The Irish Banking Federation is the representative body for the banking sector, representing all banking institutions, some 70, in the State. Today's presentation will focus on the Irish Mortgage Council which looks after the interests of the mortgage providers, of which there are 13 in total. Most are well-known household names and provide a range of other financial products. In line with the increasing level of competition in this market, some are Irish-owned but others have UK, Danish, Belgian and Dutch parent banks. The credit unions, of which there are more than 500, are also an important provider of credit.
According to the Central Bank, the total amount of credit outstanding for private households at the end of March 2009 comes to €171,798 million. Mortgage finance makes up 87% of this while 3% comprises investments and 10% personal loans such as credit cards. It is important to bear in mind that 87% of outstanding credit is secured on property.
Over the past several years there has been much comment on the level of debt per household. Contributors who have been here before have emphasised that because we have had an extended period of economic growth, we have moved up into the list of other advanced countries with similar levels of development. While we are fairly high on the list, we are not by any means the highest. Ireland ranks fourth behind Norway, Netherlands and Denmark, based on an OECD report.
Another difference between the composition of credit in Ireland vis-à-vis most of those countries is that in most jurisdictions the levels of debt will be fairly well dispersed across different types of borrowing, whereas in Ireland it is heavily concentrated on mortgage finance. One of the reasons for this is because mortgage finance over the last decade or more has been extraordinarily cheap given the benefits of Ireland’s membership of the eurozone and the ECB rates, which were consistently very low over that period. Principally, when people sought finance they would, invariably, access it through mortgage finance because that was the cheapest and most efficient form of credit available.
The other side of the balance sheet is savings. The next chart comprises a similar composition of countries. While Ireland is up there in terms of the levels of personal debt, equally we are high on the league as regards personal savings, or savings ratios and this is measured by the European Commission. Savings have been increasing very strongly and that trend is expected to continue, according to the forecasts. This is important because in terms of the balance sheet of Ireland Inc. and indeed individuals, while there may be significant borrowings in some cases, there is also quite a significant pool of savings.
Clearly, not everybody in the country is borrowed. Some 47% of the population, almost half, has no borrowings at all — and that dispels any notion to the effect that everybody in the country is indebted. It means, of course, that the level of debt is concentrated among a smaller group of people. Of the 53% who are borrowed, based on independent research carried out by Amárach Research this year, 21% of those found it relatively easy to manage their debt, 24% said they had to be careful as regards balancing outgoings and income, 6% said it was a cause for concern and 2% found it to be a very real problem as regards the managing of debt. The general conclusion from that is a significant majority of people are able to manage their debt, but that is not to deny there is an important segment who have difficulties managing. Those are the people we are focusing on today.
In terms of mortgages, 66% of homes have no mortgage. Of those that have, 3% have a mortgage which is 20 years or more outstanding. I shall not go through the rest but one may see how much time is left as regards those mortgages. Some 110,000 mortgages in total have been drawn down in the last year, of which 20,000 were for first-time buyers who account for more than 20% of the market. The mortgage market obviously has slowed down very considerably and the level of applications is much lower. At the same time, because of low interest rates and other factors, affordability has improved dramatically. However, many first-time buyers are reluctant to enter the market because of the perception that house prices have further to fall. We have been looking at figures to do with applications and approvals and while those levels have started to pick up, people with approvals are tending to defer using them because they are standing back from the market. This is somewhat off the point, but it might be of interest to the committee.
As I said, affordability has improved considerably for people. At the end of September, by our calculations, the repayments on an average loan had fallen by almost €500 per month, from €1,200 to €800, a drop of 38% on average.
The core of the issue is what is being done at the moment to assist borrowers. A number of things are happening, as the committee has probably heard from other presenters, but I shall go through them in some detail. There is the code of conduct on mortgage arrears, which the committee will probably be familiar with. This was an IBF code which was subsequently upgraded and placed on a statutory footing by the regulator. There is a joint protocol with the Money, Advice and Budgeting Service, MABS, which covers the whole area of debt management. There is the consumer protection code, which offers safeguards to consumers taking out loans and requires lenders to observe certain standards. There is also the whole are of overhauling the debt enforcement system, because we still labour under a very archaic and anachronistic debt enforcement system which has, as its ultimate sanction, the jailing of a debtor. We believe this is totally out of date and should be reformed, and the Law Reform Commission has said likewise. There is also the mortgage interest supplement which is provided by the Department of Social and Family Affairs.
I want to talk about some individual cases of practical support, to illustrate what banks are doing in real terms for customers where they encounter difficulties with personal debt. There are many safeguards for borrowers as regards the code of conduct on mortgage arrears. For a start the lenders have to adopt flexible procedures in dealing with arrears situations. They must wait at least six months before starting legal action and in the case of recapitalised banks, it is 12 months. The code covers all mortgage lenders including the sub-prime lenders, and it is a statutory initiative that builds on a code the IBF developed, which had been in place since 2000. Levels of repossession are, by international standards and from benchmarking against the UK, still relatively low. There were 96 repossessions in total last year, which is 0.01% of all mortgages. There are 35 repossessions in the UK for every one in Ireland, taking population balance into account along with other factors and 1.44% of mortgages here are in arrears for three months or over. Again, these are probably figures that have been shared before with the committee.
