Brendan Burgess
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The Central Bank has issued
[FONT=Times New Roman,serif][FONT=Calibri,sans-serif]DRAFT Internal Central Bank Guidelines - Sustainable Mortgage Arrears Solution[/FONT][/FONT] which contains the following on split mortgages
1.5. Assessment of Split Mortgage Solutions
The Central Bank is concerned that lenders persist in relying on temporary forbearance measures even where a demonstrable ability of the borrower to resume the original contractual repayments at the conclusion of this forbearance term is unlikely. Therefore, where the borrower is unable to service fully the mortgage payments but where there is some reasonable prospect of the borrower’s circumstances improving over a longer term, a split-mortgage solution may be considered as offering a sustainable solution. In the case of PDH loans, a split mortgage can allow the borrower the opportunity to remain in their home, while enabling the lender to recover an additional portion of the loan should the borrower’s circumstances improve. A split mortgage divides the sum owed into a base loan (Part A) and a warehoused loan (Part B).
When determining a sustainable solution the lender must attempt to match a solution from the available range that best matches a borrower’s current and future affordability. Because of this, various designs of split mortgage may be considered as sustainable solutions by the Central Bank depending on the circumstances of the intended cohort. Sustainability of a split mortgage will be assessed by the Central Bank inter alia with regard both to the affordability of the un- warehoused debt payment schedule and with regard to the treatment of the warehoused loan at maturity.
Transparency to a borrower of the terms and conditions of a split mortgage at the outset of such a solution is essential to the sustainability of this solution, in particular how the bank will treat future increase of income and the repayment of the warehoused loan at maturity.
a. Treatment of the base loan of a split mortgage
The Central Bank will typically consider a split mortgage sustainable if the new term and interest rate on the base loan (Part A) result in a newly contracted payment schedule which leaves the borrower with sufficient funds in line with established norms. In order to reduce the incentive for a borrower to reject a particular offer in the hope of receiving something better through the PIA process, lenders will want to consider how the schedule offered compares (i.e. in terms of monthly disposal income post debt repayment).
More generally, for a split mortgage to be considered sustainable, the lender should be able to demonstrate that, given their current and prospective economic circumstances, the borrower will be able to service Part A fully throughout the term or, failing that, will be able to cover any servicing shortfall of Part A from other resources that the lender has a good reason to expect the borrower will possess at the end of term.
As the split is designed to help the borrower stay in the family home, in the event of a sale during the term of the mortgage, the lender and borrower will renegotiate the terms of the restructure.
b. Treatment of future increase of income
The Central Bank will typically only consider a split mortgage to be sustainable if provision is made for any future increase in the borrower’s income to be shared in a reasonable proportion between the borrower and the bank. In considering this, the bank should be conscious of how such increase in income would be treated under a Personal Insolvency Agreement.
c. Treatment of term of warehoused part of split mortgage
Two approaches towards ensuring that the treatment of the warehoused part of a split mortgage can be considered sustainable are as follows (does not apply to Buy-to-Let cases):
(i) Limiting recourse at term to a fixed proportion of the property value. This approach could be suitable for dealing with owner-occupier houses to help ensure that, at the end of the term, the borrower has sufficient resources to afford step-down accommodation expenses. A provision in the new agreement limiting the bank’s recourse to the collateral to cover any un-serviced part of the warehoused loan to 30% of the property value at term will typically be considered by the Central Bank to satisfy the sustainability criterion at maturity. In the case of a split mortgage with such a rule, it will not be inconsistent with sustainability for the warehoused part of the loan to accrue interest; or
(ii) (a) Limiting recourse at term to the collateral value. This approach involves the new agreement specifying that, at the end of the term, any shortfall in the warehouse after sale of the property would no longer be owed. In order to address the fact that this means the borrower is at risk of losing their home at the end of the term, this would typically be combined with:
(b) Lifetime security of tenure. An alternative would be for the new contract to specify clearly that, at the end of the term of the new solution, the borrower (and his or her spouse) may remain in the property until death in exchange for reasonable rent payments (taking account of capacity to pay).
In either case, communications to borrowers being offered split mortgages should set out the lenders intended treatment of the warehoused portion and should clearly indicate that the property value will not be inherited in full unless the warehoused portion is fully amortized.
A split mortgage solution which does not ensure the sustainable treatment of the warehoused part of the mortgage, as outlined above or with other measures of equivalent effect, will not be counted as a sustainable solution in the context of the targets.
