Unsustainable Mortgages - The Central Bank perspective

Brendan Burgess

Brendan Burgess

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Summary


[FONT=&quot]The Central Bank has issued no definition of, or guidelines on what a “sustainable mortgage” is from a consumer viewpoint
[/FONT][FONT=&quot]
The MARTs regime is a prudential initiative. It was not intended for the protection of borrowers. It should not be criticised for not doing something it was not designed for.

[/FONT][FONT=&quot]The definition of “sustainable solution” reflects prudential considerations only and not the concerns of borrowers
[/FONT][FONT=&quot]
The MARTs regime has benefited some borrowers and harmed others [/FONT][FONT=&quot]

Some distressed borrowers may lose their trackers as a result of the revised Mortgage Arrears Code [/FONT]
 

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The Mortgage Arrears Resolution Targets


[FONT=&quot]The [/FONT][FONT=&quot]Mortgage Arrears Resolution Targets[/FONT][FONT=&quot] document was issued by the Central Bank on 13 March 2013.[/FONT]

[FONT=&quot]What is the purpose of the MARTs regime? [/FONT]
[FONT=&quot]The Code of Conduct on Mortgage Arrears Is the Central Bank’s principal tool for protecting customers in arrears. The MARTs regime is completely separate and is a tool for the prudential supervision of the banks. It is not intended for the protection of borrowers and should not be evaluated against that yardstick.[/FONT]
[FONT=&quot]
[/FONT]
[FONT=&quot]“the Central Bank has decided, [/FONT][FONT=&quot]as a prudential policy measure[/FONT][FONT=&quot], to set progressively more demanding quantitative targets for Specified Credit Institutions to process arrears cases and achieve sustainable outcomes.” (MART Page 6) [/FONT]

[FONT=&quot]So it’s perfectly reasonable, in that context, to consider repossession by court order to be a sustainable solution. This may not be in the interests of the mortgage holder, but it may be in the “prudential” interests of the banks and their depositors. [/FONT]

[FONT=&quot]The following mortgage providers, which account for around 30% of all arrears cases, are not covered by the MARTs as they are not subject to prudential supervision by the Central Bank.[/FONT]


  • [FONT=&quot]Irish Nationwide
    [/FONT]
  • [FONT=&quot]Start Mortgages and other sub-prime lenders
    [/FONT]
  • [FONT=&quot]Danske Bank (formerly National Irish Bank)[/FONT]
  • [FONT=&quot] Bank of Scotland
    [/FONT]
  • [FONT=&quot]The Local Authorities [/FONT]

[FONT=&quot]What is the MARTs’ definition of a sustainable solution? [/FONT]

[FONT=&quot]The MART document defines a “sustainable solution” as one of the following: (paraphrased - see Appendix 1 for full text) [/FONT]

[FONT=&quot] “(a) An arrangement … which is likely to enable the customer to repay the … principal sum … over the full remaining life of the mortgage. [/FONT]
[FONT=&quot] (b) A personal insolvency arrangement [/FONT]
[FONT=&quot](c) Giving up the property through voluntary sale, repossession by agreement or repossession by court order [/FONT]
[FONT=&quot]So, if the borrower cannot pay the loan in full by retirement, their mortgage is regarded as unsustainable and so they should vacate their home. [/FONT]

[FONT=&quot]What are the penalties for not achieving these targets? [/FONT]
[FONT=&quot]The banks will have to make more rigorous provisions for loans in arrears over 90 days and they may also need additional capital. [/FONT]

[FONT=&quot]If the banks need more capital, who will provide it? [/FONT]
[FONT=&quot]The shareholders, which in the case of AIB, EBS and ptsb are the taxpayers.[/FONT]

[FONT=&quot]What are the positive implications of the “prudential” definition for borrowers? [/FONT]
[FONT=&quot]All the banks involved have increased the number of solutions offered to borrowers e.g. split mortgages. [/FONT]

