“More action is needed by lenders to resolve long-term mortgage arrears, to support distressed borrowers and improve the functioning of the mortgage market for all” - Deputy Governor Ed Sibley

• Lenders effectively supported borrowers throughout the pandemic and appear to be well-prepared for emerging distress as government supports taper. Supervising this will be a key focus over coming months.
• Considerable pre-pandemic distress remains in the mortgage market, with more than one in eight private dwelling home (PDH) mortgage accounts exhibiting some level of distress.
• Resolution of mortgage arrears remains a priority for the Central Bank. In particular, lenders need to do more to resolve long-term mortgage arrears. However, full resolution cannot be delivered solely within the financial system.

Speaking at a breakfast briefing at the Banking & Payments Federation Ireland (BPFI) this morning (13 July 2021), Deputy Governor, Prudential Regulation, Ed Sibley spoke to members about the Central Bank of Ireland’s work in respect of distressed debt and particularly long-term mortgage arrears (LTMA).

The Deputy Governor’s comments coincided with the publication of four papers focused on distressed mortgage debt. These papers provide insights into:

1. The economics of mortgage debt relief during a pandemic;
2. The approach to pandemic related mortgage payment breaks in Ireland;
3. Resolving long-term mortgage arrears; and
4. The level of mortgage borrowers potentially facing shortfalls in repaying their mortgages.

He stressed that resolution of long-term mortgage arrears remains a key policy priority for the Central Bank, and that it is receiving significant focus.

Deputy Governor Sibley said the combination of supports offered by lenders and government during the pandemic had been crucial in minimising the economic effects of the emergency on households and businesses.  However, as government supports are tapered, some borrowers will require further support. The Central Bank expects lenders and borrowers to proactively engage to develop, tailor and implement solutions according to individual borrower circumstances using a wide range of solutions. He said:

"Lenders’ strategies, plans and commitments submitted to the Central Bank, together with our supervisory follow up, provide a good degree of assurance that lenders are ready and committed to provide the necessary support to those borrowers as we move to the next phase of the pandemic.  It is critically important that these plans and the engagement with borrowers are executed well and in line with our expectations.  This will be a key focus of our supervisory efforts over the coming months."

On long-term mortgage arrears, he noted that while significant progress has been made in resolving mortgage arrears, much of it due to the Central Bank’s interventions, for those remaining borrowers in deep arrears, solutions need to be found.  He highlighted that a number of issues will need to be addressed for lenders to fulfil their commitments to make meaningful progress in the resolution of these cases. Specifically he identified the inadequate use of existing tools to deliver sustainable restructures, inconsistencies in the approaches to personal insolvency arrangements, inadequate consideration of diverse borrower demographics and the need for greater collaboration in seeking system-wide solutions for those in the deepest levels of distress.

He reinforced the Central Bank’s expectations of firms in relation to supporting borrowers experiencing difficulties, both pandemic related and pre-pandemic from November 2020. In relation to longer-term mortgage distress, Deputy Governor Sibley outlined that the Central Bank’s supervisory focus will be on ensuring that senior management in all lenders are:

1. revising the waterfall of restructuring options that they have in place with a view to ensuring that a) they are sufficiently ambitious and capable of delivering sustainable solutions, including for borrowers that are in deep levels of distress; and b) when a borrower is offered an alternative repayment arrangement (ARA), that the ARA that is offered from the waterfall has the greatest potential to resolve the borrower’s arrears position on an appropriate and sustainable basis;
2. reviewing and enhancing their approach to dealing with personal insolvency practitioners;
3. reviewing and updating their contact management strategies; and
4. keeping their mortgage arrears strategies under review and ensuring that the underpinning plans are delivering effectively.

He updated on the progress of the public consultation to review the SFS, which has the aim of making borrower engagement easier. Through this consultation, he said that the Central Bank has heard the experience of those who work with the SFS directly, and it is clear that borrowers sometimes find it to be a challenging document to complete.  Based on feedback received, the Central Bank will issue a revised SFS which will be shorter and more focused and which will still achieve its primary purpose of gathering the necessary financial information from a borrower in order to assess their individual case.  The revised SFS will become effective from 1 January 2022. 

He concluded by calling on borrowers in arrears to engage with their lender or the other supports available, like MABS or the Insolvency Service. He said:

"We also urge borrowers to pay what they can towards their mortgage – paying what you can will help reduce the accumulation of arrears, and reduce your financial burden. Borrowers who do not engage, and who do not pay anything towards their mortgage, are most at risk of repossession."

On the consequences of the current situation he said:

"While much has been done to improve the functioning of the (mortgage) market, the issue of long-term mortgage arrears remains significant.  Most importantly for those households and individuals suffering the stress and uncertainty of having significant arrears and being at risk of losing their homes.  But there are also wider issues associated with this legacy – including the cost of credit for all, and the attractiveness of the Irish mortgage market for new entrants."

