In February 2013 the Central Bank of Ireland stated that they did not want to impose targets on the Irish banks unless it was absolutely necessary. A couple of weeks later on 13th March 2013 the Central Bank and the Government published a new Code of Conduct on Mortgage Arrears to be issued at the end of May 2013. Through massive fanfare and spin the Government announced targets for the banks and a range of options to be offered by lenders to borrowers. However, the reality is that the published Code of Conduct will roll-back many of the protections that were available to families living in severe financial difficulty.
The Code goes into great detail and creates a new class of borrower called “not co-operating borrower”. The definition is extensive and unambiguous. Compare that to the solutions that are put forward where there is absolutely no definition put forward as to how the banks should implement the resolutions. We simply have to trust the banks again. The solutions put forward are as follows:
STEP 4: RESOLUTION:
In order to determine which options for alternative repayment arrangements are viable for each particular case, a lender must explore all of the options for alternative repayment arrangements offered by that lender. Such alternative repayment arrangements may include:
a) an interest-only arrangement for a specified period;
b) permanently reducing the interest;
c) temporarily reducing the interest for a specified period;
d) an arrangement to pay interest and part of the normal capital element for a
specified period;
e) deferring payment of all or part of the instalment repayment for a period;
f) extending the term of the mortgage;
g) changing the type of the mortgage, except in the case of tracker mortgages;
h) capitalising the arrears and interest;
i) equity participation;
j) warehousing part of the mortgage (including through a split mortgage);
k) debt write off; and
l) any voluntary scheme to which the lender has signed up e.g. Deferred
Interest Scheme.
The Keane report of 30th September 2011 put forward a range of proposals in order to solve the mortgage crisis and put forward a suggested example of a split mortgage. It states the following:
The group has received several suggestions regarding the concept of splitting a distressed mortgage into an affordable mortgage and warehousing the balance:
â– The group considers that split mortgages could be a viable solution in certain circumstances
â– The size of the affordable mortgage, which would be paid down over the income earning life of the mortgage holder, could be calculated using an agreed model (illustrative approach discussed on next slide). This would be re-calculated on a periodic basis. Should a mortgage holder’s disposable income increase, an amount would transfer from the warehouse to the affordable mortgage, based on a pre-agreed formula.
â– The mortgage lender and mortgage holder would need to decide how the balance remaining in the warehoused loan is to be settled at term end.
There are several ways of dealing with this, including:
– Selling the property and repaying the warehoused loan from the proceeds of sale
– Trading down to a smaller property
– Realising other assets or pension lump sums
– Agreeing a life interest in the property
â– Each case would need to be assessed on its merits. However, the mortgage holder would need to properly assess the level of equity that they are likely to create in the property over time. If that is not sufficient to meet their long term needs this may not be the an appropriate solution for them
Here is a link to the Keane report in full
What is happening now?
In the absence of any input by the government or the central bank then practitioners have to engage with the bank to ascertain what is their split-mortgage policy. Each bank is different. Out of the hundreds of thousands of mortgages in arrears there have been an estimated 50 split-mortgages put in place and the details of these are not published. Each bank is a law unto themselves.
The type of split mortgage that I would recommend would be as follows:
Mortgage - €200,000
Current Market Value of Property - €100,000.
Post-Split Mortgage:
Split mortgage into 3 parts A B C as follows:
A – Mortgage of €100,000 repayment mortgage over 20 years @ 5% - €659.95 which represents less than 30% of the after tax income. (After tax salary of €2,200 per month)
B – Stretch mortgage - €10,000 to be repaid over 6 years i.e. €138.89 per month.
C – Warehoused Mortgage - €90,000 held interest free and written down provided Mortgage B is complied with.
This represents the best way to encourage borrowers to stretch themselves to pay down as much debt as possible while giving them the light at the end.
