Brendan Burgess
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This is what the OECD said in its recent report on the Irish economy (PDF page 23)
Improving the efficiency of repossession proceedings
NPLs have primarily been resolved through restructures rather than repossessions when the debtor’s primary dwelling is used as collateral. Debt restructures, even if successful, can impose a large debt servicing burden on the borrower over a long time. Almost 120 000 current primary dwelling accounts have been restructured at end-September 2017. As of mid-2017, around one third of these were in the form of arrears capitalisation, whereby
some or all of the outstanding arrears are added to the remaining principal balance and then repaid over the life of the mortgage. In about 25% of cases, restructures have been in the form of a split mortgage, whereby a portion of the mortgage is warehoused at a lower interest rate
for future payment. So far, the majority of restructured accounts are meeting the terms of the restructuring agreement.
The resolution of NPLs through restructures will become more difficult given the share of highly distressed borrowers is increasing. There are still 51 750 primary dwelling accounts in arrears (accounting for 7% of total outstanding primary dwelling accounts). Out of the accounts currently in a legal process (around 12 000), around 87% are over 720 days past due and 60% have already had some type of forbearance or modification, but remain nonperforming (CBI,2016a). A large proportion of the borrowers are highly indebted with limited income,
meaning they are unlikely to be able to bear the cost of a restructured loan. In such cases, loss of ownership is likely to be inevitable, through repossession, mortgage to rent or voluntary surrender.
Improving judicial efficiency in repossession proceedings is a key factor for further addressing NPLs (ECB, 2016). As it stands, Ireland’s repossession process for residential properties takes a long time. From when the legal process for repossession commences, it has typically taken around 1½ years for a matter to be concluded (Expert Group on Repossessions, 2013). Despite a steady decline in applications for new court proceedings related to primary dwelling repossessions, the stock of accounts before the courts has remained stubbornly high
(Figure 12). In 2016, less than 10% of primary dwelling accounts before the courts were repossessed with a court order.
The elevated stock of accounts before the courts is due to the high frequency of adjournments. In some instances, the documents submitted to the court by the lender are not adequate and the grounds for forbearance pleaded by the borrower evolve over time, which both often result in further adjournments. This problem was addressed in a 2015 reform which introduced standardised documentation outlining the grounds on which repossession is being contested, accompanied by a statement of means. The authorities should evaluate whether this reform has had any success in improving case management of repossession proceedings (including through accelerating them), though the persistent high stock of court proceedings (Figure 12) suggests that any impact has been limited.
In order to speed up repossession proceedings, case management should be improved further.The authorities should consider standardising the ‘suspended’ possession order, like in the United Kingdom (CCPC, 2017). This would grant lenders a collateral possession order at a future date with the suspension of possession only conditional on well-defined criteria. By reaching a court mandated solution at an early stage, engagement between the borrower and
lender would be better encouraged, standardising and speeding up repossession proceedings, while raising predictability for both parties. Trade-offs exist, as such a policy may have the unintended consequence of encouraging collateral to be run-down by debtors in some instances. The impact of any such policy change on debtor wellbeing should also be evaluated, with the reform carefully designed to ensure that the benefits with regard to reducing uncertainty and encouraging the provision of finance outweigh any unintended costs.
Protection of debtors
To protect heavily indebted households from slipping into poverty, adequate flanking policies
are essential. The introduction of the “Abhaile” scheme in 2016, which provides vouchers to
those with mortgage arrears so that they can access independent financial and legal advice, was important in this context. Adding to this, the provision of social housing through the realisation of the government’s Action Plan for Housing and Homelessness – Rebuilding Ireland will be
critical. This plan aims to deliver 50 000 additional long-term social homes across the period
2016 to 2021 (Table 3). Importantly for social inclusiveness, the new units will be integrated in
mixed tenure developments alongside private owners. Other reforms that promote housing
supply in the right locations (discussed further below) will complement these aims. It may be
the case that ensuring an adequate housing safety net has a positive impact on the processing
of repossession orders, as the availability of decent alternative housing is an important factor
considered by the courts when hearing these matters.
