Court power over bank veto can be a game-changer

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Granting courts power to review bank veto decisions on debt deals for the first time is a game-changer with the potential to redress the balance of power and deliver fresh hope to thousands of people with crippling mortgage arrears.

It is not only a much-needed step but it was by far the most significant element among the package of new measures announced this week by the Government to tackle mortgage arrears and bring solace to families facing repossession.

New measures at-a-glance

• Courts given power to review and overrule bank decisions to reject debt deals
• Mortgage-to-Rent scheme expanded to make it more accessible
• Increase in property value thresholds for Mortgage-to-Rent scheme 

We hope the very fact that appeals are now possible may prompt banks to adopt a more temperate approach when considering debt proposals and simultaneously force them to be more transparent about their decision-making processes. Until now, the absence of a mechanism to challenge (let alone overrule) ‘unreasonable’ decisions by banks, was a disincentive to people to engage with banks and to pursue a formal insolvency solution.

A double disincentive was hard evidence of banks rejecting reasonable repayment proposals and pushing for bankruptcy, even when it resulted in the bank recouping less money (on average €100,000 less per case according to the Insolvency Service of Ireland).

Banks have rejected 30% of debt deals involving mortgage debt

ISI data show that while banks have rejected 25% insolvency proposals overall, there is an even higher rejection rate of 30% where mortgage debt is involved. Beyond this, it is hard to quantify how many people in debt may not have takes the first step towards finding a solution to their own personal debt crisis because of lack of faith in banks.

Besides the issue of questionable commercial logic when banks push for bankruptcy and repossession which recoups less money than an alternative solution - there is an issue of justice and due consideration for families who lose their homes as a result. There is also the matter of moral responsibility on the part of banks as well as Government to enable more citizens to participate in the economic recovery.

“Progress is impossible without change” - George Bernard Shaw

The new powers awarded to courts may well be regarded by banks as an unwelcome encroachment on their own powers but without this step, there would be no reason to believe that things can really change. It required decisive intervention by the Government to begin to change behaviour and ultimately minds, both of which are necessary if we are finally to resolve the unhappy legacy of long-term mortgage arrears. It is a positive step.

As famous son of Dublin, George Bernard Shaw said: “Progress is impossible without change, and those who cannot change their mind cannot change anything.” 

We look to the courts to demonstrate that change is possible by exercising their new powers and, where warranted, overturning unjust decisions.

The first successful appeal against a bank veto will be a litmus test for others seeking to follow suit.  In the hiatus between the measures being announced and passed into law, it would be prudent to set guidelines for courts in terms of a recommended minimum percentage of debt to be returned to secured creditors.

Clarity on these issues would facilitate the decision-making process, making it possible for courts to deal with larger volumes of cases which are broadly similar rather than having to devise bespoke solutions on case-by-case-basis, with the potential for arbitrary decisions which may be out-of-kilter with business ‘norms.’ 

Mortgage-to-Rent changes welcome but devil will be in detail

Proposed measures to enhance the Mortgage-to-Rent Scheme are another welcome step with the proviso that only scant details have been released -  for example we have details of a new ceiling of €350,000 on the value of Dublin homes eligible for the scheme but no news yet on value limits for homes outside the capital.

Theoretically, enhancements to this scheme should help more people to remain in their home by surrendering ownership and renting their property back from a social housing landlord. Many will understandably regard it as a more palatable option than repossession and having to uproot their family and find somewhere else to live amid a shortage of suitable affordable family housing.

Understandably there is a degree of cynicism over how effective tweaks to this scheme will be when the scheme has been around for almost three years and so far has benefited just 88 homeowners. 

Schemes of this sort are not however designed to be a solution for the masses seeking help with mortgage arrears and repossession. Realistically, this scheme will only help a minority who meet eligibility thresholds. It can be helpful at the margin and in the context of a comprehensive package of measures to address mortgage arrears. Also, this scheme by definition offers no possibility of homeowners retaining any equity or having the option to buy their home back in future. 

There are examples of successful government intervention in the UK to address mortgage arrears and repossessions, some of which may offer food for thought in Ireland before the new measures become law. (It should be noted however that even in the depth of recession, long-term mortgage arrears in the UK were nowhere near as acute and widespread as currently in Ireland, partly because of different approaches on debt priorities.)

Scottish government schemes warrant closer look

The Scottish Government pioneered several schemes which were emulated in the rest of the UK. These include a Mortgage-to-Rent scheme introduced in 2003 which was followed by a Mortgage-to-Shared Equity scheme both of which are part of a wider Home Owners’ Support Fund.

The latter scheme entails the government agreeing to pay a fair market price to a lender for a specified slice of equity in a property belonging to a customer in mortgage arrears. The lender then reduces the mortgage payable by the client accordingly and the government recoups their money when the property is sold. The scheme was set up on the expectation that homeowners would repurchase the government’s stake within 10 years. 

These innovative Scottish schemes have been a qualified success - in the first five years of the Mortgage-to-Rent scheme, an independent report in 2008 concluded that it had reduced repossessions by 8% and also helped reduce homelessness, particularly for low-income families.

Government needs to back measures with adequate funding

The Scottish government provided substantial funding packages for these schemes until 2012 when it cut funding by 46% which impaired the effectiveness of the Mortgage-to-Rent scheme in while at the same time introducing changes which made it more difficult to access. As with Ireland - the devil is always in the detail.

For now, we give a qualified welcome to the measures introduced by the Irish Government to address mortgage arrears but policy changes must be accompanied by serious funding commitments and contain clear guidelines if they are to have any chance of long-term success.