[FONT=&quot]What are the negative implications of these targets for borrowers? [/FONT]
[FONT=&quot]Many borrowers whose mortgages are sustainable are receiving letters telling them to sell their home or face repossession.
[/FONT]
[FONT=&quot]In some of these cases, it is in both the bank’s interest and the borrower’s interest to keep the mortgage going. For example, an older borrower with positive equity who can afford to service the interest on their mortgage but who cannot repay the capital in full by retirement will be told that their mortgage is unsustainable.
[/FONT]
[FONT=&quot]While this is not in the bank’s financial interests, it does help them to achieve their targets and thus avoid the need for additional capital. [/FONT]


[FONT=&quot]Are tracker mortgage holders at risk from the MARTs regime?[/FONT]

[FONT=&quot]Yes. [/FONT][FONT=&quot]
[/FONT]
[FONT=&quot]Banks are now doubly incentivised to declare tracker mortgages unsustainable. By doing so, they get rid of a loss-making tracker and they move closer to achieving the Central Bank’s targets.[/FONT]
 
The Code of Conduct on Mortgage Arrears


[FONT=&quot]What is the Central Bank’s definition of a sustainable mortgage from the borrower’s perspective?[/FONT]

[FONT=&quot]There is no definition or guidelines in the [/FONT][broken link removed]


[FONT=&quot]How would borrowers benefit if the Central Bank provided a definition of a sustainable mortgage from the borrower’s point of view? [/FONT]


  • [FONT=&quot]The borrower would have guidelines for assessing the sustainability or otherwise of their own mortgage
    [/FONT]
  • [FONT=&quot]The borrower and the lender would have independently produced guidelines to inform their negotiations in much the same way that the Insolvency Service’s Guidelines on Reasonable Living Expenses have set standards for what is reasonable.
    [/FONT]
  • [FONT=&quot]The borrower could use guidelines to prevent the lender trying to take away their cheap tracker
    [/FONT]
  • [FONT=&quot]The guidelines could be used in the context of Personal Insolvency Arrangements to determine whether the outcome of a PIA is sustainable or not.[/FONT]
  • [FONT=&quot]The courts could use such guidelines when hearing applications for repossession. [/FONT]
What are the arguments against providing guidelines on sustainability?


  • [FONT=&quot]Sustainability must be decided on a case by case basis.
    [/FONT]
  • [FONT=&quot]Borrowers might engineer a solution to make their mortgage unsustainable [/FONT]
[FONT=&quot](I am just noting these arguments here – I don’t agree with them)[/FONT]


[FONT=&quot]Are home owners at risk of losing their cheap trackers? [/FONT]

[FONT=&quot]Yes.
[/FONT]
[FONT=&quot]
[/FONT]
[FONT=&quot]Under the old Code of Conduct on Mortgage Arrears, lenders were prohibited from taking borrowers in arrears off cheap trackers. The revised Code says that a lender must explore all options to make a mortgage sustainable e.g. interest only, reducing the interest rate, split mortgage etc. However, Section 46 says that, if having explored all these options, the lender concludes that the only way to make a mortgage sustainable is to take away their cheap tracker, then they are allowed to do so. (See Appendix 1 for text of Section 46)[/FONT]
[FONT=&quot]While this is a risk, it should be pointed out that, as yet, I have seen no evidence of the mortgage lenders exploiting this clause. [/FONT]
[FONT=&quot]How can a mortgage which is unsustainable with a cheap tracker become sustainable with a higher interest rate? [/FONT]

[FONT=&quot]The only way this can be achieved is for the lender to write down the mortgage balance outstanding. [/FONT]
[FONT=&quot]The danger is that the lender will offer some complex solution e.g. a combination of an extended term, a split mortgage and a Standard Variable Rate. Vulnerable or uninformed borrowers will sign up to this and lose their tracker. [/FONT]

[FONT=&quot]Why does the CCMA not specify that the lender must give a capital write-down in exchange for taking them off the tracker? [/FONT]

