In a recent blog I discussed proposals under the Personal Insolvency Bill to assist people who are struggling with their mortgages. This week my blog will discuss suggested changes to the Bill and recommendations submitted by the Inter-Departmental Working Group on Mortgage Arrears in October 2011.
Suggested changes to the Bill
Since the unveiling of the Personal Insolvency Bill the Committee on Justice, Defence and Equality has issued recommendations for an appeal process for individuals where the banks are repossessing their homes. The Committee submitted that the purpose of the Bill was to minimise the possibility of people finding themselves homeless and that a provision should be included to write-off debt in certain circumstances so that people can stay living in their homes.
A further significant recommendation by the committee is that if the lender refuses to come to an arrangement with the borrower they should come before MABS who will make a binding agreement. The committee also highlighted that debtors who enter into the Personal Insolvency Arrangement can only retain a minimum protected income, and the amount is not yet agreed on. The committee’s recommendations will be put to Minister Shatter who may amend the Bill.
Recommendations in the Report of Inter-Departmental Working Group on Mortgage Arrears in October 2011
In September 2011 62,970 / 8.1% of all residential mortgage holders were in arrears for more than 90 days. Almost 70,000 mortgages were restructured. The report of the Inter-Departmental Working Group on Mortgage Arrears was published in October 2011. The purpose of the Working Group was to address the problems of the over-indebtedness of mortgage holders.
The objective of the Working Group was to distinguish between mortgage holders who genuinely could not pay their debt and those who could pay, but don’t. Debt-forgiveness was not a recommendation of the Group as the negative equity in mortgages (at the time of the report) would cost in the region of €14 billion to clear. The State could not afford such a loss.
Mortgage Restructuring Proposals
The Working Group report recommended trade-down mortgages, split mortgages and sale by agreement for certain mortgage holders.
Mortgage holders with higher value properties may be able to afford to trade down to a house of lower value and also afford the negative equity.
The Group recommended splitting the mortgage into an affordable mortgage and warehousing the balance. Affordable mortgage repayments would be decided depending on the mortgage holder’s income. If the mortgage holder’s income increases an additional amount would be transferred from the warehouse to the affordable mortgage. An agreement would be made between the mortgage lender and borrower as to how the warehoused loan is settled at the end of a certain period of time. The warehoused loan could be settled by:
- Selling the property and repaying the warehoused loan
- Trading down to a smaller property
- Realising other assets or pension lump sums
- Agreeing a life interest in the property
Sale by agreement
Where the mortgage is unsustainable and mortgage-to-rent, trade down mortgage and split mortgages are not options, it will be in the best interests of both the mortgage holder and the lender to sell the property. An agreement on the shortfall would need to be met taking into consideration the borrower’s circumstances.
The report also suggested a pilot mortgage-to-rent scheme for people who are entitled to social housing, if the house if suited to social housing. It recommended two new schemes – Approved Housing Bodies and Mortgage Lender Leasing – where local authorities or voluntary housing organisations take ownership of the house and the owner becomes the tenant. At the time of the report it was estimated that up to 10,000 homeowners may need to enter into the schemes.
The mortgage-to-rent schemes are designed for mortgages which are unsustainable. For mortgage holders to enter into these schemes certain conditions must be met:
- Your mortgage arrangements must have been deemed unsustainable under the lender’s Mortgage Arrears Resolution Process (MARP)
- You must not have significant positive equity in the property
- The property must be appropriate to your housing needs (for example, you could be considered to be over-accommodated if the property is large or, alternatively, it may be considered overcrowded)
- You must agree to the repossession of your home
- You must be eligible for social housing
Eligibility for Social Housing
To be eligible for social housing the borrower will be means tested. There are three income thresholds which apply in different counties:
- €35,000 threshold applies in all the four Dublin area councils, in Cork city, Galway city, and in Meath, Kildare and Wicklow
- €30,000 threshold applies in Limerick city and county, Waterford City, Cork county, all of Kerry, Kilkenny, Louth, and Wexford
- €25,000 threshold applies in all other places
The income thresholds are based on a single-person household and are increased by 5% each for adults (with a maximum of 10%) and 2.5% for each child (maximum of 10%). The maximum threshold for the first category is €42,000, for the second category is €36,000 and the third category is €30,000.Whether the scheme is entered into with a local authority or a voluntary housing organisation the mortgage holders would need to enter into a long-term lease.
A new mortgage advice service, independent of MABS, was also recommended to mediate between struggling mortgage holders and financial institutions.The Group proposed a three-tiered debt-settlement process involving the judicial process, a non-judicial debt resolution process and debt relief orders (for lower value debts).