Many banks have used solicitors' letters to reach arrears targets

By Business Editor David Murphy

Stuffed with taxpayers’ money, comforted by a stabilising economy and buoyed by signs of life in the property market, the bankers are regaining their swagger.

That change in attitude manifests itself in their behaviour towards people in arrears. It is now clear the bankers have broken the spirit of an agreement with the Central Bank.

That pact was aimed at securing lasting solutions for people suffering with mortgages they cannot pay and homes they cannot sell.

Technically, bankers have not broken any rules. But they found a loophole and they are using it.

Six months ago the Central Bank instructed lenders to offer lasting solutions to 20% of borrowers in arrears by the end of June.

The banks were to be forced to meet the targets because they would have to set aside capital in respect of the mortgages in arrears which had not received an offer. That meant failure to meet the goals could cost the banks dearly.

But what exactly did offering solutions really mean? Last March Matthew Elderfield, the then head of the Financial Regulation at the Central Bank, released a detailed document which specifically asked banks to set out “loan modifications or resolution” for distressed mortgage holders.

Arranging mortgage restructuring requires significant work.

Banks need to thoroughly assess borrowers’ net cash flow, family circumstances and level of negative equity. It also requires the customers to co-operate with the banks.

Ulster Bank’s CEO Jim Brown claimed last week that 35% of borrowers in arrears were not engaging with the company.

There is little doubt there are borrowers who are refusing to communicate, which certainly makes the banks’ task harder. But banks were supposed to be restructuring loans, writing down borrowings and extending mortgages where possible.

In extreme cases where customers were incommunicado – or where the situation was hopeless – banks can threaten legal action which in many cases will lead to repossession, according to the Central Bank.

But instead of focussing on the hard work of offering lasting solutions, the banks carpet bombed mortgage holders with 15,000 solicitors’ letters.

Ulster Bank’s executive Steve Bell indicated the bank used the letters as a mechanism to hit the target.

He told the Oireachtas Finance committee: “The target issue was there to drive better payment solutions not to drive litigation. But when a target is issued that has significant consequences for not hitting it, then a board of directors will do what they have to do to hit the target.”

But there is a much more demanding goal regarding the number agreements banks are expected to conclude.

They are due to secure arrangements with 15% of borrowers by the end of this year. That will increase to 25% by the end of the first quarter of next year.

With 97,894 owner occupier mortgage accounts in arrears of 90 day or more at the end of June that means the banks have to finalise deals with more than 24,000 mortgages by the end of March.

That goal will get progressively more demanding.

The Troika is pushing for Irish banks to have concluded arrangements with the vast majority of people in arrears by the end of next year.

The danger is that if the target is too high banks won’t have the necessary time to assess whether an owner can remain in a home or the banks should force them to sell.

While the arrears problem has been dragging on for too long, forcing the wrong solution on borrowers could be a big mistake with dangerous social consequences.