The Government’s latest package to deal with mortgage arrears is designed to increase the use of the insolvency service, but also to encourage both borrowers and banks to reach arrangements outside this kind of formal process. It is the latest step in a long process of trying to find a reasonable and efficient way to deal with the fallout from the economic crisis. The new measures should make a useful contribution, but much will come down to delivering what is promised. As we have seen in the arrears crisis, the shine can often be taken off new initiatives by rules and restrictions or by a failure by borrowers or lenders to engage in seeking a solution.
The moves to increase the use of the insolvency service and personal insolvency arrangements was needed and, if followed through, could provide a useful route for at least some distressed borrowers. The idea of shortening the bankruptcy period is to be given further study. This may only be appropriate for a minority of mortgage arrears cases, having more relevance to those with business related debts, but does nonetheless merit examination.
Part of the strategy will also be to encourage banks and borrowers to sit down together to negotiate. In truth, this whole issue was parked in the early part of the crisis and banks have only started to deal with arrears since mid-2013, when key legislative and regulatory changes were made. Even since then, however, there have been faults on both sides. Banks have too often offered temporary solutions, rather than realistic ones, while some borrowers have been too slow to come to the table. We are now getting to a position where borrowers in arrears will have a range of options and no reason not to access proper advice.
One block to borrowers opting for personal insolvency arrangements has been the effective veto given to banks as secured creditors. There is still debate about the extent to which banks have been unreasonable in using this veto. However the promised oversight of the courts should assuage such concerns, even if finding a legislative wording that would not be vulnerable to constitutional challenge is not easy.
The extension of the mortgage to rent scheme is also appropriate, although it is also essential that the practical barriers which have limited the use of this scheme are properly addressed. Indeed, there is still work to be done by both the Government and lenders in making the range of options understandable and accessible. There is also a bottom line here for the banks. In the early part of the crisis they may have felt they could not afford to face the costs and complexities of dealing with mortgage arrears. Now, as most return to profit and a range of mechanisms are in place, they have no excuse, even if in many cases writing off some of the debt owed is, sooner or later, inevitable.