Equity Scheme for Long Term Mortgage Arrears needed

According to the latest Central Bank figures for Q3 2023, 708,810 private residential mortgage accounts for principal dwellings are held in the Republic of Ireland, valued at just over €100 billion. Of these, 47,325 accounts were in arrears, an increase of 434 accounts (or 0.93 per cent) over the quarter. The number of accounts in early arrears (up to 90 days) has increased by 482, driven primarily by the non-banks.[1] Non-bank entities are Retail Credit Firms and Credit Servicing Firms and do not, as the name might suggest, provide banking facilities. In recent years, mortgage banks have been selling mortgage loan books to non-bank entities as part of a strategy to reduce the number of non-performing loans (NPLs) to within EU parameters. Consumer advocates have expressed concerned about the lack of consumer protections for borrowers, particularly those whose loans were performing, while those in favour of this strategy cite the high level of NPLs acting as a barrier to accessing better credit terms, thereby contributing to Ireland’s high mortgage rates. These borrowers are, arguably, most at risk of losing their home should the financial institution pursue their right to take possession of the property.

29,298 mortgage accounts were in arrears for more than 90 days, 4.1 per cent of all principal dwelling house (PDH) accounts. The number of accounts in long-term arrears (more than one year) stood at 20,925 (3 per cent of all PDH accounts) at end of September 2023. 

Legal Proceedings 

According to the report, the "majority of accounts in mortgage arrears are not currently subject to legal proceedings". 67 per cent (31,674) of accounts with arrears had "no formal demand" issued at end of September 2023. 5,715 accounts (12 per cent) were at the formal demand issued stage but legal proceedings had not yet started. 5,380 accounts (or 11 per cent) are currently part of a legal process, 37 per cent of which have been in the legal system for over five years. At end-September non-bank entities held 16 per cent of all PDH mortgages outstanding and 81 per cent of all PDH accounts in arrears over one year.

A recent Report from Eurofound, 'Unaffordable and inadequate housing in Europe' also notes that overall, "Rent, mortgage and utility arrears have declined since the Great Recession (2007–2009). However, for the cohort still trying to find a resolution for their long term mortgage arrears, more needs to be done. 

Budget 2024: No Focus on Mortgage Arrears

The Consumer Price Index division with the largest increase in the 12 months to August 2023 was Housing, Water, Electricity, Gas & Other Fuels (+17.3 per cent), with actual rents for housing and mortgage interest increasing by 18.3 per cent, and Mortgage Interest alone increasing by 51.3 per cent.

Budget 2024 introduced Mortgage Interest Relief at 20 per cent for borrowers with mortgages between €80,000 and €500,000 who can demonstrate an increase in mortgage interest in the year 2023. This will be available to an estimated 165,000 mortgage holders, many would have been on low tracker rates in the previous decade, irrespective of affordability. Social Justice Ireland regrets that a more targeted approach was not taken with a specific subsidy for borrowers who are struggling with their mortgage payments. We further regret that more support was not provided to families in long-term mortgage arrears who have not recovered since the 2008 crash. Social Justice Ireland has proposed an equity scheme for borrowers in long term mortgage arrears for whom Mortgage to Rent and insolvency are not suitable.

An Equity Scheme for Long Term Mortgage Arrears 

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 and that Government start with those in arrears of more than 10 years. 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?

Social Justice Ireland proposed the commencement of this scheme with borrowers in arrears of more than 10 years. Funding for this scheme would need to be levied at between €783m and €1.4bn. 

[1] Non-bank entities comprise of Retail Credit Firms and Credit Servicing Firms. More detailed information on these institution groups is available on the Central Bank website here.