As regards the code of conduct on mortgage arrears, there is a whole range of solutions on offer. For a start, the lender is obliged to wait six months and 12 months in the case of recapitalised banks, before any action can commence. There is a range of options available on a case-by-case basis. People can defer their payments for a period, they can extend the term of the mortgage, change the type of mortgage or capitalise the arrears and the interest. Repossession is very much a last resort, I emphasise, and the code highlights the critical importance of the lender and the borrower communicating. One message I should like to get home today is that it is crucial that once a borrower is in difficulty, he or she should immediately contact the lender. The earlier this is done the easier it will be to resolve the issue. The longer the borrower stands back from the problem and does not engage with the lender, the more difficult it will be to sort out at a later stage.
As regards the MABS protocol on debt management, this is something that has been agreed in the last month. Again, the committee will be familiar with the work of MABS. It gives priority to putting solutions in place for customers and personal borrowers as against legal proceedings. The whole priority is to apply a range of solutions short of commencing legal proceedings. The most important phrasing in the document is to the effect that the emphasis is on "developing a mutually-acceptable, affordable and sustainable repayment plan" for the borrower. We put that agreement in place, having worked on it over the last year or so. It has been discussed with all the parties involved and draws on a long-standing working relationship we have with MABS, which goes back over two decades. All the IBF lending institutions have adopted this code and it is open to other lenders to adopt it. The sub-prime market has voluntarily adopted it as well.
We shall formally put it into operation in September. In the meantime, we shall embark on a campaign of promoting it and disseminating the code's details to all the relevant parties. This will be done in conjunction with MABS in the coming months and we shall prepare information materials and so forth on it for our members.
As regards a consumer protection code, the lender has to act to protect the consumer's interests and ensure the credit is suitable for the purpose the borrower requires it. The lender must ensure the borrower has the ability to make the repayment and there is no pre-approved or unsolicited credit, which has been banned under the code for some time. We have worked with the Financial Regulator in the development of this. The code came into effect in July 2007 and all our member banks are fully adhering to it. That code will be reviewed at the end of the year, and the Financial Regulator undertakes regular inspections to ensure the code is being complied with.
We fully support the overhaul of the debt enforcement system. We want to put the focus on seeking workable alternatives to imprisonment or similar sanctions because we do not think it has any place in the debt enforcement regime. We have made submissions over the years to the Department of Justice, Equality and Law Reform and have made our position very clear. We are working with groups like the Money Advice and Budgeting Service, MABS, the Legal Advice Centres and with the Law Reform Commission to make the views of our members clear on this matter and to lend our support in whatever way we can to having the legislation changed.
We also have a role with mortgage interest supplement. This is a service provided to community welfare officers from the Department of Social and Family Affairs. We provide the documentation in support of the claims for people to process this as quickly as possible. We are currently talking to the Department about proposals to speed up the efficiency of the processing of these applications. We are looking at the information we provide and standardising the form used to process the application. We are also looking at whether the mortgage interest supplement can be paid directly to the lender. We are liaising with the Department of Social and Family Affairs on this to try to develop that process and make it more efficient for those who wish to avail of the scheme.
I have a few examples that demonstrate the practical support that is being offered by the institutions to their customers. One of them is the case of a young first-time buyer who took out a mortgage in 2007. He had a repayment schedule of almost €1,000 per month. He became unemployed earlier this year and found that he was not able to maintain the level of repayments. The bank has come to an arrangement for the next six months to accept a substantially lower level of payment, and that will be reviewed after six months when personal circumstances might change. An example of a personal borrower is the case of an older single person who had developed a medical condition in 2008 which precluded him from gainful employment. He had very little assets or savings so the bank now accepts a much reduced payment from that person. That will again be reviewed after a period of time. The third example is of a couple with a mortgage who became unemployed. Their level of payment was unsustainable given their changed economic circumstances. Payments on that account have been put on hold by the bank for six months. These are just examples of the commitments that are in the code on mortgage arrears and the commitment that is in our agreement with MABS. There are practical examples of where this is being applied.
In summary, a large proportion of people have no borrowings but that is just a statement of fact. For those who have borrowings, a significant segment of them have real difficulties. The majority with borrowings are managing well but for those who are not, we are working with customers and with our members to put in place a range of measures to help people in those situations as best we can. Where consumers require support with debt, we are working with them to try to help them. The banks are committed to a supportive role because, at the end of the day, it is in the banks' interest to help the customer through a particularly difficult period. I emphasise again that early communication with the lender is critical.
