Embed Size (px)
Citation preview
Mortgage Arrears Project
Course: Higher Certificate in Business year 2
Subject: Insurance & Banking
Lecturer: Karen Guest
Word Count: 2,734
1 | P a g e
ContentsIntroduction...........................................................................................................................................3
Mortgage Arrears..................................................................................................................................3
Reasons borrowers may be in mortgage arrears...............................................................................3
How many mortgage accounts for principal dwelling houses are in arrears in Ireland?...................4
Cross-Country Comparison................................................................................................................5
The Keane Report..................................................................................................................................6
The Challenges and Responses of IDMAWG (2011)...........................................................................6
Recommended Strategies for dealing with the challenges:...............................................................7
Introduce New Bankruptcy Legislation..............................................................................................7
Mortgage Interest Supplement.........................................................................................................7
Mortgage Arrears Resolution Process (MARP)..................................................................................7
Communication..............................................................................................................................7
Financial Information.....................................................................................................................8
Assessment....................................................................................................................................8
Resolution......................................................................................................................................8
Mortgage to Rent Schemes...............................................................................................................9
Scheme 1: Approved Housing Body Option...................................................................................9
Scheme 2: Leasing Structure........................................................................................................10
Split Mortgages................................................................................................................................10
Sale by Agreement...........................................................................................................................11
The code of Conduct on Mortgage Arrears (CCMA)............................................................................11
The Personal Insolvency Arrangement (PIA)........................................................................................12
Conclusion...........................................................................................................................................12
Bibliography.........................................................................................................................................13
References...........................................................................................................................................14
2 | P a g e
IntroductionThe aim of this project is to give a brief summary of the trends in mortgage arrears for
principal dwelling houses in Ireland and try to compare this with figures from the U.S as well
as the U.K.
It also seeks to give a synopsis of what the Inter-departmental Mortgage Arrears Working
Group suggested strategies are. The aim of this report which was also known as The Keane
Report was to provide recommendations on how to alleviate the current mortgage arrears
crisis.
I will also briefly summarise the Code of Conduct on Mortgage Arrears which is a
framework set up by the Central Bank of Ireland that lenders must adhere to when dealing
with mortgagee’s in distress.
Finally I aim to provide a concise outline on how the new Personal Insolvency Arrangement
can be used to assist borrowers that are suffering.
Mortgage ArrearsMortgage arrears occur when the borrower fails to make the full or partial repayment amount
on the date agreed with their lender. The borrower is considered to be in arrears from one
day after the repayment is due. (Central Bank of Ireland, 2013).
Reasons borrowers may be in mortgage arrears.
The most obvious reason at the moment would be job loss. With the country in a recession
there is a substantial rise in the number of people claiming unemployment and can no longer
afford their repayments. According to (Central Statistics Office, 2013) there were 300,700
people in unemployment at the end of quarter 2 2013 compared to 264,600 people
unemployed at the end of quarter 2 in 2009, an increase of just over 12% reported the
(Central Statistics Office, 2009).
Another major factor would be divorce or separation due to the stress experienced by families
as a result of the financial crisis. As one person leaves the family home the other is usually
left with a mortgage they can no longer afford on their own.
3 | P a g e
When a person dies and does not have accurate life assurance then the survivor is left to pay
the mortgage balance on their own and may not be able to afford it.
Inaccurate health insurance can also be a factor as when one party suffers a serious illness the
other party will be left to pay the repayments and they may not be able to come up with the
funds.
How many mortgage accounts for principal dwelling houses are in arrears in Ireland?
Figure 1: PDH Mortgages in Arrears as a Percentage of All PDH Mortgages.
Source: Residential Mortgage Arrears and Repossessions Statistics, Central Bank of
Ireland, 6th October 2013.
Since the end of 2009 the mortgage arrears figure for Ireland has been increasing each
quarter. In September 2009 there were just 4% of PDH mortgages in arrears of more than 90
days where as at the end of quarter 2 for 2013 there was an increase in this figure of 13%
making the figure for the end of June 2013 a total of 17%, which can be seen in figure 1.
