This briefing summarises recent legislation, cases and trends relevant to ongoing efforts to resolve the mortgage arrears crisis. Mortgage arrears and repossessions are a key area of focus in the 2016 Programme for Government.
- Variable Mortgage Rates
Fianna Fil has proposed a bill (the Central Bank (Variable Rate Mortgages) Bill 2016) similar to a bill previously proposed by it in March 2015, and it has progressed to Committee Stage. The Bill proposes:
- quarterly assessments: the Central Bank will be required to carry out quarterly assessments on competition in the market for PDH loans; and
- caps on rates: if, following a quarterly assessment, the Central Bank believes that a "market failure" exists (i.e. lenders are charging higher variable rates than the Central Bank believes to be "reasonably and objectively justified" by reference to a list of factors), the Central Bank may cap the variable rates charged by those lenders.
The Minister for Finance has expressed concerns in relation to the Bill, in particular that:
- certain provisions appear unconstitutional;
- the ECB will need to be consulted before the Bill can become law; and
- the Governor of the Central Bank has stated that the Central Bank does not want to regulate interest rates.
It is possible that, notwithstanding the concerns that have been raised, the minority Government will not have the numbers necessary to defeat the Bill. The Economic and Social Research Institute, in its Quarterly Economic Commentary - Summer 2016, expressed its view that the proposed Bill, if passed into law, "... may act as a further disincentive to potential significant new entrants into the Irish market".
- Mortgages Special Court Bill/Courts (Mortgage Arrears) Bill
The Government's Legislation Programme, published on 8 June 2016, notes that the above Bill is currently "under consideration". The Bill would propose the establishment of a new court to "...sensitively and expeditiously handle mortgage arrears and other personal insolvency cases".
While the decision in Start Mortgages Limited v Hanley  IEHC 320 did not turn on the application or otherwise of the Code of Conduct on Mortgage Arrears (CCMA), when considering an argument put forward by Start Mortgages that it was not required (on the basis of the terms and conditions that applied to the mortgage loan) to serve a demand on the borrower, the High Court noted that it had never in practice encountered a lender that would take enforcement action against a defaulting borrower without first serving a demand. In particular, Mr Justice Max Barrett noted that:
- a demand indicates that the bank is taking the default seriously;
- a demand can focus the parties' minds on whether a compromise can be reached; and
- it was difficult to see how a lender could satisfy the requirements of the CCMA without serving a demand.
An argument by Start Mortgages that the service of a summons equated to the service of a demand also failed, with Mr Justice Max Barrett noting that this would "...[fly] in the face of the behaviours expected by the [CCMA] a code to which the court is entitled to look as evidence of general banking practice".
- Central Bank's Mortgage Regulations
Central Bank Mortgage Regulations which apply proportionate caps on loan-to-value ratios for primary dwelling house (PDH) mortgages and buy-to-let (BTL) mortgages, and loan-to-income ratios for PDH mortgages, came into force in early 2015. In his opening remarks at the launch of the Central Bank's Annual Report 2015, Governor Philip Lane noted that the Mortgage Regulations would be reviewed in November 2016, commenting that while "...the general framework of mortgage rules is intended to be a permanent feature, the calibration of these rules can be tightened, loosened or left unchanged...any changes will require a high evidence threshold... the Bank will invite written public submissions that provide evidence-based analyses of the impact of the rules."
The Central Bank later published that call for submissions, seeking responses by 10 August 2016.
- Central Bank's Annual Performance Statement
In its Annual Performance Statement (Financial Regulation) 2015-2016 published in April 2016, the Central Bank reiterated that it would be following up with lenders in respect of issues identified as part of its 2015 themed inspection in relation to the CCMA.
- Programme for Government
The Programme for Partnership Government, published on 11 May 2016, signalled the following as forming part of the new Government's plans for addressing mortgage-related issues, and promoting and protecting home ownership:
- "help to buy": the Government will work with the Central Bank to develop a new "help to buy" scheme, designed to ensure that mortgage finance or mortgage insurance is available for first time buyers when new houses become available;
- "capacity to pay": in connection with the Central Bank's review of its Mortgage Regulations, the Government will ask the Central Bank to consider a "capacity to pay" test, i.e. that a potential buyer's repayment capacity be assessed by reference to rent paid over a 5 year period, and that this be set-off against the deposit requirements;
- variable rates: a new code of conduct for switching mortgage provider will be introduced;
- competition: the Government will ask that the Competition and Consumer Protection Commission work with the Central Bank to examine options to lower the cost of mortgage lending and increase competition;
- mortgage arrears: to ensure the swift resolution of remaining mortgage arrears cases, the Government will:
- put in place a new national service that will standardise supports available to those in mortgage arrears;
- review the thresholds and the processes for Personal Insolvency Arrangements;
- liaise with the Central Bank in relation to the amendment of the CCMA, in particular regarding the range of "sustainable arrears solutions" available; and
- retain mortgage interest relief (on a phased basis) beyond the current end date of December 2017;
- credit servicing: the Government will ask the Central Bank and the Oireachtas Committee on Housing to examine the legislation regulating credit servicing that was introduced in 2015; and
- negative equity: the Government will ask the Central Bank to arrange an independent assessment of the banks' arrears and loans in negative equity.
