Has Matthew Elderfield gone far enough on arrears?

by Business Editor David Murphy

The Central Bank’s deputy governor Matthew Elderfield appears to be strong-arming the banks into cutting deals with some over stretched borrowers. The lenders don’t want to admit that is what is happening, but judging from comments by lobby group New Beginning it seems to be the case.

The main issue is whether Mr Elderfield has gone far enough.

At the heart of the Central Bank’s plans is the definition of a “sustainable solution” for a distressed mortgage holder. Among the options listed is an “agreed revised principal sum where offered”. This is as close as the regulators have gone to recommend debt relief. However, Mr Elderfield has left it up to individual banks to decide if that is appropriate.

For many in arrears, the new arrangement they will be offered will take the form of a split mortgage. For example if somebody has a €300,000 loan and they can only afford to repay €150,000 over the next 25 years the debt will sliced in two.

They will continue to repay loan ‘A’ and loan ‘B’ will be parked. If loan ‘A’ is repaid after 25 years and there is no possibility of any of the outstanding €150,000 being paid, then the bank is likely to write off loan ‘B’.

If over the 25 years the customer’s circumstances improve, they may be able to make repayments towards loan ‘B’. That is the theory. In practice, banks will seek full repayment of all borrowings and the customer will wait for 25 years to see what happens with loan ‘B’.

To complicate matters banks are adopting different policies. AIB will not be charging interest on loan ‘B’, however, Permanent TSB plans to charge just 1%, while Bank of Ireland will charge a commercial interest rate, in anticipation of being fully repaid.

So far just over 50 customers have been offered split mortgages. This paltry figure is an enormous indictment on the banks and explains why the Central Bank and the Government have decided to get tough. The concept of split mortgages was proposed as a solution September 2011 in the Government’s Keane Report but the banks have almost completely ignored it.

Bankers don’t want to admit debt write off is likely to happen and with some good reason. If customers feel that there is a possibility of getting half their debts wiped out, it encourages people to stop paying mortgages in order to get a deal. Professor Gregory O’Connor of NUI Maynooth argues this is a significant trend already.

Matthew Elderfield says the “Central Bank believes that some form of sustainable debt relief makes sense. But that is a call for each bank to make on a case-by-case basis.”

The Central Bank’s big stick is that it can withdraw banking licences if lenders don’t restructure half of the mortgages in arrears by the end of the year. The question for Mr Elderfield is whether he should he have gone further and publicly forced all the banks to write off debt.

But perhaps he hasn’t taken that step because he knows debt relief is going to happen anyway.