AIB has taken a refreshing approach to the problem of mortgage arrears
For five years, politicians have been carping about the slow-learning banks not writing off mortgage debt for homeowners in arrears. Now AIB is doing just that. But its actions are not being met with universal approval from public representatives.
Fianna Fáil’s Michael McGrath said whether a family gets a sustainable solution to its mortgage headache depends on which bank provided them with their loan.
Independent TD Stephen Donnelly said he “welcomed” the development but called for a more “systemic” approach. He remarked that although AIB restructured their mortgage, in one case the family involved still had problems with other unsecured debts to credit card companies or credit unions.
This was what the Insolvency Service of Ireland was originally established to achieve – agreements to deal with all debts. Next month the organisation will produce figures for the numbers of people who have gone down the insolvency route. The figures will be low but the organisation is likely to stress that the pipeline of deals is growing.
The individuals who have secured Personal Insolvency Arrangements (which cover mortgages and unsecured debt) have won significant write-offs. The problems is that numbers using the service remain very low. But the service’s existence may be forcing banks to become more realistic.
One answer is for the Central Bank to introduce a uniform system for dealing with mortgages arrears and force the banks and unsecured lenders to implement it. But the Central Bank’s policy has been to leave it to the banks to decide how they will solve the problem.
AIB has taken a refreshing approach, bitten the bullet and put the rest of the banks to shame. Its split mortgage sees a portion of debt written off and a second part of the mortgage being put to one side or warehoused. This leaves the borrowers with a new loan which is no more than 80% of the current value of the home.
If the borrowers make an attempt to pay off some of the warehoused portion of the loan, the bank will write off more money from that loan. The smart part of this arrangement is that while AIB does write down some debt there is a clear incentive for people to make a contribution to the warehoused portion of their loan. These arrangements will only apply in a minority of cases where borrowers are in arrears.
The bank has broken away from other members of the Irish Banking Federation which has remained curiously silent on AIB’s innovation.
The attitude of the remaining members of the industry is that the danger of write-offs being exploited by unscrupulous borrowers is so large as to justify not writing off debt as a policy. That has resulted in the problem dragging on for years.
The Governor of the Central Bank. Patrick Honohan. does not want to micro manage the lenders – instead he wants them to come up the solutions. So the Central Bank has ordered the banks to sort out 25% of mortgage accounts which are in arrears by the end this month.
AIB’s mortgage book is not the worst in the Irish market, but it still has decided that writing off debt is one possible solution to take to clean up the mess.
How long will it be before the other banks stop wasting time and follow suit?