Improving the efficiency of repossession proceedings
NPLs have primarily been resolved through restructures rather than repossessions when the debtor’s primary dwelling is used as collateral. Debt restructures, even if successful, can impose a large debt servicing burden on the borrower over a long time. Almost 120 000 current primary dwelling accounts have been restructured at end-September 2017. As of mid-2017, around one third of these were in the form of arrears capitalisation, whereby
some or all of the outstanding arrears are added to the remaining principal balance and then repaid over the life of the mortgage. In about 25% of cases, restructures have been in the form of a split mortgage, whereby a portion of the mortgage is warehoused at a lower interest rate
for future payment. So far, the majority of restructured accounts are meeting the terms of the restructuring agreement.
The resolution of NPLs through restructures will become more difficult given the share of highly distressed borrowers is increasing. There are still 51 750 primary dwelling accounts in arrears (accounting for 7% of total outstanding primary dwelling accounts). Out of the accounts currently in a legal process (around 12 000), around 87% are over 720 days past due and 60% have already had some type of forbearance or modification, but remain nonperforming (CBI,2016a). A large proportion of the borrowers are highly indebted with limited income,
meaning they are unlikely to be able to bear the cost of a restructured loan. In such cases, loss of ownership is likely to be inevitable, through repossession, mortgage to rent or voluntary surrender.
Improving judicial efficiency in repossession proceedings is a key factor for further addressing NPLs (ECB, 2016). As it stands, Ireland’s repossession process for residential properties takes a long time. From when the legal process for repossession commences, it has typically taken around 1½ years for a matter to be concluded (Expert Group on Repossessions, 2013). Despite a steady decline in applications for new court proceedings related to primary dwelling repossessions, the stock of accounts before the courts has remained stubbornly high
(Figure 12). In 2016, less than 10% of primary dwelling accounts before the courts were repossessed with a court order.
The elevated stock of accounts before the courts is due to the high frequency of adjournments. In some instances, the documents submitted to the court by the lender are not adequate and the grounds for forbearance pleaded by the borrower evolve over time, which both often result in further adjournments. This problem was addressed in a 2015 reform which introduced standardised documentation outlining the grounds on which repossession is being contested, accompanied by a statement of means. The authorities should evaluate whether this reform has had any success in improving case management of repossession proceedings (including through accelerating them), though the persistent high stock of court proceedings (Figure 12) suggests that any impact has been limited.
In order to speed up repossession proceedings, case management should be improved further.The authorities should consider standardising the ‘suspended’ possession order, like in the United Kingdom (CCPC, 2017). This would grant lenders a collateral possession order at a future date with the suspension of possession only conditional on well-defined criteria. By reaching a court mandated solution at an early stage, engagement between the borrower and
lender would be better encouraged, standardising and speeding up repossession proceedings, while raising predictability for both parties. Trade-offs exist, as such a policy may have the unintended consequence of encouraging collateral to be run-down by debtors in some instances. The impact of any such policy change on debtor wellbeing should also be evaluated, with the reform carefully designed to ensure that the benefits with regard to reducing uncertainty and encouraging the provision of finance outweigh any unintended costs.
Protection of debtors
To protect heavily indebted households from slipping into poverty, adequate flanking policies
are essential. The introduction of the “Abhaile” scheme in 2016, which provides vouchers to
those with mortgage arrears so that they can access independent financial and legal advice, was important in this context. Adding to this, the provision of social housing through the realisation of the government’s Action Plan for Housing and Homelessness – Rebuilding Ireland will be
critical. This plan aims to deliver 50 000 additional long-term social homes across the period
2016 to 2021 (Table 3). Importantly for social inclusiveness, the new units will be integrated in
mixed tenure developments alongside private owners. Other reforms that promote housing
supply in the right locations (discussed further below) will complement these aims. It may be
the case that ensuring an adequate housing safety net has a positive impact on the processing
of repossession orders, as the availability of decent alternative housing is an important factor
considered by the courts when hearing these matters.