customers of other lenders are wondering who will own their mortgage in the future and what will happen.
There is still an extraordinary level of uncertainty for many people who cannot pay their mortgages, and have struggled to do so for four or maybe five years. Official figures show that where restructuring occurs, around 75 per cent of those customers are sticking to the new deal.
This is actually a worrying figure. It implies that 25 per cent of all mortgage customers who have got some kind of new deal on repayments with the bank can't even meet those repayments. This looks like a sticking plaster.
As long as house prices are rising, even by a small amount nationally, the balance sheets of banks are improving slightly. A rising house value raises the value of the underlying security the bank has on its loan. This might encourage banks to hold off and not do anything too dramatic, at least until the EU bank stress tests are completed.
But it is inevitable that banks will have to move on a lot more properties than they have up to now. Buy-to-lets are very much in the line of fire. Banks are genuinely reluctant to repossess family homes but some trophy homes are just not sustainable.
The real breakthrough in the Irish Mortgage Holders Organisation deal isn't just what it does for those 4,000 borrowers in AIB and KBC. It lays down a marker that when it comes to extracting payment, sometimes the money just isn't there and won't be either.
It establishes a principle that has already been in full swing with developer clients of Nama. The philosophy there is pay what you can. There is very scant evidence of the State agency actively repossessing developer homes despite the hundreds of millions these borrowers pledged in personal guarantees.
At least banks are now, for the first time, publicly acknowledging a basic fact about ordinary people in financial trouble. It is best summed up in the phrase, "you can't pluck feathers from a frog".
In other words, if they haven't got it, they haven't got it.
Sunday Indo Business