Friday 20 April 2018

Thousands stopped paying home loans when repossessions were blocked by courts - Central Bank paper

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Charlie Weston Personal Finance Editor

THOUSANDS of people stopped paying their mortgages when the courts blocked banks repossessing properties, it has emerged.

These people could have continued to pay, but went into arrears instead as they saw no risk of losing their homes, a Central Bank paper says.

The new paper found a direct link between a 2011 High Court judgment, which blocked repossessions for a number of years, and more people defaulting.

The judgment meant banks could not repossess homes – so some felt there was no incentive for people to keep paying.

The controversial findings of the academic paper are set to reopen bitter arguments.

Conclusions in the study appear to lend credence to the moral hazard argument – taking away the risk of repossession will increase the incentive for people to stop paying.

This country has some of the highest arrears levels in the eurozone, with close to 51,000 residential mortgage accounts currently more than three months in arrears – equivalent to the population of  Waterford city.

Banks have been insisting that the difficulty in getting a repossession orders is one of the reasons that arrears levels are so high. But debt campaigners argue that so-called strategic default levels are exaggerated by the lenders.

They say most people will try to pay as they feel they have a moral and social responsibility to do so.

“Strategic mortgage default” refers to people who can pay their mortgage but decide not to do so as there is no consequences for going into arrears.

The paper by economist Terry O’Malley finds the so-called Dunne judgment in 2011, which put a halt to repossessions, led to a spike in arrears.

The ruling effectively removed the banks’ ability to repossess homes, until new legislation was introduced.

There is a clear link between the judgment and the rise in defaults, the paper states.

“Analysing mortgage arrears patterns before and after the Dunne judgment in Ireland, I show that borrowers defaulted after the judgment at a higher rate than they otherwise would have,” the Central Bank economist states.

Mr O’Malley says in his paper the evidence is clear some borrowers stopped paying because the threat of repossession was removed.

“The evidence presented here shows some Irish borrowers defaulted on their mortgages when they likely would have continued to pay if their homes could be repossessed.”

The default rate was found to have been 0.5pc higher on average in each quarter after the judgment than would have been otherwise expected, given the difference in the default rates before the judgment.

He said making repossessions more difficult discourages some people from paying up.

“Impediments to home repossession by banks reduce a borrower’s incentive to fulfil the terms of their mortgage,” according to ‘Did the Dunne Judgment Lead to More Mortgage Defaults?’

Those most likely to have stopped paying when the repossession risk was removed are usually found to be in negative equity, where the value of the property is less than the borrowings. They tend to have low incomes when they took out the home loan, to be paying a high variable rate and have missed payments in the past.

The Dunne judgment meant some who had been facing repossession decided to spend the mortgage money on their living costs instead of making repayments as the threat of repossession was lifted.

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