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Honohan Warns Irish Banks to Fix Mortgages Quicker as Tests Loom

Irish central bank Governor Patrick Honohan said the country’s banks will have to step up the pace of easing the terms on distressed home loans to reap the benefits in stress tests next year.

Banks may reduce loan losses and the need for further capital by restructuring mortgages in distress instead of estimating how much they can recover through repossessions, Honohan said in a speech, dated Oct. 7, and published on the Dublin-based central bank’s website today. Ireland will conduct bank stress tests before a wider euro-area probe next year.

“However, it may not be possible to rely for capital stress-testing purposes on the results of this alternative exercise until there is sufficient evidence of the banks actually using such modifications,” Honohan, 64, said.

Ireland’s central bank has told lenders that they risk being penalized for loans in arrears that haven’t been properly restructured. It is pressing banks to switch from temporary measures to tackle what it calls “unprecedented levels” of arrears to solutions such as permanent interest-rate reductions to split mortgages, where payments on part of a loan are deferred until a borrower’s circumstances improve.

“Though challenging, and although concrete results on the ground have been slower coming than we want to see, this work is now well advanced at the central bank and will continue to be pushed forward energetically,” Honohan said.

Home Repossessions

Almost 13 percent of loans to owner-occupied homes and 20 percent of buy-to-let mortgages were at least 90 days in arrears at the end of June, the central bank said on Aug. 23. While the central bank has called for home repossessions to increase, lenders from Allied Irish Banks Plc (ALBK) to Bank of Ireland Plc have said they plan to focus on restructuring loans.

“Honohan is putting it up to the banks to get a move on and complete sustainable loan workouts within provisioning levels that have already been allocated to bad loans,” said Ciaran Callaghan, an analyst with Merrion Capital in Dublin.

On March 13, the central bank said lenders 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. Irish house prices have fallen by half from their 2007 peak, according to the Central Statistics Office.

The central bank said it defines a “sustainable” arrangement as one “which is likely to enable the customer to meet the original or, as appropriate, the amended terms of the mortgage” over its lifetime.

To contact the reporter on this story: Joe Brennan at jbrennan29@bloomberg.net

To contact the editor responsible for this story: Edward Evans at eevans3@bloomberg.net

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