Following a meeting, to discuss the arrears crisis, insolvency and repossessions, between Department of Finance officials and our CEO, David Hall, the Irish Mortgage Holders Organisation submitted a number of proposals to the Department for consideration. Our proposals are outlined below or a copy of the submission is available to download here: deptfin
The scale of the mortgage problem
The quarterly arrears figures from the central bank for quarter 4 2014 are stark. While some short term arrears and easy pickings have been resolved the main event of those in long term arrears is increasing and is now at crisis point. There are 37,778 in arrears of over two years. The Banks have spun the fact that in their un-evidenced view many can pay and wont. This is simply not credible. Other commentators state that by their analysis borrowers can pay and are not. What they fail to realise is that the myth of paying what you can will allow you stay in your home is not true. The Central Bank in its wisdom requires banks to have sustainable solutions so a borrower making a payment of what they can afford is a waste of money if it does not meet a sustainable definition. So academic commentators who calculate that borrower and b can pay €400 per month and are not are strategic defaulters fail to understand the front line mechanics of how the banks operate. If Borrower a and b pay the €400 per month is provides them no protection at all as the bank will want them to sell the house as the payment in full is €1200 per month. Banks give no credit for these payments when dealing with any residual by writing it off.
The Department of Finance, Government and the Central Bank have fallen for the banks propaganda around engaging by debtors, but fail to be truthful and say that those who can’t pay face no option from the bank other than to lose their home. So banks want debtors to volunteer to be first in the execution line. The Government have been fooled into believing that the four pillars of resolution to the mortgage crisis would work. The Insolvency System has been a disaster and we details below suggested changes. The Mortgage to Rent program has been strangled by the Department Of The Environment and has failed, The Central Bank Mortgage Arrears resolution targets have if anything worsen matters and the reforms of bankruptcy to date have not proven sufficient to bring banks to the table.
There has been a total of 199 Personal Insolvency Arrangements (PIA’s) approved by the Circuit Court in the 15 months from the end of September 2013 to the end of 2014 and many of these have not involved principal private residences. The Personal Insolvency Act 2012 has failed to deal with the mortgage debt crisis. Lenders have not embraced the legislation and have generally exercised their veto in debtor proposals. Thus, the fastest growing debt resolution option at present is bankruptcy with 506 adjudications over the same period.
The courts are receiving on average of 800 repossession proceedings into the system on a monthly basis on top of the 8000 already in the system. This will in our view ultimately lead to 25,000 family home repossessions.
Of those mortgage accounts in arrears there are typically three different cohorts of borrowers:
- Those who can pay in full and need to reprioritise repayments away from secondary debt and direct payment to secured debt or those who require to readjust personal expenditure. This cohort may require an insolvency arrangement in order to deal with the unsecured debt that they have and our suggestions for reform of the Insolvency Service is outlined in Section 3.
- Those who can, based on reasonable living expenses, pay a restructured mortgage or require assistance to pay of a restructured mortgage. Our suggestion for this cohort is outlined in Section 1.
- Those who cannot make any payments towards their mortgage and a loss of ownership is inevitable and will require the assistance of the state or a state scheme. We outline our suggestions for dealing with this cohort of borrowers in the Mortgage-to-Lease (Section 2).
The cohort of borrowers who are in arrears for 2 years or longer (37,778 currently) all fall into one of these three categories. However it is unknown by anybody what the split is of each.
Section 1 – Industry Split & Direct Payment
For those with the ability to make some repayments a cohort are in a situation where although they can make some level of repayment it is not sufficient to achieve a restructure with their lender. We are assuming that the base level of a restructure is to pay 50% of the capital and interest on the loan.
This category of borrower will be, most likely, deemed to be unsustainable and either a voluntary sale / surrender or repossession proceedings will occur. For many of these they will then be forced into the social housing system, which is unable to cope with existing levels of demand.
In this system the state will have to make a payment to the individual as a rent supplement to allow them rent privately. However we believe that this rent supplement payment could be better used in order to keep families in suitable homes and in their existing communities.
Take an example as follows:
Scenario: Mary & Joe, married with 2 kids, €200k mortgage, property valued at €120k and €1,000 due per month in payments.
They live in Kildare and their council will pay them €925pm in rent supplement.
We are proposing a Government sponsored Industry Split Mortgage which would allow the family to remain in their home.
It works as follows:
Affordability: Mary & Joe are determined to have affordability of €300 per month to make mortgage repayments. This affordability test can be carried out by their lender, an independent 3rd party qualified advisor, MABS or a Personal Insolvency Practitioner. We would suggest that a Certificate of Affordability is produced and valid for 24 months.
The mortgage is then split into two tranches:
Tranche A: €140,000 – attracting capital and interest repayments of €750 per month.
Tranche B: €60,000 – parked at 0% interest for the lifetime of the loan.
Council Funding: The €750 is funded by Mary & Joe’s €300 plus €450 from Kildare County Council (“KCC”). This is less than what KCC would have to pay if they were liable for rent supplement. The repayments are subject to interest rate variations and reviewed every 2 years for a new Cert of Affordability. When renewed the payment by the borrower increases or decreases in line with review, as does the council payment – up to the max rent supplement the county pays.
