Irish Central Bank Deputy Governor Matthew Elderfield pledged to “breathe down the necks” of the country’s banks to deal with unsustainable home loans, as mortgage arrears surge.
Irish banks may need to “warehouse” portions of some loans, allowing “borderline insolvent homeowners” to pay down a smaller part of the loan for a period to ease the burden, Elderfield said in an e-mailed version of a speech in Dublin today. They may also take equity stakes in homes, he said.
“The mortgage arrears problem is one of the biggest remaining challenges for Ireland from the financial crisis,” said Elderfield. While borrowers “who genuinely can’t afford to pay back all their mortgage should get help,” those that can “need to face up their responsibilities,” he said.
Irish home loans more than 90 days in arrears stood at 9.2 percent at the end of last year, according to the central bank, as unemployment trebled to 14.3 percent and house prices almost halved since the real-estate market collapsed in 2007. While arrears will probably rise this year, banks have “a substantial capital buffer with which to absorb losses on their mortgage portfolios,” Elderfield said. Lenders need to be more realistic in using this capital to provide for unsustainable loans, he said.
Ireland has injected 62 billion euros ($82 billion) into its banking system over the past three years to cushion lenders against soaring bad loan losses. Still, banks will probably need more capital over the “medium term” as they prepare for the implementation of Basel III financial rules in 2019, Elderfield said.
“The sooner the banks can be restored to profitability, the better they are able to meet these medium-term targets, ideally from market sources,” he said. The nation’s two largest banks, Bank of Ireland Plc and Allied Irish Banks Plc (ALBK), have about 5 billion euros of so-called deferred tax assets, which they can use to reduce the tax paid on future profits.
As the central bank pushes lenders to find solutions for unsustainable mortgages, the government is reshaping personal bankruptcy and insolvency laws. Troubled borrowers seeking at least partial mortgage writedowns in out-of-court settlements need approval from 75 percent of creditors, according to proposed legislation.
“There are considerable uncertainties regarding the impact of the forthcoming bankruptcy law reform on borrower behavior,” Elderfield said.
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