House repossessions and mortgage arrears remain very low, writes Simon Carswell, Finance Correspondent

THE LEVEL of bad debt in Ireland is on the rise in the current economic downturn but leading banks note that the increase is only marginal and from historically low levels. While mortgage costs have been creeping up, house repossessions by financial institutions and mortgage arrears still remain very low.

The best snapshot of house repossessions can be taken by examining the Chancery Special Summons list. Only a few cases in this High Court list last Monday featured mainstream lenders such as AIB and Bank of Ireland. Subprime lenders, which provide loans and mortgages to borrowers with chequered credit histories, dominate the list - with Start Mortgages and GE Capital accounting for most of the cases.

There has been no major rise in possession applications in the list so far this year, compared to last year, according to court records. However, there was a 50 per cent increase in possession applications and mortgage lawsuits last year over the figures for 2006.

A High Court search shows that the number of applications before the courts is in line with last year. Start Mortgages has issued 71 possession suits so far this year, compared to 171 for the whole of last year, while GE Capital has issued proceedings in 22 cases, compared to 55 last year.

Start Mortgage's arrears have increased, however. More than one in six mortgages provided by the lender was at least two months in arrears in March. The subprime lender raised almost €900 million two years ago by bundling its mortgages into two packages and selling them on to investors through two securitisation deals entitled Lansdowne Mortgage Securities No 1 and No 2. In an analysis of the deals, ratings agency Moody's found that arrears of over two months rose to 21.7 per cent in March from 18.7 per cent last June in the first package and to 17.3 per cent from 7.8 per cent in the second package.

Applications do not necessarily lead to repossessions as legal proceedings can often encourage recalcitrant borrowers to pay - especially those who are unwilling rather than unable to pay. One case was resolved last Monday when a cheque of €3,530 was paid over in court to clear mortgage arrears. Subprime interest rates are higher than those of mainstream lenders, as they weigh up the risk of providing home loans to borrowers with a higher risk profile. Rates range from 7 per cent to more than 10 per cent and are assessed on a case-by-case basis, based on a borrower's credit record, repayment history and employment.

Presiding over the Chancery Special Summons list last Monday, Ms Justice Elizabeth Dunne granted a number of orders to GE Capital Woodchester Finance and Start Mortgages to take possession of properties secured under loans provided by the companies.

GE Capital obtained a possession order against Patrick Noel and Elizabeth Cox over a property at Harristown, Kinnegad, Co Meath. The couple were advanced €180,000 in May 2006 but no monthly repayments had been made since August 2007. The monthly repayments amounted to €1,305 and arrears of €21,889 had built up on the account over the last nine months. The total debt outstanding was €195,322. The judge put a stay of three months on the possession order.

A stay of three months is common in most successful possession cases as it allows the borrower to vacate the property or raise money elsewhere, possibly through a remortgage, to repay the arrears on their existing loan.

Another GE Capital customer had received a loan for €233,800 in 2006 for a rental property in Swords, Co Dublin. The monthly repayments came to €1,751, but the court heard no payments had been made on the account since April 2007 and arrears of €15,018 had built up.

The lender obtained a possession order against Áine McDonagh over a property at Derrendaragh, Lettermore, Co Galway. The court heard that Ms McDonagh borrowed €145,000 in 2005 and that she had allowed arrears of €9,715 to mount up, bringing the total amount outstanding to €149,312, though she had made a payment in March. The judge put a stay of four months on the order.

Start Mortgages secured a possession order against Kieran and Maria O'Brien of Ballintermon, Annascaul, Co Kerry, over arrears of almost €81,000 on a €500,000 loan obtained in August 2005. Counsel for the couple said they had placed a property on the market to repay the debt and sought a stay of nine months to allow the sale to be completed.

The judge said the most she "can do and should do" was put a four-month stay on the order.

The judge adjourned a number of other cases on Monday for several weeks to await further details, such as whether an individual has right of residence over a property, whether a property is vacant and to await details of refinancing by a borrower to see if they can repay.

Financial institutions generally resort to the High Court for repossession applications against borrowers, as it tends to be a speedier process. However, lenders can seek possessions through the Circuit Court, though the process tends to be less efficient, and this court can sit around the State. A spokesman for Start said the High Court did not fully represent the overall number of possession applications, as both prime and subprime lenders take cases in the Circuit Court.

Last month, First Active applied for a repossession order through the Circuit Court against a couple who bought a house in Malahide, Co Dublin, three years ago for €1.8 million, but who could not meet monthly repayments of €4,500. The court was told the house was worth considerably less than what they had paid for it.

The Irish Financial Services Regulatory Authority says that, under its code of conduct, lenders must assist a borrower in difficulty with repayments and help them manage their debts, and only turn to the courts to repossess a property as a final option.

Speaking at the Oireachtas Joint Committee on Finance and the Public Service earlier this year, Pat Neary, chief executive of the regulator, said: "Relying on repossessions should be the final straw." He said repossession "should be the last resort and that all efforts should be made to resolve any difficulties at an early stage with the customers concerned."