It is Critical that we Deal Effectively with the Mortgage Distress Crisis

IAt the outset, I welcome the legislation and congratulate the Minister, Deputy Shatter, not only on this legislation but, more importantly in the context of our overall ambition, on the insolvency legislation that preceded it. The two together represent a realistic effort on his part to have the question of personal indebtedness and mortgage distress dealt with. They represent a reasonable effort to achieve that. The two pieces of legislation, combined with the Central Bank recommendations and targets set on the banks, will have the desired effect. It is critical that we deal with mortgage distress and personal debt issues, not only for the individuals concerned which, in itself, would justify it, but also for the well-being of the economy. We will not be fit to regain normal economic activity and have a normal economy functioning again until we deal with personal debt, whether in the form of mortgage distress or other personal debt. All of us in this House will be aware that what has distinguished this recession from previous recessions is the degree of personal indebtedness which has matched the overall societal debt in national sovereign debt. There is personal indebtedness and then, of course, the structural problems within the banks.

I am happy to speak on this Bill. Last year the Government made a commitment to introduce legislation to remedy the loopholes identified in the Land and Conveyancing Law Reform Act 2009. This came on foot of an inherited mortgage arrears crisis which is an ongoing problem, not only for the banks but for the wider economy. An ESRI statement in the latter end of 2012 reinforces this fact. In this statement, mortgage arrears were seen to be a challenge to bank profitability, apart from any other personal issues involved. Some 95,000 mortgage accounts were in arrears over 90 days at the end of 2012. Central bank figures for mortgage arrears show that there has been an increase of 8.6% in those in arrears between 2009 and 2012. We cannot continue to ignore the fact that this is a real crisis. In the light of this, I commend the Minister for bringing forward the legislation to deal with this issue, for once and for all.

The Bill deals with two main provisions. It seeks, first, to provide statutory provisions on repossessions for mortgages created before 1 December 2009 and the repeal and amendment of the provisions in the Land and Conveyancing Law Reform Act 2009. This arises from the decision of Mr. Justice Dunne in Start Mortgages v. Gunn, which demonstrated unintended effects of the 2009 Act.
Importantly, in the context of what we all are seeking to achieve, second, it provides for the adjournment of repossessions relating to the family home where the matter could be resolved by referring back to the terms of the Personal Insolvency Act 2012. Basically, that allows the courts to exercise their discretion and insist on a personal arrangement being made between the financial institution and the borrower.
I will briefly touch on the first provision of the Bill. Section 1 deals with the new safeguards for mortgages created before 1 December 2009. It addresses the current uncertainly in law where, under existing legislation brought in in 2009, lending institutions were restricted from asserting their repossession rights.

Historically, this comes out of the High Court case, where it was found that where a Start Mortgages mortgage was created before 1 December 2009, the banks would only have the legal right to seek a summary repossession when the principal sum was due and was demanded prior to 1 December 2009.

It is important to stress that this legislation will not make it easier for banks to repossess family homes. Any efforts by Opposition spokespersons to create a smokescreen or an illusion around this are wrong. Everyone knows that the approach taken is the same one. Unfortunately, we cannot write a charter that rights off debt. Unfortunately, we cannot create a mythical fairyland type of response. Unfortunately, the response that we create must be grounded in reality, must have a factual basis and must have a structured basis. As was implicitly recognised by Deputy Boyd Barrett, the question of moral hazard must arise because one must take account of the reaction of those who see a neighbour being dealt with differently. All of that still must happen, but it cannot be done in an unstructured way. The introduction of this legislation is to address the area of uncertainty around the loophole and comes out of a revised memorandum of understanding between Ireland and the troika. It certainly firms up the position taken by the previous Administration when it enacted the 2009 Act. I would remind Deputy Niall Collins that such was the purpose of the 2009 Act until Mr. Justice Dunne’s judgment in Start Mortgages v. Gunn.
The second provision of the Bill is addressed in section 2. This section provides a specific safeguard for borrowers in repossession actions, subject to certain conditions. Under the terms of section 2(2), the court is allowed to adjourn repossession proceedings, for up to two months, regarding the family home-principal residence, in other words, the court can and will stop repossession proceedings. This is in order to ascertain whether or not a personal insolvency arrangement, as per the terms of the Personal Insolvency Act 2012, would be a better option for all concerned.

I welcome this provision. In many cases, a personal insolvency arrangement is a better option, from both the bank and the borrower’s perspective. Repossessions are costly procedures from a financial and emotional perspective and the financial costs involved usually diminish the amount of money that the lender can recoup, and obviously, with awful implications for human beings and for communities and fractious relationships arising from sale of the property, etc.

Under current legislation, provisions exist to ensure that borrowers can continue to maintain ownership of the family home in cases where this is appropriate. This is always seen to be the best option.
While repossessions are seen to be a last resort, it is vital that legislation is tightened in this area in order to deal with unsustainable legacy debts. I believe that in most cases arrangements will be put in place. In a few cases, as we all will be aware from cases we come across in clinic work, it would be better for the individual where his or her mortgage is so distressed and where the circumstances are so difficult and in such an unmanageable condition that, from a psychological, family welfare, basic needs, children’s education point of view, holistic considerations would suggest that the logical course of action would be for the person to take rented accommodation or that the local authority purchase the property. The latter is the ideal outcome, where, if the person was due to come back into social housing, the option to purchase the property would be taken by the local authority and the person would become the tenant.