(Central Bank of Ireland, 2013)
Although the number of accounts in arrears of less than 90 days has continuously fallen since
its peak at the end of quarter 4 (2011) there is still great concern as 17% of private residential
mortgages were in arrears of more than 90 days at the end of quarter 2 (2013). This is almost
1/5 of the 18.6 billion that they are worth.
4 | P a g e
We can also see that long term arrears of 180 days or more have increased quarter on quarter
leaving them at 14.3% which is an increase of 11.6% since the (Central Statistics Office,
2013) commenced collecting this data in 2009.
The (Central Statistics Office, 2013) notes in their quarterly bulletin released in October 2013
that the improvements of the labour market along with lenders success at managing their pre-
arrears cases has been some of the main reasons that early arrears have been declining since
December 2011.
Finally, there is major concern as mortgages in arrears of more than 2 years has increased by
12.8%, this accounts for nearly 1/3 of all mortgage accounts in arrears of more than 90 days
and showing no signs of progress reports the (Central Statistics Office, 2013).
Cross-Country ComparisonFigure 2: Mortgage arrears cases as a percentage of mortgages for Ireland, U.K and U.S
Source: Residential Mortgage Arrears and Repossessions Statistics, Central Bank of
Ireland, 6th October 2013.
Even when the recession is taken into consideration the increase of mortgage arrears in
Ireland has been vast. It is tough to make precise cross-country comparisons due to the lack
of regular data on mortgage arrears. However, figure 2 illustrates the massive increase in
arrears compared to the U.S and the U.K. This diagram is a good indicator of the conflicting
experience in Ireland relative to both countries even though the three countries are not
directly comparable. The three countries were all around the same level for arrears more than
90 days in 2009 and whilst Ireland’s trends increased to 17% the repayment difficulties for
both the U.K and the U.S eased over the same period.
5 | P a g e
The Keane Report(Inter-Departmental Mortgage Arrears Working Group, 2011) was tasked by the Governments
Economic Management Council to deliberate on additional actions to improve the growing
crisis of mortgage arrears. The work of IDMAWG (2011) only focused on home owner
mortgages and given the number of variable factors impacting every situation they state that
blanket debt forgiveness will not be effective. They suggest that a range of practical
solutions are required which should be applied based on the assessment of individual
mortgage holders affordability, the level of negative equity and the future prospects. They
also note that there are some key principles that should be recognised before any solutions are
accessible.
The Key Principles
If you can pay, you must.
There is no entitlement to a solution.
A borrower who fails to co-operate within the MARP may lose certain protections.
All solutions have consequences.
The Challenges and Responses of IDMAWG (2011)Shown in Fig. 2 are the challenges the group had to overcome and what their proposed
suggestions were for each challenge.
Figure 3.Challenges and responses.
Source: The Keane Report 15th Sep 2013
6 | P a g e
Recommended Strategies for dealing with the challenges:
Introduce New Bankruptcy Legislation
The IDMAWG (2011) states that early introduction of new judicial and non-judicial
bankruptcy options were crucial. However, it would be highly complex and need to be
properly resourced. Without effective bankruptcy legislation the mortgage arrears problem
would not be resolved. However, they also note that changes that would incentivise
behaviour to cease paying debts must be avoided. The proposal by the IDMAWG (2011) was
to commence a three-tiered debt settlement process using each of the following:
A revised judicial process
A non-judicial debt settlement process
Debt relief order
Mortgage Interest SupplementThe IDMAWG (2011) argues that MIS should be time limited and although they realise that
it is a massive support for mortgage holders in difficulty they report that long-term MIS
essentially acts as a State financial support to the bank and that the introduction of Mortgage
to rent schemes would be more beneficial for many borrowers in long-term MIS.
Mortgage Arrears Resolution Process (MARP)The compliance of MARP by mortgage lenders will be continually monitored by The Central
Bank and the findings publically reported. According to (Citizens Information, 2013), under
the Central Bank’s Code of Conduct on Mortgage Arrears (CCMA) all lenders must operate a
MARP when dealing with customers in pre-arrears and arrears. Although this requirement
commenced in January 2011 under the revised CCMA which came into effect in July last the
rules have changed leaving only 4 stages of MARP instead of the previous 5. The previous
5th stage known as the appeals process is still under the CCMA but no longer in the MARP.
