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There is 'no silver bullet' to address mortgage arrears, says financial regulator

Matthew Elderfield says Ireland’s mortgage arrears problem is going to get worse before it gets better.

FINANCIAL REGULATOR Matthew Elderfield has said that Ireland’s mortgage arrears problem remains one of the biggest challenges of the financial crisis but that there are no ‘silver bullets’ to tackle the issue.

Speaking to Harvard Business School today, Elderfield said that the latest mortgage arrears data “is a source of concern”, but that Irish banks have a “substantial capital buffer with which to absorb losses on their mortgage portfolios”.

“The Central Bank believes it is time to do just that,” he added.

In mid-February, data released by the Central Bank showed that the average Irish mortgage is €1,453 in arrears (ie three months or more behind on mortgage repayments).

He added that the bank expects the number of mortgages in arrears to continue rising through the coming year because “it will likely take some time before the stock of arrears cases in the sustainable category are resolved through loan modification, bankruptcy, or non-judicial settlement mechanisms”:

This is not a problem susceptible to quick fixes or silver bullets but is going to take more time before the exact scale of the problem becomes clearer and certainly many years before it is resolved.

The regulator noted that although arrears cases are increasing, the “vast majority of customers are still meeting their mortgage obligations” despite many of them being in negative equity.

However, being in negative equity does not equate with being in mortgage arrears and the Central Bank is planning to make it easier for people who can afford to move but are in negative equity to do so.

“Frankly the Irish taxpayer does not have the financial resources to somehow eliminate or reduce negative equity in the mortgage market, either directly or through the banking system, but it does not need to do so in order to tackle arrears,” he said. “Negative equity will I fear remain an unpleasant reality for many borrowers for years to come, but it is encouraging that in the vast majority of cases where customers can still afford to pay their mortgage that they are doing so.”

He said that negative equity mortgages could help people who could afford to move, but are in negative equity, to do so but warned that they post consumer protection issues because the move could involve the homeowner switching to a larger home and taking on more debt.

Two lenders approached the bank in 2010 about launching these kinds of mortgages, and the bank has now decided to set out general criteria – but not “prescriptive standards” – to make the provision of negative equity mortgages easier.

Elderfield also said it was important to have a better understanding of new bankruptcy legislation because although it “is not likely to come in force for a little while yet, having clarity on the policy framework for bankruptcy and debt settlement is extremely important and very welcome”.

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