In an absolutely distressed position that is the correct solution. There are no magical solutions to this. Nobody can sustain individual malpractices, including favouritism to certain people as alluded to by Deputy Boyd Barrett. Nobody would support that in any circumstances. Having said that, one cannot extrapolate from a few bad situations and a few wrong calls that it is right to create mayhem with the generality of cases. We need legal parameters, structures and a methodology for the good of all concerned. It is illogical and disingenuous to suggest the contrary.

Repossessions are seen as a last resort. The Governor of the Central Bank, Professor Honohan, shares the view that repossessions should only be exercised in extreme cases. There are many cases where people who through no fault of their own – unemployment, illness etc. – fall into arrears in their mortgage repayments. There were many cases where people were lulled into making or were allowed to make poor decisions. While everyone has personal responsibility for his or her actions, some people were in a weaker or disadvantageous position in evaluating the loans and options presented to them. There are many people – young and not so young – who have inappropriate mortgages simply because they had wrong information or because wrong lending principles were applied. One has to be cognisant of that in any evaluation of and response to the situation. I believe Professor Honohan is also saying that clearly.

Many people in such situations are trying their best to meet their repayments. In these cases repossessions should be avoided and a practical yet humane approach should be taken instead. Professor Honohan argues that “a debt modification [system] that enables them to stay in their home will often be the best solution all around.” From a practical point of view, if a borrower and lender can work out a sustainable revised repayment system, then the borrower is paying back an affordable loan, which will undoubtedly be of greater value than the value of the property.

I had the privilege of speaking at a meeting of the Oireachtas Joint Committee on European Union Affairs today when Professor Honohan and his team were giving evidence on the proposed banking union that is in the process of construction as well as the implications of Economic and Monetary Union for the Irish economy. I made a point to Professor Honohan which he received very well. I believe we should consider intergenerational loans. We should turn a number of the distressed mortgages into much longer-term loans – what is called a split mortgage or a mortgage over a period longer by 20 or 30 years if necessary. Why not have a house passed from one generation to another with a level of debt on the house that is sustainable and realistic. It is not an unreasonable proposition that a child or another generation would acquire a family home with a level of indebtedness but yet the person inheriting the family home would have significant equity in the home. The banks would get a constant amount of money from the repayments and it is a much better option from a humane and societal point of view than repossession and sale. We should consider that.

As I said to Professor Honohan today, we should consider the Japanese model where mortgages continue for 25 or 50 years as the case may be. The mortgage fits the individual and is intergenerational. There is no reason that should not be the case here. Given the level of subsidisation and support the banks have received and are effectively nationalised, we should persist with the banks to ensure we get intergenerational mortgages, split mortgages, and a sensible and humane solution. That is different from some of the poppycock suggested that banks should basically write off everything, which is not sustainable. We cannot have fantasy economics applied to this. The solutions need to be gradual, realistic and involve responsibility on the part of the borrower and lender. They need to be tapered in such a way that the normal economy can return to the country.

The lender will recoup more money under this arrangement than if it was to seek repossession. Borrowers will also get to benefit in that they will get to keep their homes and make reasonable repayments on their loans thereby having more money to spend in the wider economy.
We can no longer turn a blind eye to the mortgage arrears crisis. We need to face it head on in a real and practical way and I believe this Bill seeks to do so. It is great that the Central Bank in conjunction with Government has set mortgage arrears resolution targets for 2013. By the end of June, banks should have proposed sustainable mortgage solutions for 20% of distressed borrowers. The effect of that over the coming six or eight months will be enormous. By September 2013 this will have been achieved for 30% of distressed borrower and by the end of 2013 for 50% and so on.

The dealing with individual debt at a micro level will be matched with the major achievement of promissory note deal, which will save the country having to pay €3.6 billion each year, putting the payment out to 2038, which is effectively almost a write off of that debt in real terms. The reductions in interest rates achieved since the bailout, which are very considerable, come on top of the recent achievement – another in a sequence of achievements – of the Minister for Finance, Deputy Noonan, in getting a seven-year extension of the period to pay off the bailout debt. That is a very significant achievement. Those macro achievements will match the micro achievement of dealing with individual loans.
When a bank deals with an individual person’s distressed mortgage, a number of simple objectives are achieved. I again call on the banks to act properly to do this. I also call on Government to be vigilant in the area. When a long-term solution to an individual distressed mortgage is reached, a number of things are achieved. The quality of life and wellbeing of the borrower and his or her family are enhanced. Such people come back into the real economy because they are fit to conduct normal business in society and are not handcuffed financially in the sense that they can build a normal extension to their house, educate their children, have holidays and do the things normal people do. That gets a normal economy returning.

We have had an abnormal ill economy for a number of years. We need to return reality to the economy and matching that, as we are, with structural achievements and investment from abroad. The people with savings – we should remember there is some €100 million in savings in this country – will then begin to get confident about reinvesting those savings in initiatives locally in local businesses, in their own businesses and in the economy generally and then we return to a normal economy again.

Dealing with distressed debt and mortgage arrears with personal indebtedness, which is a unique dimension with this recession here, is a critical part of the reparation of the economy and our society. Debt is inherent in this legislation in that under the second part of the legislation the courts have the power to intervene in a repossession and insist that an arrangement be worked out between the lender and the borrower. Courts will have that prerogative and discretion. The courts will exercise that discretion and the existence of that discretion will bring the banks to work on that as the insolvency legislation does prior to that point.

I thank the Leas Ceann Comhairle for his indulgence and I welcome the legislation as another brick and important milestone on the road to recovery.

Senator Joe O'Reilly representing Cavan & Monaghan 2010. | An ExSite website