BANKS WILL have to be more aggressive in repossessing properties in the buy-to-let sector, governor of the Central Bank Patrick Honohan warned last night.
He stressed while public policy should aim to avoid the repossession of family homes “where this is unnecessary”, when it came to investment properties, “there are many circumstances in which there is less reason to be inhibited about repossessing”.
He said it was “surely now past time for the banks to be dealing more proactively with the situation of over-indebted buy-to-let borrowers no longer able to service the debts they assumed in order to take investment positions – now loss-making – in property.”
Mr Honohan said the increased repossession could see banks having to manage a portfolio of repossessed buy-to-let properties. It was “not an insurmountable task” and would “facilitate the improved functioning of the property market and getting closer to a market-clearing price by bringing to the market many of those properties which at present are implicitly hanging over it as an excess supply”. At the peak of the boom in 2007 a quarter of mortgages were for buy-to-let properties.
Mr Honohan had little comfort for tens of thousands of homeowners struggling to meet mortgage repayments as he ruled out a widespread debt forgiveness programme, describing it as unaffordable.
Speaking to students at the University of Limerick, he refused to comment on the negotiations over the Anglo Irish Bank promissory note. He refused to elaborate on what level of contact he believed banks should be allowed to have with creditors, other than to say the conduct on mortgage arrears was being reviewed. Banks are prohibited from contacting mortgage holders in arrears more than three times a month.
He said topping-up the banks’ balance sheets by the State had given them a “capital buffer” to absorb potential losses for the next few years, but he warned it was “not enough for any broad strategy of debt forgiveness”.
Mr Honohan suggested that Government policy should be focused instead on helping families avoid the loss of their homes “where this is not necessary” and he cautioned against “creating a perverse incentive for those who can afford to pay their debts to exploit the system at the expense of the rest of society”.
He said “unnecessary debt forgiveness could quickly erode that buffer, placing a further burden on the Government finances, which they are in no condition to absorb”. Mr Honohan called on banks to “work out their problem loans in a measured and realistic way that deals promptly and sensitively with the unrecoverable, but does not shrink from ensuring that affordable debts are properly pursued”.
Mr Honohan accused the banking sector of failing to develop efficient systems of dealing with the personal debt crisis and warned it was in danger of driving people unnecessarily into insolvency procedures set to become law later this year.
He said legislation aimed at tackling the State’s personal debt crisis should only be used as a last resort and in most cases banks and debtors should be able to resolve issues independently of the legal system. He suggested only cases “impossible to resolve in bilateral negotiation, including some situations of complex indebtedness involving multiple creditors” should need to avail of the new personal insolvency legislation.
Mr Honohan said it would be a “major and complex task for the banks to implement at sufficient scale a programme of effective engagement with troubled borrowers” but claimed “early engagement, fair procedures, tailored forbearance or rescheduling adapted to individual debtor circumstances” would be central to the development of a sufficient response. It was in the long-term interest of everyone that the banks continue to ramp up their capacity to engage with and process such debtors.