[FONT=&quot]I can’t think of any good reason why this would be omitted from a Code aimed at protecting borrowers. It would be right to omit it from a Code which is aimed at solving the banks’ tracker problems. [/FONT]
 
Appendix 1

[FONT=&quot]The Central Bank’s definition of a sustainable solution[/FONT]

[FONT=&quot]A “sustainable solution” as one of the following:[/FONT]
[FONT=&quot](a) An arrangement concluded under a bank’s Mortgage Arrears Resolution Process MARP , in accordance with the CCMA, where the borrower is cooperating under the MARP and the bank has satisfied itself that the arrangement provides a sustainable solution which is likely to enable the customer to meet the original or, as appropriate, the amended terms of the mortgage over the full remaining life of the mortgage, including repayment of the original or an agreed revised principal sum where offered. This may include an interest only or other temporary solution for a period if it is likely that full repayment of the original or revised principal will be achieved over time, or where there is a payment plan to return the account to sustainability through the clearance of arrears;[/FONT]
[FONT=&quot]
[/FONT]
[FONT=&quot](b) A personal insolvency arrangement effected under the Personal Insolvency Act 2012; or[/FONT]
[FONT=&quot]
[/FONT]
[FONT=&quot](c) If an arrangement could not be reached or is not appropriate, that the PDH or BTL property securing the loan has been voluntarily sold or, failing that, any situation where a Specified Credit Institution takes possession of the property including by way of voluntary agreement with the borrower or by Court Order or otherwise [/FONT]
[FONT=&quot]([/FONT][FONT=&quot]MART[/FONT][FONT=&quot] Page 20) [/FONT]
[FONT=&quot] [/FONT]
[FONT=&quot]The Mortgage Arrears Code [/FONT][FONT=&quot] sections on trackers [/FONT]

[FONT=&quot]46. In the case of an existing tracker mortgage, if, following consideration of the options in accordance with Provision 39, in conjunction with Provision 41, the lender concludes that none of the option(s) that would allow the borrower to retain his/her tracker interest rate is/are appropriate and sustainable for the borrower’s individual circumstances, the lender may offer the borrower an alternative repayment arrangement which requires the borrower to change from an existing tracker mortgage to another mortgage type, if that alternative repayment arrangement:[/FONT]
[FONT=&quot]a) is affordable for the borrower, and[/FONT]
[FONT=&quot]b) is a long-term sustainable solution which is consistent with Central Bank of Ireland policy on sustainability.[/FONT]
[FONT=&quot] [/FONT]
[FONT=&quot]39. In order to determine which options for alternative repayment arrangements are viable for each particular case, a lender must explore all of the options for alternative repayment arrangements offered by that lender. Such alternative repayment arrangements may include: (Interest only/reduced interest rate/split mortgage, etc. ) [/FONT]
[FONT=&quot] [/FONT]
[FONT=&quot]41. The lender must not require the borrower to change from an existing tracker mortgage to another mortgage type, as part of any alternative repayment arrangement offered to the borrower, except in the circumstances set out in Provision 46.[/FONT]
[FONT=&quot] [/FONT]
 
Here are some questions which the Oireachtas Finance Committee should ask Governor Honohan.


[FONT=&quot]What input did the Consumer Protection division have into the framing of the MART document?[/FONT]
[FONT=&quot]
[/FONT]
[FONT=&quot]What input did the Banking and Insurance Supervision division have into the framing of the revised CCMA?
[/FONT]
[FONT=&quot]
[/FONT]
[FONT=&quot]Why have you not issued guidelines on what a sustainable or unsustainable mortgage is from a consumer point of view?
[/FONT]
[FONT=&quot]
[/FONT]
[FONT=&quot]Is there any situation where the sustainability of a tracker mortgage could be improved by increasing the interest rate, other than by having a reduction in capital?
[/FONT]
[FONT=&quot]
[/FONT]
[FONT=&quot]If there is no such situation, why did you not specify that in the revised CCMA? [/FONT]
 
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