The time for “passivity” on mortgage arrears in Ireland has long since passed, Central Bank Governor Patrick Honohan said today.
Speaking at a conference hosted by UCD and NUI Maynooth in Dublin, Mr Honohan said the persistent rise in cases of prolonged mortgage arrears “undoubtedly presents one of the biggest economic policy challenges of our day”.
“Wait-and-see may have been an appropriate or sufficient initial position to take as the great crisis unfolded, but the time for passivity is long past,” he said. “The longer term welfare of borrowers is at stake here, but so is the welfare of taxpayers and users of public services, given that bank losses affect the Government because of its ownership of banks.”
Mr Honohan said significant numbers of soured mortgages may be able to come “back on track.”
“The triage process needs to start with the question: is this a distressed case, or one in which the borrower does have the capacity to come back on track?’’ Mr Honohan said in a speech in Dublin today.
‘’It is evident that a significant proportion of current arrears cases fall into the latter category.’’
Mr Honohan said splitting mortgages between borrowers and lenders may provide sustainable solutions for ‘’significant numbers.’’
He said the concept removes the threat of imminent bankruptcy and retains the potential for economic recovery to reduce banks’ prospective loan losses.
Where a mortgage is split, banks should consider limiting their recourse on a loan to a fixed share of the property value.
“Such an arrangement serves to enhance the borrower’s stake in continuing to service the new contractual arrangement and could work out better in the long run for both borrower and lender,’’ he said.
Mr Honohan said lenders needed to address the problem of non-performing mortgage debt “more energetically than has been the case in the past”.
Following the introduction of personal insolvency legislation, Mr Honohan said it would be “unwise” for anyone to think that not paying their debts is a matter of choice and he warned that non-cooperative mortgage borrowers “really are at risk of losing their homes”.
He said permanent debt relief was not something that can be offered to all and has to be limited to those who are truly over-indebted to the point of insolvency.
“In particular, despite the fact that households in negative equity do seem to be over-represented among the arrears cases, negative equity is not in itself a viable rationale for providing debt relief,” he said.
International Monetary Fund director Ajai Chopra told the event that Irish banks may receive further capital through the European Stability Mechanism.
Additional reporting - Bloomberg
