Tuesday, July 6, 2010

Economics 6/7/10: Mortgage Arrears Group Report: soapy and wooly

Mortgage Arrears and Personal Debt Expert Group, Interim Report was published today. Its stated objective is to provide recommendations, "focused on actions/solutions that effectively address immediate priorities and are capable of implementation in a relatively short time frame” to deal with defaulting mortgages and rising arrears.

Apart from the report being about 18 months too late, I missed any actual solutions or actions that would help addressing these priorities. Instead, the report contains 44 pages of rather general, if lofty, talk about the need to do things, discuss things and agree to things. A handful of meaningful recommendations it contains actually set out nothing more than the best practices that all lenders should pursue regardless of the Working Group effort.

In the end, the entire report is roughly 90% rehashment of arrangements that already exist in the industry, with a call to standardize these, plus 10% relating to stronger Social Welfare protection measures. If you are a private homeowner in trouble (negative equity, fallen income, including due to higher taxes, or loss of one income without crossing means tested barrier) you are not covered by the Report.

Let's take a look at those recommendations that do contain at least some substantive proposals.

37. The Financial Regulator should amend its quarterly public report on mortgage arrears to record, amongst other things, the number of mortgages that have been rescheduled. (Page 11)

[It is mind boggling to think that there is a need for a Working Group to get to this done. One would assume that the FR could have established such a reporting system on their own.]

38. The Department of Social Protection should introduce an alternative and more equitable approach to achieving the MIS [Mortgage Interest Supplement] objectives and maintaining its sustainability in light of changes in the economic climate and the mortgage market.
This should cover issues such as:
  • No legal action should be taken by the lender while MIS is being paid and the borrower is cooperating with the lender. [logical]
  • The ban on paying MIS to a couple where one person is in full-time employment should be removed and a revised means test developed. [logical]
  • The current rule which excludes the payment of MIS when a house is for sale should be suspended. [Logical, but there should be a strict limit for such payments – say average duration of sale, plus 3 months – to discourage ‘perpetual’ listings and unrealistic pricing. None are set.]
  • The State should not provide MIS where the lender is charging interest above the market rate. [This might be logical, but presents a problem for subprime borrowers who are more likely to be in distress.]
  • MIS should only be payable where no capital is being repaid.
  • MIS should be paid directly into the mortgage account of the borrower.
  • Lenders should agree forbearance options with borrowers for a period of six months and ensure the SFS is completed before the State shares the responsibility by providing MIS support to the borrower. [logical, but potentially too restrictive]
  • An overall time limit for MIS should be considered to ensure that the scheme does not act as a disincentive to seeking or retaining work. [What limit? How is it to be determined?]
  • The scheme should remain as a short term income support. [How short? Especially, how short relative to expected length of unemployment spells?]
  • Where a borrower’s situation is or becomes unsustainable, they should be facilitated, if necessary, in applying for social housing appropriate to their needs. [Errr, sure… why is this even being established here?]
In three words - largely useless fluff.

40. Urgent consideration should be given to the effective implementation, in the shortest possible timeframe, of measures for the comprehensive reform of both judicial bankruptcy proceedings and the establishment of a non-judicial debt settlement process.

[You can get this advice without paying for a working group. Just listen to any radio programme about mortgages arrears or read newspapers and you’ll hear or read someone speaking about the need for such a reform, with actually more details supplied than in the current report].

There is a really bizarre, if not outright offensive, claim in the report (chapter 3 - which incidentally provides volumes of rehashed unoriginal information on housing market bust) relating to the negative equity mortgage holders:

“Recent ESRI research estimates the number of mortgage borrowers in negative equity. House price declines to date, coupled with the anticipated price decline in 2010 would take the number of borrowers up to 250,0009. Although this represents a large number of households in absolute terms it is a small proportion of the stock of households in Ireland.”

Now, there are 791,000 mortgages in Ireland according to the same report (page 17). Which means that negative equity is expected to impact roughly 1/3 of all mortgage holders in the nation. How this can constitute a ‘small proportion’ of households, beats me.

“Lenders must not require the borrower to give up their low cost tracker or other existing product if to do so would put the borrower at a financial disadvantage.This must be publicly communicated by all lenders.” (page 19)

This introduces a bit of dilemma for the banks – if the banks are to continue subsidise tracker mortgages, especially non-performing ones, who will cover the banks’ losses? Of course, variable rate mortgage holders, who are, predominantly, at a higher risk of default, and at a higher risk of negative equity. So is this idea of preserving tracker mortgages a cure that can make the disease only stronger?

Needless to say, the working group should have done some work and estimated what would be the impact of continued tracker mortgages losses on costs of mortgages to variable rate holders. And then stress-tested the actual loans against this. But, alas, this was not performed. So hold on to your seats, folks, the working group solutions might give a rough ride in the near future, as banks hike up their mortgage rates to compensate for the working group’s well-meaning, but un-researched recommendations.

Crucially, there is nothing in the Group recommendations preventing lenders from arbitrarily forcing higher and higher repayments on people who might be currently compliant with their mortgage repayments, but are in either severe negative equity or otherwise in breach of loans covenants. In other words, being pro-active – the advice given by the Group to mortgage holders – is not something the Group itself is following.

“All lenders should publish the types of forbearance that are available under their MARP and the guidelines they are employing for decision making on which approach is appropriate for typical sets of financial circumstances. These could include one or more of the following alternative repayment measures [notice – this is really crucial – ‘one or more’, which means that none, collectively, of the below actions are required, page 27]:

An arrangement on arrears could be entered into whereby the amount of monthly repayment may be changed, as appropriate, to help address the arrears situation [Presumably this should not alter conditions to the detriment of the borrower, yet that is not explicitly specified in the statement].

Deferring payment of all or part of the instalment [sic] repayment for a period might be appropriate where, for example, there is a temporary shortfall of income [How this is to be determined remains unknown – if unemployment is deemed ‘temporary shortfall’ then ‘temporary’ might mean 12 months or 36 months].

Extending the term of the mortgage could be considered in the case of a repayment loan - although this may not make a significant difference to the monthly repayments.

Changing the type of the mortgage (e.g. to interest only) might be appropriate if this could give rise to a reduction in the level of monthly mortgage outgoings.

Capitalising the arrears and interest could arise where there is insufficient capacity over the short term to clear the arrears but where repayment capacity exists to repay the capitalised balance over the remaining term of the mortgage. This measure may be considered where a pattern of repayment has been established and where sufficient equity exists. [Does this mean equity sharing with the lender? If so, on what terms? How these terms should be set? Simply to say ‘capitalising can be allowed’ is not good enough for a Working Group report]”

So in brief, this report is hardly worth 47 pages expended on it. It is not even worth the first few pages that serve as a summary. And it certainly not something you'd expect from a really concerned Working Group labouring over it for 5 long months since February 2010.


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