Wednesday 19 June 2019

Time to resolve unsustainable mortgages once and for all

As arrears problems grow, the Home for Life scheme can offer a fresh start

Mortgage-to-rent should be a solution for a greater number of households Stock image
Mortgage-to-rent should be a solution for a greater number of households Stock image

Raymond Lambebe

The Irish mortgage arrears crisis has had a profound impact on households, on bank lending and on society as a whole over the past decade.

It has presented policy quandaries for successive governments and considerable stress and trauma for households caught up in its wake. Despite much tinkering in what some would describe as forbearance and others as 'kicking the can down the road' resolutions remain few and far between.

With the focus of the authorities being, in the main, on stabilising the banks, there has been negligible emphasis on dealing with underlying non-performing mortgage loans. The 'kicking the can' approach has been bruising for both the banks and borrowers. Banks have been unable to fully recognise the losses on these loans and a significant number of borrowers live in dread of sheriffs at the door.

The latest statistics from the Central Bank show a worsening problem with the number of cases involving principal dwelling homes (PDHs) in arrears of 720 days or more increasing by more than 50pc from 19,541 in 2012 to 29,509.

In other jurisdictions, the most difficult cases are dealt with through repossessions and debt write-downs, neither of which has materialised in any meaningful way here. The US experience, for example, shows that debt write-downs are the most effective loan modification tool. In contrast debt write-downs have just not been a feature of the Irish experience, whether for reasons of moral hazard or fears of precedent-setting.

Irish banks have also been very cautious with regard to the repossession of PDHs. The courts process is slow, unpredictable and expensive. In the first quarter of 2018, only 252 orders for possession of principal dwelling houses were made by the Irish courts.

What this highlights is the need for alternative solutions, such as the new mortgage-to-rent scheme launched recently by Minister of State with Special Responsibility for Housing and Urban Development Damien English.

The rationale for mortgage-to-rent has always been sound - it allows households in unsustainable mortgage situations to get certainty around their long-term housing.

However, the rate of uptake was always disappointingly low due in large part to the multitude of stakeholders and the excessive bureaucracy involved. In the years from 2013-2016, only 217 mortgage-to-rent arrangements completed. In the same period there were a total of 2,723 unsuccessful applications. These figures illustrate the low conversion rate as well as the generally strong appetite for the scheme.

It was accepted in Rebuilding Ireland (published in July 2016) that mortgage-to-rent should be a solution for a greater number of households.

A review of the scheme was published in February 2017. The review set out a series of actions and amendments that aimed to make the scheme quicker, more transparent and easier to navigate and access. The actions identified in the review included the expansion of the eligibility criteria as well as improvements to the financing, processing and administration of the scheme.

In particular, the review noted that alternative funding options were available (including the off-balance sheet potential of non-publicly funded entities).

The recent launch of Home For Life as the only non-publicly funded participant in the new mortgage-to-rent scheme allows for scalability, off the Government's balance sheet for the first time.

The Home For Life model involves the voluntary surrender of the property to the mortgage lender who then sells the property to Home For Life. The property would then be leased to the local authority who in turn grants the former property owner a tenancy to remain in the property. Subject to prior agreement with the bank, residual mortgage debt and arrears are eliminated.

The availability of the new scheme is likely to become a feature in repossession cases before the various Circuit Courts. Banks and borrowers (facing possible eviction) may be directed to consider the new mortgage-to-rent scheme as an alternative to the granting of a possession order.

It is also likely that courts will be more amenable to granting possession orders in cases where they are informed that a borrower has refused to consider the new mortgage-to-rent scheme even though they were eligible to participate.

The recent launch of a scalable mortgage-to-rent solution is a very significant development for thousands of households in long-term unsustainable mortgage arrears.

Ten years after the crisis first hit and for the first time, households will have an opportunity to make a fresh, mortgage-free start in their existing home.

Raymond Lambe is a senior associate with OSM Partners. Its clients include Home For Life.

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