Earlier this year the Central Bank set both a target and a deadline for banks to offer some financially distressed customers a way out of their debt difficulties. By last June, the banks were required to offer one fifth of their customers, who last March were over 90 days in arrears on loan repayments, a long-term sustainable solution to their mortgage problems.
The Central Bank acted to ensure that the banks, which have delayed far too long in tackling the mortgage arrears crisis, finally did so. But what the Central Bank meant by a long-term sustainable solution, it would seem, became a matter for the banks to interpret and decide themselves. And for three days this week, a succession of bank executives came before a joint Oireachtas Committee on Finance and outlined how their institutions had fully complied with the Central Bank directive. All claimed the banks had met the deadline and exceeded the target set for offering customers in arrears sustainable debt solutions.
But the banks had done so in their own fashion and in a variety of ways: by restructuring loans, splitting mortgages, reducing payments and issuing thousands of legal letters. Whether those solutions are acceptable to the Central Bank remains unclear; likewise whether they prove acceptable and sustainable in the case of those to whom they have been offered.
What emerged clearly from the hearings was the reluctance of all banks to engage in debt forgiveness as well as their heavy reliance on legal letters as part of the proposed solution to the mortgage crisis. This resort to the law is a response, in part, to the significant increase in strategic defaulters – those who can but don't repay their loans and who refuse to engage with the lender. AIB estimated that one fifth of those in arrears were in that category while Ulster Bank reported an even higher number.
The Government and the Central Bank have partly exacerbated the strategic default problem through their inaction. In 2011, Ms Justice Dunne found a loophole in the law that prevented banks from repossessing the homes of defaulting borrowers. One likely effect of the Dunne judgment was to boost the number of strategic defaulters. But just why it took the Government two years to close the loophole – which involved a simple amendment – has not been explained nor why the Central Bank failed to press harder for the Government to do so sooner.
Taxpayers have already financed bank recapitalisation. And while the banks have had the resources since 2011 to manage the mortgage crisis, they have shown themselves reluctant to act. However, the key to a sustained economic recovery is a banking system restored to full health. And that first requires a resolution of the mortgage crisis, something the new personal insolvency service that starts next week should help to expedite.