- Oireachtas Committee on Housing and Homelessness
This Committee issued a Report on 16 June 2016 in which it made various recommendations, including the following:
- the Government should introduce legislation (subject to advice from the Attorney General) setting out a moratorium on home repossessions until the Government's proposals (as set out in its Programme for Government, referred to above) have been implemented;
- the Government should put in place measures to enable it, or others, to acquire distressed BTL mortgage properties with a view to the occupant remaining in the property;
- the use of solutions such as mortgage-to-rent schemes, split mortgages, debt write-downs and downsizing should be increased; and
- the CCMA should explicitly provide for split mortgages and a mortgage to rent scheme.
- The international view
In its Statement following the conclusion of the fifth postprogramme surveillance mission to Ireland, the European Commission noted that:
- while bank profitability in Ireland has improved, it remains limited by the high amount of distressed loans;
- the share of non-performing loans in Ireland has dropped from 27.1% in 2013 to 16.1% at the end of 2015, but this remains one of the highest levels in the euro area;
- banks need to continue to improve their sustainable restructuring solutions, and efforts should continue to deal with insolvency and bankruptcy procedures; and
- a "timely introduction" of the proposed Central Credit Register (read our briefing here) would help improve lending standards.
The IMF has also commented that:
- intensive efforts should continue to resolve mortgages in long-term arrears; and
- the Central Bank's Mortgage Regulations should be maintained to protect both banks and households however, when the Central Credit Register comes into operation, the loan-to-income limit should be replaced with a debt-to-income limit to better address the repayment capacity of borrowers.
- Key CCMA trends
In the May 2016 edition of its Consumer Protection Bulletin, the Central Bank highlighted key trends on certain aspects of the CCMA, including:
- 163,962 borrowers completed the Mortgage Arrears Resolution Process from the start of 2014 to the end of 2015;
- between 87% and 89% of those borrowers were offered an alternative repayment arrangement (ARA), and between 91% and 94% of those ARAs were accepted;
- the proportion of appeals relating to offers of (or failures to offer) an ARA during that period which found (wholly or partly) in favour of the borrower ranged from 23% to 33%; and
- the proportion of appeals by borrowers against their classifications as not cooperating that which found (wholly or partly) in favour of the borrower ranged from 31% to 39%.
- Statistics for Q1 2016
The statistics on residential mortgage arrears and repossession relating to the first quarter of 2016 have recently been released by the Central Bank of Ireland and the Courts Service of Ireland. In terms of the main key trends, these are as follows:
11% of all residential mortgage accounts were in arrears at the end of March 2016, marking the eleventh consecutive quarter of decline. A total of 85,989 of residential mortgage accounts were in arrears at the end of March 2016, a decline of 2.6% relative to the previous quarter. The rate at which residential mortgage accounts in arrears are declining has slowed down since the second quarter of 2015.
- Proceedings issued
The first quarter of 2016 saw 1,895 legal proceedings issued in the Irish Courts for the enforcement of security in respect of PDHs, an increase on the 1,687 and 894 proceedings issued in the third and fourth quarters of 2015 respectively. This, however, does mark a 32% decrease in the number of proceedings issued as against the same period in 2015, when 2,788 proceedings were issued, and a clear decline from the peak of 3,274 in the second quarter of 2014.
- Possession orders made
A total of 297 orders were made for possession of both PDHs and non-PDHs across the High Court and Circuit Court in the first quarter of 2016, a decrease of 314 (51.39%) as against the same period in 2015. Of this total of 297, 284 orders for possession were made in the Circuit Court, which stands in contrast to the 586 orders made in the Circuit Court during the first quarter of 2015. This, however, is consistent with the downward trend in the number of Circuit Court orders evident over the course of 2015, which saw a decrease from 586 in the first quarter to 210 orders made in the last quarter of 2015. The decrease in the orders for possession made in the High Court has separately continued, with 13 orders made in the first quarter of 2016 as against the 25 orders made during the same period in 2015.
- PDHs actually repossessed
The total number of PDHs ultimately repossessed on foot of Court orders made in the High Court and Circuit Court in the first quarter of 2016 came to 139. This is lower than any quarter in 2015, when the total number of PDHs repossessed in all of 2015 came to 726. This represents a 23.4% decrease from the average number of PDHs repossessed in each quarter of 2015.
(Click here to view graphs)
The continuing decline in the level of arrears is very positive. However, there continues to be a high level of focus on mortgage arrears at political and regulatory levels and changes to the legal and regulatory environment could affect the ease with which enforcement action can be taken, which may be a concern for purchasers and funders of residential loan portfolios. The proposal to regulate variable mortgage interest rates may (if enacted) impact on competition in the market, but much will depend on whether the Central Bank exercises its right to impose caps following its quarterly assessments.