[FONT=Times New Roman,serif][FONT=Calibri,sans-serif]DRAFT Internal Central Bank Guidelines - Sustainable Mortgage Arrears Solution[/FONT][/FONT] which contains the following on split mortgages
1.5. Assessment of Split Mortgage Solutions
The Central Bank is concerned that lenders persist in relying on temporary forbearance measures even where a demonstrable ability of the borrower to resume the original contractual repayments at the conclusion of this forbearance term is unlikely. Therefore, where the borrower is unable to service fully the mortgage payments but where there is some reasonable prospect of the borrower’s circumstances improving over a longer term, a split-mortgage solution may be considered as offering a sustainable solution. In the case of PDH loans, a split mortgage can allow the borrower the opportunity to remain in their home, while enabling the lender to recover an additional portion of the loan should the borrower’s circumstances improve. A split mortgage divides the sum owed into a base loan (Part A) and a warehoused loan (Part B).
When determining a sustainable solution the lender must attempt to match a solution from the available range that best matches a borrower’s current and future affordability. Because of this, various designs of split mortgage may be considered as sustainable solutions by the Central Bank depending on the circumstances of the intended cohort. Sustainability of a split mortgage will be assessed by the Central Bank inter alia with regard both to the affordability of the un- warehoused debt payment schedule and with regard to the treatment of the warehoused loan at maturity.
Transparency to a borrower of the terms and conditions of a split mortgage at the outset of such a solution is essential to the sustainability of this solution, in particular how the bank will treat future increase of income and the repayment of the warehoused loan at maturity.
a. Treatment of the base loan of a split mortgage
The Central Bank will typically consider a split mortgage sustainable if the new term and interest rate on the base loan (Part A) result in a newly contracted payment schedule which leaves the borrower with sufficient funds in line with established norms. In order to reduce the incentive for a borrower to reject a particular offer in the hope of receiving something better through the PIA process, lenders will want to consider how the schedule offered compares (i.e. in terms of monthly disposal income post debt repayment).
More generally, for a split mortgage to be considered sustainable, the lender should be able to demonstrate that, given their current and prospective economic circumstances, the borrower will be able to service Part A fully throughout the term or, failing that, will be able to cover any servicing shortfall of Part A from other resources that the lender has a good reason to expect the borrower will possess at the end of term.
As the split is designed to help the borrower stay in the family home, in the event of a sale during the term of the mortgage, the lender and borrower will renegotiate the terms of the restructure.
b. Treatment of future increase of income
The Central Bank will typically only consider a split mortgage to be sustainable if provision is made for any future increase in the borrower’s income to be shared in a reasonable proportion between the borrower and the bank. In considering this, the bank should be conscious of how such increase in income would be treated under a Personal Insolvency Agreement.
c. Treatment of term of warehoused part of split mortgage
Two approaches towards ensuring that the treatment of the warehoused part of a split mortgage can be considered sustainable are as follows (does not apply to Buy-to-Let cases):
(i) Limiting recourse at term to a fixed proportion of the property value. This approach could be suitable for dealing with owner-occupier houses to help ensure that, at the end of the term, the borrower has sufficient resources to afford step-down accommodation expenses. A provision in the new agreement limiting the bank’s recourse to the collateral to cover any un-serviced part of the warehoused loan to 30% of the property value at term will typically be considered by the Central Bank to satisfy the sustainability criterion at maturity. In the case of a split mortgage with such a rule, it will not be inconsistent with sustainability for the warehoused part of the loan to accrue interest; or
(ii) (a) Limiting recourse at term to the collateral value. This approach involves the new agreement specifying that, at the end of the term, any shortfall in the warehouse after sale of the property would no longer be owed. In order to address the fact that this means the borrower is at risk of losing their home at the end of the term, this would typically be combined with:
(b) Lifetime security of tenure. An alternative would be for the new contract to specify clearly that, at the end of the term of the new solution, the borrower (and his or her spouse) may remain in the property until death in exchange for reasonable rent payments (taking account of capacity to pay).
In either case, communications to borrowers being offered split mortgages should set out the lenders intended treatment of the warehoused portion and should clearly indicate that the property value will not be inherited in full unless the warehoused portion is fully amortized.
A split mortgage solution which does not ensure the sustainable treatment of the warehoused part of the mortgage, as outlined above or with other measures of equivalent effect, will not be counted as a sustainable solution in the context of the targets.