The 4 stages of MARP are:
CommunicationThe lender must inform the borrower and any guarantor on the mortgage in writing of their
mortgage accounts status if their arrears remain unpaid 31 days from the date their arrears
commenced. This letter must be sent within 3 business days and include the following
details:
7 | P a g e
The arrears are now being dealt with under MARP
Clearly state the amount owed by the borrower and details of missed payment(s)
The importance of the borrowers co-operation with the lender and effects of non-co-
operation
The impact it will have on the borrower’s credit rating.
The lender is also responsible for forwarding on relevant contacts, website details and
information on mortgage arrears along with a booklet that contains all the information on the
MARP. Each lender must also have a communications policy that is approved by the board
of directors and which ensures that communication with borrowers is appropriate and of
necessary frequency.
The lender may only make an unsolicited visit to the borrower’s home if they have given 5
days’ notice and all other attempts to contact the borrower have been unsuccessful.
Financial Information
Borrowers in arrears or pre-arrears must be provided with a standard financial statement
(SFS) from their lender so as their lender can use this to assess the borrowers financial
situation, therefore distinguishing the best course of action. According to (Citizens
Information, 2013) the lender must offer assistance to the borrower when completing their
SFS along with ensuring that the borrower fully understands the MARP.
Assessment
All lenders must have an Arrears Support Unit (ASU) to where they will send completed
standard financial statements to be assessed based on the borrowers full circumstances
including their personal circumstances, the information provided in their SFS, overall
indebtedness, their previous payment history and finally their current repayment capacity.
Resolution
All options for alternative repayment arrangement must be explored by the lender when the
assessment has been completed reports (Citizens Information, 2013). The lender must
inform the borrower in writing of the alternative repayment arrangement which they deem
appropriate. However this arrangement must not be used by lenders to transfer borrowers
from existing tracker mortgages. The alternative repayment arrangements must be reviewed
every six months to check if it is still an appropriate arrangement for the borrower or to see
8 | P a g e
has the borrowers circumstances changed. The borrower must be advised of their options by
their lender if either party is not willing to enter into an alternative repayment arrangement.
Mortgage to Rent Schemes
The Keane Report proposes two mortgage to rent schemes that would be intended for
borrowers who would meet the criteria for social housing if they lost their home and where
their home is appropriate for social housing. Both schemes would need to have the mortgage
assessed as unsustainable via MARP and both the borrower and the home assessed as being
eligible for social housing.
Scheme 1: Approved Housing Body Option Figure 4: AHB Structure
Source: The Keane Report, 24th October 2013
Structure of Scheme:
The Approved Housing Body (AHB) buys the house at a discount to the current
market value from the borrower.
The lender would supply the AHB with a 75% long term loan and therefore having
first legal charge on the property.
The Department of Environment, Community and Local Government (D/ECLG)
would have a second charge on the property as they would provide the AHB with a
25% equity investment.
The owner would use the proceeds of the sale to pay a lump sum off the mortgage.
The mortgage holder would then rent the house from the AHB at a means tested rate.
The AHB would be paid up to 80% of the market rental from the D/ECLG.
9 | P a g e
Scheme 2: Leasing Structure Figure 5 Leasing Structure
Source: The Keane Report, 24th October 2013
Structure of Scheme:
The mortgagee voluntarily surrenders the house to the mortgagor.
The Mortgagor enters into a 20 year lease with the Local Authority.
The Local Authority would then rent the house to the previous mortgagee at a means
tested rate.
The D/ECLG would pay the Local Authority rent up to 80% of market rental.
Trade Down Mortgages
According to the Keane Report the trade down option is beneficial for both the borrower and
the lender if the terms are viable. This type of mortgage is aimed at borrowers who are in
negative equity, so as they may be able to carry the negative equity with them as they trade
down to a lower value house. Important factors in determining if this option is viable are:
The scale of the trade down.
Borrower’s level of sustainable income.
Amount of negative equity.
Split Mortgages
The IDMAWG (2011) also recommended this option where the borrower would pay an
amount that they could afford over the lifetime of the mortgage which is pre-agreed with their
lender and then the balance being warehoused and later being paid when the term of the
mortgage comes to an end, this can be done by trading down to a smaller property, realising
10 | P a g e
assets, using pension lump sums or agreeing a life interest in the property. The affordable
part of the mortgage could be recalculated on a regular basis to consider increases in
disposable income.
