Personal Insolvency: The rules of engagement
Solving Ireland's mortgage arrears crisis is a key priority for the consumers involved, the banks, the regulator and the government. There's no disputing the importance for the broader economy of solving this problem, but reaching consensus on an appropriate solution is a bit trickier.
One of the issues in the debate on mortgage arrears and how to address the problem has been the distinction between those who simply can't pay and those who won't pay. Banks have raised concerns about the idea of "strategic default", whereby people who could pay their mortgage don't in the hope of getting some of it written off.
One senior banker said that the concept of strategic default was "alive and well". Another banking source said that debt forgiveness was wholly unfair for the taxpayer, and fraught with moral hazard.
"How can you make the arbitrary decision to write down the debt of one person but not another. Who decides?" the banker said.
However, brokers and lobby groups say that the vast majority of those in debt are trying to engage with their banks and reach a solution, and some experts maintain that an element of debt forgiveness will be inevitable. With a range of new routes out of debt now available via the new personal insolvency regime, there's now an added incentive for banks to strike a deal with customers in arrears.
While these helicopter view debates on policy continue in the upper echelons of the banks, Central Bank and corridors of power, what's the real situation for people coping with the day to day reality of mortgage arrears? If yours is one of the thousands of families affected by mortgage arrears, you might feel overwhelmed but remember, you do have options.
What steps should I take?
First things first: even if you want to ignore the problem, don't. Engaging with your bank is a vital step towards finding a solution. A failure to engage with the bank means you are afforded less protection, so there's a carrot there to pick up the phone.
The Central Bank's code of conduct on mortgage arrears, which is currently being reviewed, requires lenders to establish a mortgage arrears resolution process (Marp) and use it when dealing with arrears and pre-arrears customers.
The Marp has five stages: effective communication; gathering financial information; assessment of the borrower's situation; finding a solution to the problem; and an appeal option for borrowers unhappy with the outcome of the process.
What do I have to do?
The Marp system requires borrowers to fill in a really detailed form called a standard financial statement. This gives the lender an overview of your financial situation and is used as the basis for negotiating a solution. However, be prepared to wait a while for a response.
A Money Advice and Budgeting Service (MABS) report published last week revealed that many borrowers were waiting in excess of two months to receive responses to correspondence submitted to lenders. "Some serious action is needed here," said Michael Culloty, national development officer for social policy and communications with MABS. "People are stuck in a holding pattern with no resolution, often coming under severe pressure from their creditors, particularly their unsecured creditors."
What will the bank do to help me?
Unfortunately there's no clear-cut menu of solutions. There are lots of buzz words floating about: forbearance here, restructuring there.
But, for the indebted borrower, it's not simply a case of looking at their situation, looking at a list of possible solutions and picking one. Instead, banks will adjudge each situation individually. This bespoke "case-by-case" approach is best because there's no one size fits all solution, according to lenders.
However, this lack of clarity on exactly what options are available can make it confusing for borrowers who are trying to get to grips with their next move.
What type of solution is my bank likely to offer me?
In the initial assault on mortgage arrears, banks stook to the traditional menu of forbearance options. These were typically short-term solutions, such as a period of interest-only repayments, an extension of the mortgage term or, in some cases, a payment moratorium. With mortgage arrears skyrocketing over the last couple of years, it quickly became apparent that more creative, longer-term solutions were needed and last year banks introduced pilot schemes to test a range of longer-term solutions. These include things such as split mortgages, negative equity trade-downs, mortgage-to-rent schemes and in some cases, the voluntary sale of the property.
Wait a second - how do those solutions work?
A split mortgage involves a portion of the outstanding loan being parked for a number of years to give struggling borrowers some breathing space, while a trade-down mortgage sees borrowers selling their negative equity home and purchasing a new property at a lower price. However, there's not a totally consistent range of solutions on offer across the market, as options will differ from one lender to the next. For example, some banks charge interest on the so-called warehoused portion of the split mortgage, and others do not.
Will my mortgage be written down?
Anecdotally, there's a sense that some banks are doing deals in situations where there is no chance of the loan being sustainable, but the official line from most lenders remains that debts will not be written off. However, if a person goes down the personal insolvency route, a proportion of their debts could be written off, subject to lots of terms and conditions. But, remember, to be eligible for a debt deal via the new insolvency regime, you must prove that you have already engaged with your bank to try to find a solution.
Do the banks have to offer a solution to a struggling borrower?
Last month the government and the Central Bank unveiled a new plan that puts the squeeze on banks to agree workable solutions with indebted borrowers. The Central Bank has told the banks that 50 per cent of customers whose mortgages are in arrears must be offered sustainable solutions before the year is out. Otherwise, the bank faces hefty capital penalties. However, the decision on what constitutes a sustainable solution rests with the bank. So your bank could offer you a solution but not one you necessarily like the look of.
How do I decide if it's a good deal?
For homeowners struggling to weigh up whether the solution being proposed to them by their lender is a good deal, there's an advisory service available. Borrowers in distress have access to a free independent professional consultation with an accountant who can talk them through the implications of what the lender has put on the table. The lender pays the €250 fee to the accountant on the borrower's behalf.
However, broker groups have questioned whether accountants are the best people to be providing this service.
What do I do if I decide it's not a good deal?
If you have engaged with your lender and exhausted the MARP system but find yourself at an impasse, the next step is to consider the new personal insolvency regime.
"It is intended that all arrangements entered into between a lender and a borrower should be sustainable," said a Central Bank spokesman. "However, should a borrower be co-operating with its mortgage lender for at least six months and have not been able to agree an alternative repayment arrangement or if the mortgage lender is unwilling to enter into an alternative repayment arrangement, at this stage, the borrower may wish to seek an arrangement with the Insolvency Service."
Is my home likely to be repossessed?
Repossessions are likely to become more frequent now that a recent legislative tweak has closed a loophole that had prevented lenders from pushing the button in relation to this issue.
"Repossessions will rise from current levels," the Central Bank spokesman said. "However, where borrowers are cooperating they can expect that repossession will be the last resort and will only be used in cases where there is no valid sustainable long term solution due to the mortgage being unsustainable based on all income measures."
What about a buy-to-let mortgage?
If you have an investment property, and have fallen behind with your mortgage, your case will not fall under the remit of the code of conduct on mortgage arrears. This code deals with arrears in relation to a person's family home, not buy-to-let properties.
However, new targets for lenders in relation to the number of sustainable solutions they reach each quarter includes buy-to-let investors in arrears. So if you are a buy-to-let investor with a mortgage problem, the first step on what could be a long road out of debt is to engage with your bank.