In this regular briefing, we summarise recent cases, developments and trends relevant to the ongoing efforts to resolve the mortgage arrears crisis.
A series of recent cases have shed further light on factors that a Court will take into account when hearing a debtor’s appeal of a secured creditor’s decision to reject a proposed Personal Insolvency Arrangement (PIA) under the Personal Insolvency Act 2012 (the 2012 Act).
» Comparison with bankruptcy: In Ennis & Personal Insolvency Acts, Baker J confirmed that the Courts must consider the fairness of the PIA, and that a comparison with the likely outcome in bankruptcy is an essential part of that fairness assessment.
In Dunne & Personal Insolvency Acts, the High Court considered the terms of a proposed PIA that involved a warehousing element. The debtor’s unsecured creditors had supported his PIA proposal, as had PTSB (as secured creditor) until such time as the debtor’s personal insolvency practitioner (PIP) proposed the inclusion of a further term which purported to restrict PTSB’s ability to renegotiate the terms of the warehoused portion after a period of time. While the Court had no issue with the inclusion of a warehousing element in the proposed PIA, it felt that the further condition would unfairly prejudice PTSB by restricting its right to review the warehousing element in the context of the debtor’s future means.
In Re Callaghan (a debtor), KBC appealed a Circuit Court decision confirming the debtor’s PIA. One of the points considered by the High Court was whether the 2012 Act allows for a PIA that proposes to warehouse a portion of the secured debt beyond the PIA’s term. The Court held that a PIA can provide for a portion of the debt to be warehoused in that manner. However, in this particular case, the Court was not satisfied that KBC had shown that its warehousing proposal offered a better return than the debtor’s proposed PIA. KBC had proposed warehousing €135,000 of the secured debt (50% of the secured debt that would remain after a debt write-down of €15,000) at a 0% interest rate, giving the debtors the ability to live in the property for the rest of their lives, with KBC’s security not being enforceable until the survivor died. However, that amount was more than 125% of the value of the debtor’s home, and was not proportionate to, or reasonably derived from, the debtor’s current income or assets, or future ascertainable means.
» Creditor objections: In Re Varma (a debtor), the Court looked at Section 115A(3) of the 2012 Act which allows a creditor to lodge an objection (within 14 days) to a debtor’s appeal of the secured creditor’s decision to veto a PIA. The Court held that this particular 14-day period is not mandatory and that the specialist judges of the Circuit Court have discretion to agree to extend it (because a creditor’s rights are capable of being adversely affected on appeal, and because the 2012 Act does not expressly prevent the Court from hearing from a creditor who has not lodged a formal notice of objection.
While two recent decisions did not specifically relate to residential mortgage arrears, their potential impact for all lenders should be borne in mind.
» Guarantors: Following the decision in ACC Loan Management Ltd v Connolly, the Court of Appeal’s position is now very clear on the question of guarantors needing independent advice - unless an individual guarantor has an arguable defence that he/she has been the subject of undue influence or misrepresentation by the debtor, the Court will not find that the lender was under a positive duty to ensure that the guarantor received independent legal advice (see our recent briefing here).
» Joint Borrowers: As most arguments of undue influence are raised in cases where an individual has guaranteed the business debts of his/her spouse, of particular interest is the recent decision of Peart J in ACC Bank plc v Walsh & Anor in which an undue influence argument was raised in the case of joint borrowings by spouses. In this case, Peart J allowed an appeal by Mrs Walsh (who had jointly borrowed with her husband) that the proceedings against her should be remitted to plenary hearing on the basis that she had put forward arguable defences that (a) she had acted under her husband’s undue influence and (b) ACC was on inquiry and, as such, should have ensured that she obtained independent legal advice. While Peart J stressed that, in remitting ACC’s proceedings against Mrs Walsh to plenary hearing, he was not suggesting that her case was strong or that it was likely to succeed, the outcome of this case will be awaited with interest.
Appointment of Receivers
In the context of the mortgage arrears crisis, issues regarding the appointment of receivers arise on by-to-let (BTL) cases, rather than on cases involving primary residences (PDHs).
In the recent High Court case of Woods v Ulster Bank Ireland Limited & ors, the Court considered whether Ulster Bank was entitled to appoint a receiver before it was registered as the owner of the relevant charge in the Land Registry. The charge was dated 3 March 2006, the application to register the charge was made on 23 March 2013, the receivers were appointed 3 days later on 26 March 2013 and the charge was finally registered as a burden on the relevant folio 2 months later on 31 May 2013. Baker J found in favour of Ulster Bank for two reasons:
» because (with reference to the judgment in McEnery v Sheahan) once a charge is registered it is deemed to have been registered from the date of application to register; and
» “the joint receivers were appointed under a contractual power and did not require at the time of the exercise of that power the charge be registered, as the Bank was not seeking to engage a power dependent on its being the registered owner of the charge”.
This decision is helpful in the context of the appointment of a receiver under a charge securing a loan originated by the chargee, but in our view the decision does not directly address the issues raised in last year’s judgment in Harrington v Gulland (see our briefing here). In that case, the High Court granted an interlocutory injunction restraining a receiver from taking possession of certain registered properties owned by the Harringtons, holding that the Harringtons had made out an arguable case that the receiver was not validly appointed because Gulland – the party purporting to make the appointment having acquired the loans and related charge from IBRC – was not yet registered as owner of that charge in the Land Registry. That decision appeared to be limited in its application to cases where charges had been transferred (which was not the case in Woods v Ulster Bank).
