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James Fitzsimons: We need mortgage solutions that favour borrowers


People view properties advertised for sale in the window of an estate agent

People view properties advertised for sale in the window of an estate agent

People view properties advertised for sale in the window of an estate agent

THE Central Bank has launched a pilot scheme to help homeowners. It is called the Framework for Multiple Distressed Debt.

It's a pity we didn't have it four years ago. The plan requires lenders to work together to achieve sustainable and fair outcomes for homeowners in financial difficulty.

I will set out what is involved and why we should give it a chance. It is not for impaired business loans and there is nothing for those in trouble with buy-to-let properties.

The banks still call the shots, but the framework encourages participating lenders to find sustainable solutions for keeping borrowers in their homes. This is to be achieved by what it calls a "Restructuring Waterfall". If this pilot scheme works and produces workable criteria that borrowers can rely on, it could help those who are struggling to hold on, as well as those who are already in arrears.

It is worth looking at the background to what has happened before we look at the proposed framework.

In 2009 the Central Bank produced a Code of Conduct on Mortgage Arrears (CCMA) which sets out the Mortgage Arrears Resolution Process that imposes five steps on lenders. They must (1) communicate with the borrowers.; (2) use a standard financial statement to gather financial information; (3) assess the borrower's case; (4) consider options that might resolve the problems; and (5) consider appeals.

You can't fault the process, but it hasn't produced the solutions.

At the end of 2012, there were 792,096 private mortgage accounts for principle dwellings in Ireland, and 143,851 were in arrears. Most were over 90 days and many for over two years.

CCMA has been in place for a number of years, but there were 106,000 cases that had not been restructured at the end of 2012.

Last year a panel of accountants was set up, to help borrowers understand options that the banks might offer. A step in the right direction, but not a solution in itself. By the end of June 2013, borrowers can use the new personal insolvency legislation to claw their way back, if they are insolvent. This involves engaging with a Personal Insolvency Practitioner, or PIP, to broker a deal with the financial institutions. It divides those in trouble into three categories.

The first two deal with unsecured loan and demand credit (credit cards and overdrafts). The third includes secured debts such as mortgages. The plan requires the Personal Insolvency Practitioner to broker a deal between financial institutions and borrowers. Only co-operative borrowers who engage with their lenders to find solutions will be covered.

The process remains one-sided, in favour of the financial institutions. Not everyone is insolvent, but many need to restructure their finances to get back on track. The new framework could help everyone, as it points the way for lenders to proceed. The pilot scheme will be operated by a third-party service provider.

Hopefully it will not be like the Credit Review Office where ex-bankers review what bankers do. We need solutions that favour borrowers. Up to now they can ask for a solution, but they have no right to expect one, or what it might be. There was no blueprint to carve out a deal.

We know what is possible, such as longer payback terms, interest-only arrangements and more. But any deals that have been done took place behind closed doors and those involved were sworn to secrecy. All we know is that the borrower will be made suffer, if they are to get any deal.

Not much has changed.

The pilot scheme will last for three months from the time it begins. The plan is to get over the hurdles facing multiple financial institutions that are dealing with one borrower. Under the new personal insolvency arrangements, a deal requires the agreement of 65 per cent of the creditors. In most cases the lender providing the mortgage will be in control. Unsecured lenders could be left out in the cold.

The Central Bank's proposals will get the financial institutions working together so that they can agree a framework that they can all live with. If they cannot work together the personal insolvency legislation is dead in the water. The Central Bank's Restructuring Waterfall, if adopted by financial institutions, might help impaired borrowers take the first step on the road to recovery.

While there are nine outcomes under this framework, they can be broken down into three main scenarios.

Firstly, are the borrower's debts affordable or not? Maybe the borrower just needs to tighten their belt and get on with it. Secondly, there are six proposals to deal with various levels of indebtedness. And thirdly, for those in crisis, the mortgage would require radical restructuring, possibly a writedown.

Most of the solutions that the banks must consider work outside the personal insolvency process. Scenario 2, in particular, proposes such a framework. If the Restructuring Waterfall works, you could avoid life on the breadline.

There are six possibilities under Scenario 2. They all envisage debts, secured and unsecured, being repaid in full. If things can be sorted out in six months, a little flexibility is all that's needed.

In the case of demand credit (credit cards and overdrafts), the borrower could be given five years to repay and interest of 9 per cent would be charged.

If a mortgage is not being serviced as required, the term can be increased by whatever it takes, subject to the borrower being no more than 65 at maturity. Any unsecured loans and demand credit would be dealt with as outlined above. If the financial problems are more acute, the interest rate applied to unsecured debts and demand credit could be cut to 4.5 per cent.

Finally, in addition to the above, the mortgage interest rate could be cut to no more than 4.5 per cent for a period of five years. If a tracker rate applied that would be preserved.

When the pilot scheme has run its course, we should have a better idea as to whether the banks will be reasonable. Don't hold your breath.

James Fitzsimons is an independent financial adviser specialising in tax and financial planning

Irish Independent