Media reports that AIB will begin contacting mortgage customers in arrears before the summer with a view to restructuring and possibly even offering some deal on debt is a good news story. But this is not new.
Mortgage lenders are required to engage with their customers in arrears as part of the Code of Conduct on Mortgage Arrears (CCMA).
In recent weeks, the Central Bank Governor, Mr. Patrick Honohan has again been highly critical of banks for their lack of action on mortgage arrears. He and his deputies have criticized banks for not doing ‘more’ for those in arrears, they have been “pulling their hair out” in frustration in the lack of progress by banks.
Again, this is all nothing new, the Central Bank has been highly critical of the commercial banks for some time.
It would be easy to take a view that banks may finally be under some real pressure to do more…perhaps even offer ‘a deal’ on mortgage debt. This would be a mistake.
Offering any amount of debt write-down would open a Pandora’s Box. Beneficiaries would immediately hit the news headlines and those not in arrears would be tempted to join the ‘me too’ queue. It’s a situation that would quickly get out of control…banks are fully aware of the risks.
Instead, what is much more likely to develop is a situation where banks may forgive part of mortgage debt where a foreclosure has already taken place and the negative equity aspect of a mortgage is not pursued. And since the Central Bank Governor has already stated that he does not expect many foreclosures to happen on residential (owner-occupier) mortgages, the audience appears to be buy-to-let.
Approximately 18% of buy-to-let mortgages are already in arrears according to the Central Bank statistics. Many buy-to-let property owners are ‘accidental investors’. In other words, they own just one other property which they purchased at a unique period during the property boom. This usually occurred when they decided to move home and instead of selling their old home, held onto it and rented it out (in some cases with the encouragement of the bank), releasing equity to assist the purchase of their new home.
Many such property owners find that they are uniquely leveraged where their ability to service their buy-to-let mortgages directly impacts their ability to service their residential mortgages also.
The Central Bank is aware of the link, and so are the banks.
For those already in mortgage arrears, hope is the necessary companion. Even the slightest glimmer of hope that banks could forgive some debt will resonate enormously. Many are too wise and discount the prospect, but some may grasp on.
It is highly unlikely to banks, desperate to escape the clutches of state control are about to ‘soften up’ and make debt write-down available to the masses. Nothing of the sort will happen. Instead, banks will, and must continue to do what they do best…find ways to make a profit. And the best means of achieving their goal is the exact opposite to debt write-down.