Mortgage lenders will run the risk of financial sanctions if they fail to meet Government targets in a new plan to overcome the personal debt crisis.
The plan, to be unveiled on Wednesday, includes last-resort measures to facilitate the repossession of property from home owners deemed to be in “strategic default” if they do not co-operate with their lenders.
This is designed to prompt borrowers who can repay their loans but who won’t do so to engage with their banks. The aim is to separate them on a case-by-case basis from borrowers who genuinely cannot repay, and to settle such cases quickly.
Tone of remarks
The matter is politically sensitive. The tone of remarks on repossessions by Department of Finance secretary general John Moran last week went down badly with some Cabinet members.
However, a senior Government source said there was a clear understanding among all stakeholders that the arrears question should be urgently addressed. The objective was to keep people in the family home “where it’s at all possible”, the source said.
There is support for the initiative within the EU-IMF troika. The view within the troika is that the task of settling genuine arrears cases would be made much more difficult if strategic defaulters are not tackled.
Increased pressure on the banks to confront tens of thousands of mortgage arrears comes in a week in which Revenue starts writing to 1.66 million home owners with estimates of their property tax liability. It will take four weeks to complete the delivery of letters to all properties.
A new Revenue web page on the tax went online yesterday, setting out valuation estimates on homes throughout the State. Valuations scrutinised by The Irish Times were perceived to be at the conservative end of the scale.
The new plan to confront the mortgage crisis aims to remove an incentive for the banks to postpone the definitive settlement of arrears cases, a practice known as “extend and pretend”.
Current rules enable banks to avoid taking a financial loss on mortgages which are in default but which have yet to be formally restructured.
Under the new plan, the Financial Regulator will compel lenders to recognise such losses up front if they do not meet targets to restructure a set number of loans in arrears every three months. Banks would have to set aside capital against such losses, weakening their financial position.
The objective is to encourage banks to put arrears customers in a sustainable position for the long-term, moving away from interim measures like forbearance on repayments or interest-only arrangements. The target number of cases to be settled every three months by each institution will increase in steep increments.
The prospect of further penalising unco-operative banks by preventing them from reducing future corporate tax payments by offsetting liabilities against past losses was discussed within the Government. Such measures, however, are likely to be held in reserve this week.
New regime
The new regime will apply to the two State-supported pillar banks, Allied Irish Banks and Bank of Ireland, and all other mortgage lenders active in the Irish market.
It is likely to include provisions to give the banks increased scope to make contact with customers in arrears. High-level bankers have been complaining in private that current rules allow only four “contacts” per month.
