Banks may have to write down loans more than 90 days in arrears that haven’t been properly restructured by the end of 2014 to their repossession value, the Dublin-based central bank said in a statement today. Irish home prices have fallen by half from their 2007 peak, according to the Central Statistics Office.
“Now is the time to see real delivery from banks,” Matthew Elderfield, deputy governor at the central bank, said in the statement. “We are therefore setting performance targets for the banks to end the impasse on arrears and to ensure that sustainable solutions are put in place for borrowers.”
Prime Minister Enda Kenny said last week he’s seeking “to accelerate a solution” to the nation’s mortgage crisis. Some 11.9 percent of the nation’s 792,096 owner-occupier loans were at least three months behind in payments at the end of December, while arrears on buy-to-let loans provided to landlords were 18.9 percent, the central bank said on March 7.
Irish banks bad loans have soared following the collapse of the nation’s real estate market and tripling of the unemployment rate since 2007. The jobless rate stood at 14.1 percent in February, according to the central statistics office.
Lenders have so far largely relied on temporary measures, such as switching borrowers to interest-only payments and lengthening the term of loans, to avoid recognizing losses.
The central bank is setting quarterly targets for banks to put troubled loans on a “sustainable” basis. It defines this as an arrangement “which is likely to enable the customer to meet the original or, as appropriate, the amended terms of the mortgage” over its lifetime.
Banks must make loan restructuring proposals for 20 percent of customers in arrears by the end of the second quarter, rising to 50 percent by the year end, according to the central bank.
The central bank may also require banks to hold additional capital if their “mortgage resolution strategies are not well executed,” it said.
Banks’ solutions for loans include permanent interest-rate reductions and split mortgages, where some of the loan is hived off until a borrower’s circumstances improve.
Allied Irish Banks Plc (ALBK), the nation’s largest mortgage lender, is beginning to write off some irrecoverable debts as it eases terms on 2,000 mortgages a month, David Duffy, chief executive officer, said in an interview last month. He said the bank “will have long-term restructuring in place by the end of the year, bar a small percentage.”
The central bank said that in some cases, particularly for buy-to-let loans, “legal action for repossession may be required.”
Ireland’s housing crash has differed from the U.S. subprime bust as banks have been reluctant to foreclose on properties, a cultural taboo dating to memories of 19th century evictions by British landlords.
While 11.9 percent of loans on Irish private homes were at least three months in arrears in December, repossessions amount to 0.11 percent of all mortgages. By contrast, while 2.89 percent of U.S. home loans are in arrears, Banks’ inventory of repossessed homes was equivalent to 3.74 percent of their loan book during the same time period, according to Mortgage Bankers Association in Washington D.C.
Duffy, Bank of Ireland Plc CEO Richie Boucher and KBC Bank Ireland CEO John Reynolds have each said in the past month that the level of repossessions needs to rise, even as they seek to keep owner-occupiers in their homes.
The government has committed under its bailout program to drafting laws by the end of March to close a legal loophole hindering repossessions in Ireland.
Before December 2009, lenders used a 1964 law as the basis to seize homes. This was repealed and replaced in 2009, which applied only to loans taken out after Dec. 1 2009, due to a drafting oversight.
Separately, the central bank is also proposing to amend an industry code on mortgage arrears, including the lifting of a restriction on banks contacting troubled borrowers more than three times a month.
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