Central Bank Mortgage Regulations
As mentioned in Resolving the Mortgage Arrears Crisis (Volume 1/2017), changes to the Central Bank’s Mortgage Regulations came into effect on 1 January 2017 (see our briefing on those changes here). The Mortgage Regulations are expected to be reviewed again at the end of 2017 and, in a recent speech to the European Central Bank, Sharon Donnery, Deputy Governor of the Central Bank, highlighted that such annual reviews of the loan-to-value and loan-to-income caps will allow the Central Bank to assess, on an ongoing basis, whether those measures set out in the Mortgage Regulations are appropriately calibrated for current market conditions.
ECB Guidance on Non-Performing Loans (NPLs)
The ECB’s Final Guidance to Banks on Non-Performing Loans has now been published (the draft guidance was discussed in Resolving the Mortgage Arrears Crisis (Vol 3/2016). While the guidance is non-binding, all significant credit institutions directly supervised under the Single Supervisory Mechanism (together with their international subsidiaries) will need to be able to ‘comply or explain’. Among other matters, the Guidance asks that inscope banks devise a strategy that could include a range of policy options such as NPL work-out, servicing, and portfolio sales. The Guidance also addresses key governance and operational aspects of an NPL work-out model, and examines common forbearance measures and their viability.
Financial Services Ombudsman
The Financial Services and Pensions Ombudsman Bill has been published, which aims to combine the offices of the Financial Services Ombudsman and the Pensions Ombudsman. Notably, the Bill also proposes a change to the timeframe within which certain complaints in respect of a new category of ‘long term financial service’ can be made.
It appears that the concept of ‘long-term financial service’ has been introduced to cover products such as mortgages. For further information, read our recent briefing.
Insolvency Service of Ireland (ISI)
The ISI is consulting on the operation of Part 3 (Insolvency Arrangements) of the 2012 Act (the Minister for Justice and Equality is required under the 2012 Act to carry out such a review) and has sought industry feedback on the operation of Part 3 by the end of June 2017.
Department of Finance
The Department of Finance published a Housing and Property Sector Chartpack in May 2017. Using statistics provided by the Central Bank, it charts (at Section 6), PDH and BTL mortgage accounts in arrears, and those that have been restructured.
In Ireland and its Banks (an economic update published in April 2017), the Department of Finance noted the ongoing challenges posed by legacy debt, but noted that PDH arrears have reduced from 17.3% at peak to 11%, that the Government’s policy has focused on keeping people in their homes if at all possible, that home repossessions have been comparatively low in Ireland given scale of downturn, and that the Central Bank had estimated the repossession rate in Ireland at 0.7% versus 1.7% in UK.
» there was:
- a 10% increase in the number of PIAs approved compared to Q1 2016
- a 19% increase in the number of PIAs approved compared to Q4 2016 in more than 90% of cases involving a PDH, the debtor has remained in that property
» where the PIA involved the write off of mortgage debt, the average write off was €93,338
The number of bankruptcy adjudications in Q1 2017 was 138, down 23.8% from Q4 2016 but up 24.3% on Q1 2016.
Central Bank Residential Mortgage Arrears and Repossessions Statistics
The Central Bank has published both its Residential Mortgage Arrears and Repossessions Statistics for Q4 2016 and its Residential Mortgage Arrears and Repossession Statistics for Q1 2017, highlighting that:
- PDH: the number of PDH residential mortgage accounts in arrears continued to decline to 11% (77,493) at the end of December 2016, and then to 10% (76,422) at the end of March 2017.
- BTL: the percentage of BTL residential mortgage accounts in arrears was 19% at the end of December 2016 (a decrease of 3.2% compared to the end of Q3 2016), and remained at 19% at the end of March 2017.
» Proceedings Issued
- PDH: Q4 2016 saw 1,397 sets of legal proceedings issued in the Courts for the enforcement of security in respect of PDHs – an increase on the 1,210 proceedings issued in Q3 2016. The volume of legal proceedings in respect of PDHs increased further in Q1 2017, with 1,645 PDHs the subject of new Court proceedings in that quarter.
» Actual Repossessions
- PDH: 112 PDH properties were repossessed on foot of a Court order in Q4 2016 – that number increased to 142 in Q1 2017. A further 343 PDH properties were voluntarily surrendered or abandoned in Q4 2016 - that number decreased to 228 in Q1 2017.
The total of 455 PDHs taken into possession in Q4 2016 was the highest number since the Central Bank began to issue these quarterly statistics (but that total reduced to 370 in Q1 2017).
- BTL: rent receivers appointed to 562 BTL properties in Q4 2016 and to 550 such properties in Q1 2017. 110 BTL properties were repossessed on foot of Court orders in Q4 2016, with 117 repossessed in Q1 2017. 149 BTL properties were voluntarily surrendered or abandoned in Q4 2016, with the level of voluntary surrenders or abandonments decreasing to 122 in Q1 2017.
Notably, at the end of Q1 2017, nonbank lenders held a total of 48,315 PDH and BTL residential mortgage accounts (almost 63% of those are held by regulated retail credit firms, with the remainder held by unregulated entities).