Fianna Fáil Spokesperson on Finance Michael McGrath has stated that the improvement in official mortgage arrears figures is being flattered by the prevalence of arrears capitalisation as a means of dealing with mortgages in distress. He was speaking following the publication of monthly Department of Finance figures on mortgage arrears and restructurings.
Deputy McGrath commented: “One of the most noticeable trends in both the Central Bank and Department of Finance data is the increase in the number of restructured mortgages. According to today’s Department of Finance figures 86,576 mortgages have been restructured. This represents 12.5% of mortgages held with the six main banks. While this should on the face of it be a welcome sign of activity on the part of banks to address the arrears issue, recent comments from the Central Bank indicate that in fact it is having the effect of masking the true extent of the arrears problem.”
The recent Central Bank quarterly report noted “of the total stock of accounts in the arrears capitalisation category, 32 per cent of private dwelling home accounts have ‘re-defaulted’, i.e. the arrears balance has increased since the arrangement was put in place.” Today’s data shows 25,306 mortgage account holders have had their arrears capitalised making it the largest category of restructuring.
Deputy McGrath said: “In essence arrears capitalisation is proving to be only a sicking plaster solution in many cases. Families are moved out of the arrears category and the banks are able to claim that they are taking action to address the problem. However the reason why the account fell into arrears in the first place is not addressed. Unless this was temporary in nature and the borrower’s repayment capacity has been restored they will not be able to maintain the new repayment, which will almost certainly be higher. In many cases the reduction in repayment capacity is enduring so a restructure to reduce the monthly repayment is necessary. The fact that 32% of such restructures are falling back in to arrears highlights that is in many cases not suitable for the customer’s needs. By contrast the split mortgage arrangement has a 96% success rate.
“In this context it is imperative that the banks are asked to review their practices to give greater preference to those restructuring options which are proving successful. I would suggest that in each case when an arrears capitalisation arrangement in put in place the banks are asked to explain in detail why this option was chosen rather than the proven more successful method of a split mortgage. Alternatively, given the low success rate associated with arrears capitalisation relative to other options consideration should be given to removing it from the list of approved restructuring options in order to direct the banks to more sustainable solutions. The banks must learn from the solutions that are working and give emphasis to these when they are dealing with mortgages in distress.”