A “legal vacuum” is preventing banks from promptly repossessing homes owned by individuals who have fallen into mortgage arrears.
Pat Farrell, chief executive of the Irish Banking Federation, said a High Court ruling last year - which found a gap in legislation - was an impediment to repossessing homes from people who took mortgages before December 1st, 2009.
He was responding to comments from Central Bank governor Patrick Honohan who last night said banks needed to be more aggressive in repossessing properties in the buy-to-let sector.
Mr Honohan said that while public policy should aim to avoid the repossession of family homes “where this is unnecessary”, when it came to investment properties, “there are many circumstances in which there is less reason to be inhibited about repossessing”.
He said it was “surely now past time for the banks to be dealing more proactively with the situation of over-indebted buy-to-let borrowers no longer able to service the debts they assumed in order to take investment positions – now loss-making – in property.”
Mr Honohan said the increased repossession could see banks having to manage a portfolio of repossessed buy-to-let properties. It was “not an insurmountable task” and would “facilitate the improved functioning of the property market and getting closer to a market-clearing price by bringing to the market many of those properties which at present are implicitly hanging over it as an excess supply”. At the peak of the boom in 2007 a quarter of mortgages were for buy-to-let properties.
Mr Farrell said a number of legislative and practical obstacles were an impediment to reaching resolution with some holders of mortgages that were in difficulty. In particular, he pointed to the “legal vacuum” created by last year’s High Court ruling which found that the Land and Conveyancing Law Reform Act only applied to mortgages created after its commencement on December 1st, 2009.
Borrowers 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, he said.
Mr Farrell told RTÉ Morning Ireland that the judgement also applied to the buy-to-let sector and "prevents the banks from realising their security". He said IBF was looking for "a restoration" of the legal situation that obtained before that judgement.
While identifying the legal loophole as a an impediment to pursuing resolution of many cases, Mr Farrell said banks were “actively” working through problem mortgages and that 75,000 mortgages have been restructured to-date.
“The facts are indisputable. Seventy-five thousand mortgages have been restructured. The banks were asked to submit mortgage arrears resolution strategies last November – that, they have done," he said.
Mr Farrell said deputy governor of the Central Bank Mathew Elderfield had laid out a timetable of practical issues that need to be deployed around the Keane Report.“The banks are now working to a central bank timetable which will see these solutions coming on stream between now and the end of the year…So, the banks are absolutely working to the timetable that has been set down by the Central Bank and by the deputy governor.”
Mr Farrell said it was in the banks’ own interest to ensure they “make arrangements” with people who are experiencing mortgage difficulties and said they will have “another suite” of solutions "beyond forbearance" that will come into use later this year.
He also criticised the Code of Conduct for Mortgage Arrears which restricts the number of times contact can be made with customers was “operating as a practical impediment” to engaging early with mortgage holders.
Mr Honohan had little comfort for tens of thousands of homeowners struggling to meet mortgage repayments as he ruled out a widespread debt forgiveness programme, describing it as unaffordable.
Speaking to students at the University of Limerick, he refused to comment on the negotiations over the Anglo Irish Bank promissory note. He refused to elaborate on what level of contact he believed banks should be allowed to have with creditors, other than to say the conduct on mortgage arrears was being reviewed. Banks are prohibited from contacting mortgage holders in arrears more than three times a month.
He said topping-up the banks’ balance sheets by the State had given them a “capital buffer” to absorb potential losses for the next few years, but he warned it was “not enough for any broad strategy of debt forgiveness”.
Mr Honohan also suggested that Government policy should be focused instead on helping families avoid the loss of their homes “where this is not necessary” and he cautioned against “creating a perverse incentive for those who can afford to pay their debts to exploit the system at the expense of the rest of society”.
He accused the banking sector of failing to develop efficient systems of dealing with the personal debt crisis and warned it was in danger of driving people unnecessarily into insolvency procedures set to become law later this year.
He said legislation aimed at tackling the State’s personal debt crisis should only be used as a last resort and in most cases banks and debtors should be able to resolve issues independently of the legal system.