2nd Charge: In addition we are proposing that KCC would receive a 2nd charge on the property for the value of Tranche B. This is an incentive for KCC to make the payments. The Bank will receive over the lifetime of the loan a greater return than if they repossessed the property now.
Direct Payment: We are further proposing that the bank would receive the €425 directly from KCC, thereby giving them certainly of cash flows.
Expedited Repossession: In the event that Mary & Joe did not make their portion of the payments, as per the Cert of Affordability the lender could then avail of an expedited repossession process and obtain a repossession order at the 2nd court date. A High Court Practice Directive would be required to grant the order at the 2nd date if a Cert of Affordability is exhibited and the payments outlined in it have been broken.
Section 2 – Mortgage-to-Lease
An alternative to the Mortgage-to-Rent scheme, is a Mortgage to Lease scheme. A leasing scheme’s principle advantage over the Mortgage-to-Rent scheme is that it could be done at a scale that could significantly reduce the number of unsustainable mortgages. The Mortgage-to-Rent scheme has been in operation for over 3 years and in that time less than 100 arrangements have concluded and there have been very few, if any, representatives of either borrowers, housing associations or banks who believe that the scheme, as currently constructed, has a future.
It is proposed that it would operate as follows:
- In SPV called BankLease would be established.
- BankLease’s initial funding would come either from the bank, or an investor, or it could be government owned.
- BankLease would purchase non-performing loans from the bank at a discount. Ownership of the dwellings would be transferred to BankLease.
- Mortgagees whose dwellings had been transferred to BankLease would either voluntarily surrender ownership to BankLease, or BankLease would repossess the dwellings.
- BankLease’s income would be an availability payment from the DoECLG. This would not be based on market rent, but would be reduced to reflect the discounted value that BankLease acquired the properties at. This would be agreed in advance between BankLease and the DoECLG. The availability payment could possibly be channelled through an AHB.
- An AHB would be contracted to provide housing management and maintenance services to the occupiers and their dwellings.
- The former owners would become tenants of the AHB and would pay a differential rent to the AHB.
- The former owner’s mortgage would have to be unsustainable, that is, there is no realistic possibility of the mortgagee making significant repayments in the future.
- The former owner’s income would have to be below the limits set for eligibility for social housing.
Issues arising in operating such a scheme:
- A minimum length of tenancy would have to be agreed in advance.
- A purchase option for the tenant or the AHB would give some comfort to tenants.
Section 3 – Insolvency Reforms:
There has been a total of 199 Personal Insolvency Arrangements (PIA’s) approved by the Circuit Court in the 15 months from the end of September 2013 to the end of 2014 and many of these have not involved principal private residences. The Personal Insolvency Act 2012 has failed to deal with the mortgage debt crisis. Lenders have not embraced the legislation.
Once of the most significant complaints by Personal Insolvency Practitioners (“PIP’s”) about the new system is that it is too cumbersome and bureaucratic to progress arrangements. There are a number of structural reforms that PIP’s believe would make the system less cumbersome and easier to access and process arrangements.
- ISI to be able to grant Protective Certificates (reduce court involvement).
- PIP to be able to grant one only extension to a PC.
- An Independent Panel for reviewing rejected Insolvency Arrangements.
- VAT to be waived.
- Bankruptcy term to be reduced to 1 year.
Currently the voting structure for Insolvency Arrangements is as follows:
Debt Settlement Arrangement (“DSA”): The DSA proposal must be agreed by you and then approved at a creditors’ meeting. The proposed DSA will have to get the support of creditors representing at least 65% of the total debt that it covers.
Personal Insolvency Arrangement (“PIA”): A PIA must be agreed by you and then approved at a creditors’ meeting by a qualified majority of your creditors. It will have to get the support of creditors (both secured and unsecured) representing at least 65% of your total debt. In addition, over 50% of your secured creditors and 50% of unsecured creditors must vote in favour.
The current voting system is a drag on arrangements being concluded and we would propose that it is amended to be aligned with the current regime for corporate Examinership. This regime, outlined below, has been in operation for a number of years in Ireland successfully.
In an Examinership once appointed, the examiner sets about formulating Proposals, which would typically involve the introduction of new monies and the writing down of historic debt. The write down under an examiner’s scheme will normally leave each creditor (secured and unsecured) in no worse a position than they would have been in on a receivership or liquidation of the company (using the current realisable value of the assets) – in an Insolvency Arrangement the relevant comparison would be bankruptcy.
The examiner then convenes a meeting of each class of creditors affected by the scheme. The examiner will generally class creditors by reference to their priority for payment in a winding up, e.g. secured, preferential and unsecured. Provided 50% plus one in number and value of the creditors represented vote in favour of acceptance of the Proposals, the examiner can seek the court’s approval of those Proposals.
We would propose that the voting structure’s in Personal Insolvency is reformed to mirror this structure which has historically worked effectively and has been accepted by the creditor and debtor stakeholders as effective.