Mortgage debt is one of Ireland's great hidden problems. Thousands of people are wrestling with their inability to pay back their home loans but, for most, it is not something they talk about. Long-term arrears are crippling emotionally and financially, preventing families from planning for the future and increasing household stress.
Last week Central Bank deputy governor Ed Sibley spoke to delegates at a Banking & Payments Federation Ireland event about the regulator's work in respect of distressed debt and particularly long-term mortgage arrears.
While his comments came as no great surprise to the industry, the acknowledgement that the Standard Financial Statement presents a challenge for consumers in distress is bizarre to say the least. Completion of the statement is the very first step any borrower in difficulty must take.
The commitment to review it is welcome but it comes too late for many people who had to go through the process in the last 14 months arising from the fallout from the pandemic.
Lenders are to be commended for the way in which they have dealt with distressed mortgage holders during the pandemic. That being said there is another issue that warrants a similar response and that is long-term mortgage arrears.
The requirement for Irish banks to hold three times more capital reserves than their euro zone counterparts is often cited by the banking industry as one of the main reasons for the higher cost of credit – i.e. higher mortgage interest rates – in Ireland. But we need to remember that the increased requirement was caused by over-exuberant lending in the run-up to the financial crash after which the State picked up the tab to keep the banks afloat.
The industry must deal with this issue and, fundamentally, that means addressing long-term mortgage arrears.
The quality of the mortgage book has improved over the last number of years, with stricter criteria with the Central Bank’s macroprudential requirements playing a significant role in ensuring that we have more responsible lending.
A significant number of problem loans have been sold by the originating lender to other institutions at a discount, leaving them to deal with the debt. But that does not mean the individuals affected should be forgotten and the arrears kicked down the road to be dealt with another day.
According to the Central Bank’s report on long-term mortgage arrears, almost 57 per cent of those who are more than one year behind in their mortgage payments have the ability to pay only half their debt. Workable solutions must be found to deal with this cohort and get them out of the arrears trap and onto a more stable path.
Then there is the even more challenging group of 17 per cent who are not in a position to repay their mortgage and most likely not able to service any type of restructure.
Celtic Tiger
Of those in long-term mortgage arrears, half have monthly debt repayments that account for more than 43 per cent of their monthly income. It is important that these individuals be facilitated in drawing a line under their current financial predicament so that they can move on with their lives.
The cohort most impacted by long-term arrears is those between 50 and 60 years of age. In the Celtic Tiger boom years, 15 years ago, they would have been buying properties at peak prices. They may still not have positive equity in their homes.
Failure to deal with this issue can have devastating consequences on the mental and physical health of those involved, not to mention wider society – including those who took out mortgages in recent years and are paying higher interest rates arising from the arrears legacy.
Mr Sibley noted that long-term mortgage arrears affect the wider economy in terms of cost of credit and the attractiveness of the Irish market for new entrants. It is important that Ireland would be seen as an attractive place for new mortgage lenders to establish a presence. Tackling the issue of long-term mortgage arrears will go a long way towards achieving that outcome.
It is also important that we look afresh at what type of arrangements are being offered to distressed borrowers and whether these “solutions” are just kicking the can down the road.
Long-term interest-only options or the warehousing of debt are not realistic long-term solutions. Both require the borrower to pay the capital by way of lump sum at some stage in the future. For a sizeable group, this will simply not be possible.
Even today, 13 years on from the financial crash, one in eight mortgage accounts are exhibiting some level of distress. In Ireland debt remains a taboo subject.
We need to get rid of the stigma around it by bringing it out from the shadows and giving people hope about their future, assuring them of realistic and fair solutions. Those who are having trouble repaying their mortgage should be encouraged to visit MABS, the Money Advice and Budgeting Service, or a personal insolvency practitioner, both of whom are experts in this area.
The very idea of living in a society implies an interdependence upon each other. And it is this concept that should inform our attitude and actions towards those dealing with mortgage distress.
Rachel McGovern is director of financial services at Brokers Ireland
