“Household financial distress is at unprecedented levels in Ireland,” said Governor Patrick Honohan at the Central Bank Conference last week. He cited “extraordinary” rates of arrears on the servicing of mortgages secured on owner-occupied homes for his bleak view. “I can think of few themes that are more topical for the Central Bank, not only in Ireland, but in many other countries as well,” he said.
In Governor Honohan’s address, he said that it’s been 16 months since the previous economic research conference, and in that time the Central Bank had identified the depth of the problem of mortgage indebtedness and mortgage arrears. According to Governor Honohan, following the two Prudential Capital Assessment Reviews (PCARs), the Central Bank had ensured that the banks secure sufficient capital to “enable them to absorb the both expected and unexpected losses on distressed mortgages.
“Many people’s view on what the priority should be in dealing with the mortgage arrears situation is coloured by their direct experience of friends or family,” said Governor Honohan, who added that borrowers are, in general, continuing to service their loans.
Despite widespread over-indebtedness, most people in Ireland, according to Governor Honohan, subscribe to the general proposition that debtors should fulfil their obligations if at all possible. ”While long-term debt modification involving permanent debt relief is a necessary ingredient in the resolution of arrears, it is relevant chiefly for cases of over-indebtedness involving or bordering on insolvency,” he said.
To date, the majority of banks have dealt with the situation in two ways: capitalisation of arrears, and temporary moves to interest-only payments.
“Such temporary forbearance measures do provide cash-flow relief to the borrower and have the considerable merit of bringing their payments back onto a schedule and avoiding the arrears spiral,” said Governor Honohan.
The above measures are temporary restructures and, as such, do not address long-term issues. Permanent debt relief measures would therefore seem the most likely alternative.
However, according to Governor Honohan: “Permanent debt relief is not something that will be offered to all of those who have suffered a loss of wealth, but has to be limited to those who are truly over-indebted and close to insolvency. In particular, negative equity is not in itself a rationale for debt relief.”
“While repossession may be inevitable for many investment properties (Buy To Let), it should be avoidable for the majority of owner-occupier cases where the distressed over-indebted borrowers—often suffering from unemployment—are doing their best; a debt modification that enables them to stay in their home will often be the best solution all round,” said Governor Honohan.
With respect to the tell-tale signs of arrears, Governor Honohan said that even before the emergence of arrears, there are usually warning signs for problem loans. “A long-understood maxim in retail banking is that early engagement with distressed borrowers is a valuable tool for improving ultimate recoverability.” Identifying pre-arrears cases and acting upon those leads can prove to be extremely cost effective in arresting this spiral in the level of indebtedness. “Having ensured that the banks are much better staffed and organised for dealing with arrears, we will be setting out our quantitative expectations for their effectiveness in achieving lasting solutions,” he said.
According to an article in The Irish Times, AIB chief executive David Duffy has said the bank would make contact, by the summer, with its 33,000 mortgage holders who are in arrears, with a view to agreeing deals with them by the end of the year.
The same article stated that Mr Duffy said “he was confident the bank would be able to work out a deal with all willing customers by the end of the year.”
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