Split mortgage model must be standardised as approach by banks differs dramatically – McGrath

Fianna Fáil Spokesperson on Finance Michael McGrath TD has said the Central Bank must intervene to remove the dramatic differences in the split mortgage offers being made by different banks to borrowers. At present, a Bank of Ireland split mortgage customer will pay tens of thousands of euro more than an AIB customer for example.

Deputy McGrath commented: “The Keane report on mortgage arrears of September 2011 identified the split mortgage model as an important long term forbearance option. However, different banks are offering very different terms on their split mortgage offer. For example, AIB is not charging any interest on the warehoused portion of the mortgage whereas Bank of Ireland is charged full interest on it. I understand Permanent TSB is charging 1% interest on the warehoused mortgage.

“The dramatic difference for the customer is best illustrated by way of an example: Let’s take a distressed borrower with a mortgage of €200,000 who qualifies for a split mortgage with 50% of the mortgage being warehoused for a ten year period. With AIB, no interest is charged on the warehoused €100,000. However, under the Bank of Ireland model, the borrower will clock up an interest bill of almost €57,000 on the warehoused principal sum of €100,000 (assuming an interest rate of 4.5%). Under the Permanent TSB model, the borrower will clock up an interest bill of €10,500 on the warehoused mortgage.

“In a recent Dáil reply to me, Finance Minister Michael Noonan acknowledged the split mortgage ‘product details vary from lender to lender’ but indicated no willingness to intervene. Both the government and the Central Bank have again taken a ‘hands off’ approach on this issue and have allowed the banks to set their own rules for the split mortgage solution.

“It is completely unfair that – depending on which bank they are with – a typical distressed borrower would be treated differently to the tune of €57,000 under a solution that has been sponsored by government and the Central Bank. The Minister for Finance and the Central Bank need to intervene immediately to address this blatant discrimination.”

DÁIL QUESTION

NO  217 and 308

To ask the Minister for Finance if he will provide details of the rules that apply to the split mortgage arrangements including details of the maximum percentage of the mortgage that can be parked; the eligibility criteria; and if he will make a statement on the matter.

– Michael McGrath.

*    For WRITTEN answer on Tuesday, 16th April, 2013

Ref No: 16071/13

REPLY

Minister for Finance (Mr Noonan) :

On 13 March 2013 the Central Bank announced new measures to address mortgage arrears, including the publication of performance targets for the main mortgage banks.

Performance targets have been set for:

§   ACC;

§   AIB;

§   Bank of Ireland;

§   KBC Bank Ireland;

§   Permanent TSB; and

§   Ulster Bank.

The specific targets which have been set by the Central Bank, require banks to systematically work through their mortgage book to offer durable solutions to mortgage holders covering arrears cases that are 90 days or more overdue.

The Central Bank’s targets stipulate that:

• By end June 2013, the banks should have proposed sustainable mortgage solutions for 20% of mortgage loans that are over 90 days in arrears, and
• By end September 2013, 30%, and
• By the end of 2013, 50%.

The Central Bank will also, over the coming period, set targets for the conclusion of durable solutions and for the sustainability of such solutions.  The targets should provide a better measure of progress on a more consistent basis and promote a movement away from ‘temporary’ forbearance measures which are not sustainable in the long term. In addition the banks will also be set specific, non-public, targets, principally in relation to handling of early arrears cases. The Central Bank is working with individual institutions to incorporate these measures which will be set in line with each institution’s capacity, processes and systems. These targets will be adjusted quarterly to ensure they are ambitious.

The banks will be required to publish their performance against the targets and make quarterly reports to the Central Bank.  The Central Bank will consider each bank’s performance against the targets, including assessing whether the modifications provided are in fact sustainable solutions.

The split mortgage is one of a number of arrangements suggested by the Inter-Departmental Mortgage Arrears Working Group Report (the Keane Report).  The Central Bank of Ireland has informed me that the majority of lenders have introduced, or are in the process of introducing, a split mortgage arrangement.  The concept involves splitting a distressed mortgage into an affordable mortgage and warehousing the balance. While lenders have taken the broad approach set out in the Keane report, the product details vary from lender to lender. The most notable difference involves the interest rate charged on the warehoused element of the split mortgage varying from 0% up to the full mortgage interest rate. Also, the maximum amount that can be warehoused is dependent on each lender’s own internal criteria. The split mortgage, like all other forbearance and modification arrangements, is based on affordability and sustainability of the arrangement from both the borrower and the lender’s perspective.