An equity scheme for Long Term Mortgage Arrears

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The Central Bank of Ireland published a series of papers this week on the subject of mortgage arrears. One of these papers 'Long-term mortgage arrears: Analytical evidence for policy considerations' clearly shows that for many mortgage borrowers, the impact of the 2008 financial crash is still being felt. Key findings from this report show that:

• Among Long Term Mortgage Arrears (LTMA) borrowers engaging with a retail bank, half have debt repayments larger than 43 per cent of their monthly income, far in excess of payment burdens generally considered affordable.
• Despite the price gains of recent years, over a quarter of LTMA borrowers remain in negative equity.
• Close to one fifth of engaged LTMA borrowers have incomes so low that they can make no repayments whatsoever, once reasonable non-housing expenses are accounted for. For these borrowers, the only solutions that involve retention of homeownership will be those that lead to significant reductions in monthly repayment obligations.
• One quarter of engaged LTMA borrowers are over 60 years of age. For these borrowers, future income generation capacity is minimal, and solutions that retain homeownership while clearing debt balances may need to rely on the value of the property in the future.

A range of supports is required that take into account the individual circumstances of households in mortgage arrears. One such support, proposed by Social Justice Ireland in our 10 Point Plan to Deliver Housing for All, is for Government to take an equity stake in homes with mortgage arrears. Our Budget Choices policy briefing, Delivering a Fair Recovery, proposes that Government start with those in arrears of more than 10 years in Budget 2022. The Government is not adverse to taking equity in private homes, as has been demonstrated by the Shared Equity provisions in the recently passed Affordable Housing Bill, 2021. The problem is these schemes tend to favour those who need them least and artificially maintain high property prices. Our proposal would see the State use the Shared Equity model to support those who need it most to avoid homelessness.

How would it work?

The actual working of the scheme would be a matter for policymakers, however based on the current model set out in the Affordable Housing Bill, Social Justice Ireland proposes the following possible scheme: 

1. Government would establish an equity fund to support borrowers in long-term mortgage arrears.
2. A call would be made to borrowers who meet eligibility criteria to apply to access the fund in exchange for giving the State an equity stake in their property.
3. An assessment of the borrowers' eligibility, property condition and equity proportion would be conducted and approval granted / denied within a specified period set out in Regulations.
4. If the application is approved, the State would pay the equity amount direct to the mortgage lender, decreasing the amount owed by the borrower and, consequently, their mortgage repayments (it may also be the case that the amount is used to clear arrears on the mortgage if the borrower can sustain the mortgage repayments, but not the additional arrears repayments).
5. The equity stake would be registered as a charge on the property, subordinated to the mortgage(s) registered at the time of application. No subsequent subordination in favour of new mortgages would be permitted save in the case of a remortgage by the borrower to take advantage of more favourable rates and reduce their indebtedness.
6. The borrower will have the option to repurchase the equity at a point in time.

Who would be eligible?

Eligibility criteria would be set out in Regulations, however Social Justice Ireland suggests that this take into account research from the Central Bank of Ireland on profiles of borrowers in long-term arrears and tailor criteria to include as many as possible within the scheme.

How much would it cost?

In our Budget Choices 2022 policy briefing, Social Justice Ireland proposed to commence this scheme with borrowers in arrears of more than 10 years. The latest data from the Central Bank of Ireland indicate that 5,416 mortgages were in arrears of more than 10 years at the end of March 2021, owing a total of €1.4bn of which €783m was arrears. Funding for this scheme would therefore need to be levied at between €783m and €1.4bn.