Dunne judgment in 2011 led to higher mortgage default rates

Irish borrowers defaulted on mortgages more than usual in the aftermath of the Start Mortgages v Gunn case in 2011 which effectively removed a bank's ability to repossess a house in the event of a mortgage default, a Central Bank research paper has found.

In his economic letter Did the Dunne judgment lead to more mortgage defaults?, Terry O'Malley argues that borrowers defaulted on mortgages after the judgment at a higher rate than if the repossession regime at the time had been legally upheld. The judgment is named after Ms Justice Elizabeth Dunne, who delivered it.

Mr O’Malley’s statistical analysis points to borrowers in negative equity being more likely to be those who defaulted, or have missed payments before the judgment. He found the default rate to have been 0.5 per cent higher on average in each quarter after the judgment than would have been otherwise expected.

The 2011 judgment from Ms Justice Dunne ruled that the 2009 Land and Conveyancing Reform Act had failed to preserve the terms of older legislation regarding the transfer of property rights.

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The issues raised at the time included whether or not lenders were entitled to summary possession orders claimed under section 62.7 of the Registration of Title Act 1964 given that the Act had been repealed by section 8 of the Land and Conveyancing Law Reform Act 2009, which came into operation on December 1st, 2009.

Arrears

Ms Justice Dunne ruled that borrowers who went into arrears before December 1st, 2009, and received demand letters from lenders before that date, could still be repossessed under the old legislation.

Borrowers, however, who took out mortgages before the December date and who went into arrears after it, could not be repossessed under the old or the new law.

Mr O’Malley outlines how economic theory “predicts that such an event would lead to more borrowers defaulting on their mortgages” before laying out evidence for the defaults after the event.

“Home repossession is a large cost associated with mortgage default, rendering it an unattractive prospect for borrowers. Substantially reducing possession risk therefore decreases the costs associated with default,” Mr O’Malley wrote.

Mr O’Malley concludes that, while it’s tempting to label the defaults arising from the Dunne judgment as “strategic”, Irish evidence shows that only borrowers with the “most to lose from from continuing to pay default after repossession risk is removed”.