“More action is needed by lenders to resolve long-term mortgage arrears, to support distressed borrowers and improve the functioning of the mortgage market for all” – Deputy Governor Ed Sibley (13 July 2021)

Speaking at a Banking & Payments Federation (Ireland) breakfast briefing on 13 July 2021, Central Bank of Ireland Deputy Governor Ed Sibley noted that while lenders appear well-prepared for any emerging PDH mortgage arrears cases in the coming months, those lenders need to address some key issues to enable meaningful progress to be made in resolving long-term/deep PDH mortgage arrears cases.

The Deputy Governor’s speech coincided with four new publications from the Central Bank, focusing on PDH mortgage arrears:

Behind the Data: Mortgage borrowers facing end of term repayment shortfalls

Financial Stability Note: The economics of mortgage debt relief during a pandemic

Financial Stability Note: Irish Mortgage Payment Breaks – Extensions and Expirations

Financial Stability Note: Long-term mortgage arrears: Analytical evidence for policy considerations

Notable statistics from last week’s speeches and publications include:

  • One in eight PDH mortgage accounts is in some form of distress, with most arrears cases pre-dating the onset of the COVID-19 pandemic.
  • 13%, or 95,000 PDH mortgage accounts may have an end-of-term shortfall, and approximately two-thirds of those borrowers currently have a moderate, low or uncertain ability to repay that balance at the end of the term of the loan.
  • Of PDH mortgage accounts in more than one year’s arrears, 50% are more than five years in arrears and one in six are more than ten years in arrears.


Payment Breaks

The Central Bank reiterated its message that active engagement and sustainable solutions are the priority when regulated lenders deal with borrowers who availed of COVID-19 payment breaks in 2020 (see COVID-19 Payment Breaks: Active engagement and tailored sustainable solutions remain the Central Bank’s priorities for more information on the Central Bank’s overall approach).

As signalled by the Central Bank previously, more than 172,000 accounts representing €23 billion of Irish lending availed of payment breaks. Borrowers who applied for extensions to their original payment breaks were more likely to have sought previous forbearance, and were more likely to be resident in areas where the workforce suffered a longer-term impact from workplace closures in light of COVID-19. Loans originated before the 2008 financial crisis were the subject of a higher volume of payment breaks than those originated over the last 10 years.

Most of those who availed of payment breaks (extended or otherwise) have now gone back to their pre-existing payment arrangements. 2.2% of those who availed of a single payment break went on to submit a Standard Financial Statement (SFS) to their lenders as a precursor to discussions on potential alternative repayment arrangements (ARAs).  5.4% of those who availed of an extended payment break also went on to submit an STS.  The Central Bank has cautioned that those who availed of payment breaks and those who availed of COVID-19 Government supports could still be vulnerable to financial distress.

For short term (less than one year) arrears, the Central Bank reiterated that effective engagement, assessing the borrower’s circumstances and implementing appropriate support are the “tried and tested” ways of dealing with these cases. But on restructured loans where the borrower is meeting the terms but a shortfall is likely at the end of the loan’s term, lenders must satisfy themselves and the Central Bank that the current restructure is appropriate and that there is a “plausible plan” for dealing with the shortfall.

On a related note, the ECB Supervisory Board Member Elizabeth McCaul this week outlined some practices that banks could improve on as they prepare to deal with distressed debtors.  These include the implementation of more granular early-warning systems, collecting updated information in a more structured way, and promptly recognising stage 2 exposures for the purposes of IFRS9. She also cautioned that banks need to be aware that COVID-19 support measures are potentially masking risk.  In particular, she noted a slight increase in the amount of euro area banks’ NPLs (from €444 billion in December 2020 to €455 billion in March 2021) as a potential indicator that some credit risk deterioration built up during the COVID-19 pandemic may not yet have peaked. She also noted that the number of euro area non-financial corporate defaults dropped 17% in 2020 when compared with 2019 but that while this may look positive, the ECB is concerned that this drop is in part due to the impact of strong support measures which may mask the true extent of potential financial distress.  She emphasised that banks need to remain prudent and recognise financial difficulties and indications of unlikeliness-to-pay at an early stage, and cautioned that it is still too early to release provisioning.


Long-term arrears: issues to be addressed

Central Bank Deputy Governor, Ed Sibley commented that, for longer-term arrears, lender-borrower engagement remains a key challenge. He emphasised that it is never too late for borrowers to engage with their lenders, albeit how the legal system works will continue to be critical to the effective functioning of the mortgage market.  Four key issues were noted as needing to be addressed by regulated lenders:


Inadequate tools to deliver sustainable restructures
The Central Bank’s view is that many ARAs are too shallow to solve underlying affordability issues. It expects lenders to revise their waterfalls of restructuring options to ensure that they are sufficiently ambitious and capable of delivering sustainable solutions. Any ARA offered must be the one that has the greatest potential to resolve the arrears in an appropriate and sustainable manner.


Inconsistent approaches to personal insolvency arrangements
The Central Bank is concerned that, with some lenders, the conversion rate from protective certificate to personal insolvency arrangement is as low as 30%. It expects lenders to review and enhance their approaches to dealing with personal insolvency practitioners.


Inadequate consideration of diverse borrower demographics
Of particular concern to the Central Bank is the fact that 25% of borrowers in long-term PDH mortgage arrears are aged over 60, and it views many of the solutions in lenders’ waterfalls of restructuring options as not being extensive or ambitious enough to address issues specific to this cohort of borrowers. The data published by the Central Bank indicates that there are lower LTV ratios and higher property values in that cohort, and that more innovative solutions are needed.


Greater need for collaboration in seeking system-wide solutions for those in the deepest levels of distress
Approximately 20% of those in long term arrears have no excess income to service mortgage debt after reasonable living expenses are accounted for, and system-wide solutions may be needed to address this.

The Central Bank has asked that lenders review and update their contact management strategies to make it easier for borrowers in long-term arrears to engage with them. Lenders’ boards should challenge and sign-off on those strategies. Lenders should also keep their mortgage arrears strategies under review and ensure that the plans that underpin them are delivering effectively. Lenders’ boards should monitor the implementation of those plans, and should be provided with progress reports by senior management at least bi-annually.


SFS Update

Following its recent consultation on revising its form of SFS (see our March 2021 NPL Update for more detail), a revised SFS will be issued by the Central Bank which will be shorter and more targeted (for use from 1 January 2022 onwards).

NPLs are likely to be a feature of the Irish banking market for the foreseeable future.  We will continue to issue regular updates.