Sale by Agreement
Taking into account the borrower’s situation the mortgagor and mortgagee should concur to
sell the property and come to an arrangement regarding the loss.
The code of Conduct on Mortgage Arrears (CCMA)
The CCMA sets out how distressed mortgagees must be treated and considered on their own
merits due to each case being unique. This applies to all regulated entities operating in the
state and participating in mortgage lending activities and applies to the loan of the borrower’s
primary residence that is used for security for the finance. The current version of the CCMA
came into effect in January 2013. It is compulsory that lenders abide by this code.
The code states that lenders must have a minimum of one person who deals with arrears cases
and who must also liaise with the Arrears Support Unit (ASU) of the lender. Procedures
must be put in place and aim to be flexible in their approach when dealing with distressed
borrowers as well as assisting them as much as possible. It should also outline how the stages
of MARP are implemented and how each case is assessed by the ASU.
A lender must prepare and have a booklet available for borrowers with full details of the
MARP, what options are available from the lender and remind borrowers that they may want
to make a claim if they had previously purchased Payment Protection Insurance.
Previously known as the 5th stage of the MARP, the appeals process is part of the CCMA and
states that lenders must set up an appeals board using three senior personnel and who have
not previously been involved in a borrower’s case. At least one of these members must be
unconnected to the lenders management team. The lender must have written criteria for
appropriate handling of appeals.
11 | P a g e
The Personal Insolvency Arrangement (PIA)A PIA is an arrangement that insolvent debtors who are eligible to reach an agreement
regarding the settlement/restructuring of their debts with their creditors. It is included in the
Personal Insolvency Act 2012 as one of three alternatives to bankruptcy.
There is a limited amount of three million that can be included for secured debts and
amounts above this require the creditor’s consent. The borrower must have participated
under the MARP for at least six months before they shall be deemed eligible.
A PIA can last for up to six years and possibly a further 12 months on top of this, however it
can only be obtained once in a borrower’s lifetime and must be sought through a Personal
Insolvency Practitioner.
Conclusion
The suggested recommendations from the Keane Report that have been implemented along
with the CCMA’s framework have been closely monitored and in my opinion they are
working to a certain extent. However, I believe that the strategies should have been in place
a lot sooner to prevent the severity of the situation. I would also be happy to see the lenders
take more responsibility and write off part of the debts. We have only recently in the last few
months seen borrowers avail of the new PIA so it’s premature to discuss if this is having the
desired effect. With the U.K having a similar arrangement in place before the crisis it is
known that this was beneficial to their borrowers, so this should provide some confidence for
Ireland’s distressed borrowers.
12 | P a g e
Bibliography
www.mortgages.ie
www.askaboutmoney.ie
www.independent.ie
www.allaboutbusiness.com
www.irishtimes.ie
www.findarticles.com
13 | P a g e
References
Central Bank of Ireland, 2013. www.irishcentralbank.ie. [Online] Available at: http://www.centralbank.ie/publicinformation/Documents/2013%20CCMA.pdf[Accessed 10 09 2013].
Central Statistics Office, 2009. www.cso.ie. [Online] Available at: http://www.cso.ie/en/newsandevents/pressreleases/2009pressreleases/quarterlynationalhouseholdsurveyquarter22009/[Accessed 26 10 2013].
Central Statistics Office, 2013. www.cso.ie. [Online] Available at: http://www.cso.ie/en/media/csoie/releasespublications/documents/labourmarket/2013/qnhs_q22013.pdf[Accessed 06 09 2013].
Citizens Information, 2013. www.citizensinformation.ie. [Online] Available at: http://www.citizensinformation.ie/en/housing/owning_a_home/mortgage_arrears/mortgage_arrears_resolution_process.html[Accessed 01 November 2013].
Inter-Departmental Mortgage Arrears Working Group, 2011. The Keane Report. [Online] Available at: http://www.finance.gov.ie/documents/publications/reports/2011/mortgagearr2.pdf[Accessed 15 09 2013].
14 | P a g e
