Household financial distress is at unprecedented levels as seen in the extraordinary rates of arrears in owner-occupied mortgages, according to Central Bank governor Patrick Honohan.
Speaking at the bank’s conference on distressed property markets this morning, Mr Honohan said negative equity is not a rationale for debt relief and that the bank will be "ramping up" its contact with financial institutions that have been "behind the curve" in addressing mortgage arrears.
He added that although repossessions may be inevitable for many investment properties, considerations would be made for people who are doing their best to maintain repayments.
Long-term debt modification will be needed for those facing over-indebtedness or bordering on insolvency, he said, but there will be "consequences" for uncooperative borrowers.
He said banks had a responsibility to deal more proactively with borrowers in mortgage arrears.
"Banks will have to act more proactively and liberally in respect of those who cannot realistically pay, if they are to avoid the costs and inefficiencies of having to respond to PIA (personal insolvency arrangement) proposals or bankruptcy cases," Mr Honohan said.
"Given how little is often recovered by creditors from payment plans, in many if not most cases, a well-designed loan modification bilaterally arranged between borrower and insolvent debtor can be better for both than the net outcome of a PIA or bankruptcy."
The Central Bank’s own figures revealed in December that more than one in 10 mortgage holders were in arrears of three months. Some 26,770 or 17.9 per cent of buy-to-let mortgages were in arrears of more than 90 days at the end of September.
Mr Honohan said permanent debt relief must be limited to people “truly over-indebted and close to insolvency”. Negative equity was not a good enough reason on its own to ease debt, he added.
"Still, at the end of the day, most would agree that there must be consequences for an uncooperative borrower refusing to make a reasonable effort," he said.
PIA allows for a six-year arrangement between debtors and their creditors to spread out mortgage payments. Payment plans can be restructured to extend the term, meaning monthly repayments would be reduced.
The legislation also includes a new bankruptcy regime, allowing debtors back into business in three years rather than 12.
Mr Honohan said banks were behind the curve in addressing the problem of mortgage arrears.
He said while they have in some cases moved to capitalise arrears and introduced temporary interest-only payment schedules, their measures do not fully address the problem of spiralling debt.
“Such temporary forbearance measures do provide cash-flow relief to the borrower and have the considerable merit of bringing their payments back on to a schedule and avoiding the arrears spiral,” Mr Honohan said.
“But they do not deal with situations where the actual and prospective circumstances of the borrower, combined with the existence of the new insolvency framework, mean that full recovery of the loan cannot realistically be assumed.”
