A topic examined a number of times on here has been the very low level of repossessions in Ireland even though residential property prices have dropped 35%+ and unemployment is at 13.7%. Although the number of applications for repossessions has gone up in recent months, annual repossessions are still less than 500 and have largely been confined to sub-prime lenders. Repossessions Irish-style have been compared with the experience of the state of Nevada in the US which has the same unemployment rate, prices have dropped by nearly 60% and wait for it, they have 188,000 repossessions per year in a state with a population of under 3m. Reasons suggested for the low level of repossessions in Ireland included our draconian bankruptcy laws, the 12-month moratorium on repossessions adopted in February 2010 and a desire on the part of fragile banks not to crystallise a loss and sell a distressed asset when the bottom has fallen out of the market.
Another topic which has been examined is the confirmed practice whereby banks have been strong-arming borrowers to sacrifice their tracker mortgages in favour of more costly standard variable rate mortgages in return for the bank agreeing to a restructure of a mortgage. This practice is particularly ugly because financially distressed borrowers are in a vulnerable position, may not have access to independent advice and may have been coerced into giving up tracker mortgages, a decision which may cost them hundreds of thousands of euro over the life of the mortgage.
Following speculation earlier this week by lenders who then claimed that the new repossession rules could prevent them from taking action for five years, the Financial Regulator yesterday issued a consultation paper to make repossessions a bit harder for banks but which will outlaw their practice regarding trackers.
The consultation paper follows from the work undertaken by the Mortgage Arrears and Personal Debt Expert Group which was set up at the start of this year and which reported in July 2010. The Group includes the Financial Regulator, Matthew Elderfield so it is no surprise that the consultation paper takes up many of the recommendations of the Group. A further report from the Group is expected in September and will deal with cases where borrowers have no realistic prospect of repaying the debt.
Highlights of the consultation paper
(a) lenders only allowed up to three unsolicited communications with the defaulting borrower each month (on top of communication under the mortgage arrears procedure). This is to cut out the 10-calls-a-day harassment suffered by some borrowers.
(b) lenders not allowed to force borrowers to give up their tracker mortgages.
(c) lenders being forced to deal with borrowers before they get into arrears
(d) lenders having to await the outcome of any appeal procedure (including an appeal to the Ombudsman) before repossessing
(e) lenders having to wait 12 months for borrowers to default on a revised payment plan
It seems that the practical effect of the new rules is to increase the moratorium on commencing repossession action from 12 months to a maximum of 2-3 years, but only for borrowers acting in good faith and who have some prospect of making payments – the no-hope cases will be the subject of a report by the Expert Group in September, 2010.
The new rules are likely to be welcomed by both borrowers and surprisingly banks (in general unless a borrower has significant other assets, a bank doesn’t want to repossess property in the present market, sell it as a distressed asset at a firesale price, crystallise large losses in its books and involve itself in bankruptcy procedures). However banks will not welcome the rule preventing them from forcing their borrowers to give up trackers in return for help. What will happen though with the estimated 50,000+ mortgages that have already been “restructured” with an unknown number having already been strong-armed into giving up their trackers – will they be compensated, will banks be forced to place these borrowers back on trackers? To me, this practice seems to have been one of the most heinous acts by banks dealing with financially distressed vulnerable borrowers without access to independent advice. Although the new rules are to be welcomed what about the historical cases?
UPDATE: 23rd August, 2010. The Financial Regulator has published the results of research into borrowers changing their tracker mortgages for other kinds of mortgage. The Regulator calls for standardised specific information on the financial impact of any change to be given to the borrower. The Regulator concludes “the examination did not find any evidence that customers were being offered incentives to move off tracker rate mortgages but mortgage lenders have been instructed to give careful consideration before offering any incentives to customers to move from tracker rate mortgages and to notify us in advance of any such proposals.” However the Regulator has still not clarified how many of the 50,000-odd mortgages that have been restructured by banks following borrowers getting into difficulty, have been changed from tracker to fixed or standard variable rate. Ignoring this issue is a stain upon the reputation of the office of the Financial Regulator.