He concluded by reiterating that for borrowers, lending institutions, and the wider Irish financial system, solutions will vary depending on the financial situation and level of engagement of borrowers. By breaking down the differing problems, actions can be taken to address these in a tailored way, which will improve the functioning of the mortgage market for all. The Central Bank’s supervisory efforts will continue in order to bring about those solutions within the financial system and where interventions from outside the financial system will be required, the Central Bank will continue to engage with all stakeholders to pursue this.

Notes

The Standard Financial Statement (SFS) gathers specific financial information from borrowers to enable regulated entities to undertake an assessment of the borrower’s case and to consider whether an alternative repayment arrangement is appropriate and sustainable for the borrower’s individual circumstances.

Behind the data - Mortgage borrowers facing end of term repayment shortfalls

New data in the latest in our Behind the Data series offer greater insights into the challenges to managing mortgage distress, potentially enabling a fuller assessment of the solutions required. The data provided by financial services firms to the Central Bank shows:

• Over 95,000 or 13% of private dwelling home mortgage accounts are assessed by financial services firms as facing a shortfall in repaying their balance at the end of their term.
• Almost 63,000 accounts are assessed to have a shortfall greater than 10% of the balance.
• Of this group of nearly 63,000 accounts; 54% are not restructured and 45% are in arrears longer than 1 year.

Today the Central Bank has also published the following Financial Stability Notes:

The economics of mortgage debt relief during a pandemic

• The COVID-19 macro shock was significantly different to previous crises, including in terms of its speed, the severity of job loss, the fiscal support response, and the stability of house prices
• During the previous crisis, the prevalence of negative equity and the long-term nature of income declines for many borrowers meant that, in debt markets globally, restructuring arrangements that either wrote off or parked principal payments were optimal in many cases.
• Building on the lessons of the previous crisis, the initial response to COVID-19 in the mortgage market, involving payment breaks, was appropriate for the specific, unexpected economic shock facing the Irish economy in March 2020.
• Offering payment breaks to borrowers has proven to be an effective tool for mitigating the short-term default risk of potentially vulnerable borrowers.
• As the pandemic progresses, the optimal future response will depend on the joint evolution of the labour and housing markets. In circumstances such as those of early 2021, where uncertainty and additional temporary liquidity challenges remain in some sectors, additional extensions of payment moratoria or other short-term arrangements have been appropriate for some borrowers.

Irish Mortgage Payment Breaks – Extensions and Expirations

• Of those PDH mortgage borrowers who availed of a payment break in 2020, half went on to extend their initial payment break.
• Borrowers receiving payment break extensions were more likely to have existing or historic forbearance measures in place, less likely to be in long-term arrears (>1 year) and more likely to reside in counties where the labour force had a more subdued recovery following the onset of the COVID-19 shock. Borrowers who received a payment break extension had, on average, somewhat higher origination loan-to-incomes than those receiving one payment break only.
• Upon expiry of payment breaks, for those borrowers who have engaged with their lender regarding their current financial difficulties, the evidence available suggests that lenders have agreed mainly short-term restructuring arrangements. Depending on how the economic recovery and incomes evolve, some borrowers may need further adjustments. Longer-term solutions will be required and should be considered where more permanent income shocks are apparent.
• Of those borrowers who submitted a Standard Financial Statement (SFS) form seeking further restructuring, the median borrower in receipt of a payment break was making repayments in full in the three months prior to the pandemic, suggesting that the pandemic was the root cause of financial distress amongst the payment break group.
• Borrowers with either current or past forbearance were more likely to have taken up payment breaks and were more likely to avail of extensions. It is vitally important that lenders and borrowers engage early and meaningfully before short-term arrangements expire. Doing so, will avoid the build-up of future distress among borrowers and adding to already sizeable number of longer-term mortgage arrears cases in the Irish market.

Long-term mortgage arrears: Analytical evidence for policy considerations

• Among Long Term Mortgage Arrears (LTMA) borrowers engaging with a retail bank, half have debt repayments larger than 43 per cent of their monthly income, far in excess of payment burdens generally considered affordable.
• Despite the price gains of recent years, over a quarter of LTMA borrowers remain in negative equity.
• Close to one fifth of engaged LTMA borrowers have incomes so low that they can make no repayments whatsoever, once reasonable non-housing expenses are accounted for. For these borrowers, the only solutions that involve retention of homeownership will be those that lead to significant reductions in monthly repayment obligations.
• One quarter of engaged LTMA borrowers are over 60 years of age. For these borrowers, future income generation capacity is minimal, and solutions that retain homeownership while clearing debt balances may need to rely on the value of the property in the future.