We will now hear statements on the report of the interdepartmental working group on mortgage arrears. Following the statement of the Minister of State at the Department of Public Expenditure and Reform, Deputy Brian Hayes, each Senator will have five minutes to speak. This time limit will be strictly adhered to, as many Members wish to speak. The Minister of State will be called on not later than 6.55 p.m. to conclude the debate which will finish not later than 7 p.m.
Report of Interdepartmental Working Group on Mortgage Arrears: Statements
I thank the Acting Chairman for giving me the opportunity to respond on behalf of the Government to the Keane report which was published recently.
Like all Senators, I am acutely aware of the enormous pressures on the people. Those who face the twin problems of negative equity and distressed mortgages demand that the Government respond with effective solutions to the nightmare they face. Our response to the problem will define how an entire generation views politics. The Keane report is a good starting point, but that is all it is. What is needed, as the Minister for Finance, Deputy Michael Noonan, has acknowledged, is a clear plan throughout government to implement those ideas that can work to provide relief for those in this appalling position. That is what we are going to do, with an implementation strategy which will deliver real solutions.
We are not bound by the report. I very much disagree with its conclusions on providing support through the tax code for those who bought at the peak of the boom. Helping people through enhanced mortgage interest tax relief, particularly those caught in negative equity and who are meeting their repayments in full, is both a prudent and a sensible use of the taxation code. This issue is under active consideration and is, of course, a matter for the Minister and the Government in their deliberations on the framing of the budget. At this stage we should rule nothing in or out.
Let us be absolutely clear about what has happened. The banks cannot slither away from their responsibility for creating this mess. They were on steroids during the boom which was reflected in totally over-hyped property prices. They were the ones which pumped money into the market, which introduced 100% and higher mortgages, as well as 35 and 40 year mortgages. They cannot now behave like Pontius Pilate, wash their hands and walk away from the problem.
The covered institutions have a particular responsibility in this regard. They have been provided with public capital to allow a debt write-off for persons with unsustainable mortgages. Their failure to date in providing for this represents more of the same denial that was such a feature of the years leading up to the crash. The public has done the heavy lifting on behalf of the banks. It is now time for the banks to step up to the plate and they need to get on with the job in hand.
This debate in Seanad Éireann is crucial, as are the various committees of the Houses working on this problem. The Government does not have all the answers. Therefore, I appeal to all Members to work with us in coming to agreement, where that is possible, and setting out a common approach to the problem. However, solutions have to be realistic and applicable.
Like many others in this debate, I am particularly concerned about that group of young people who bought during the peak period of the boom and now find themselves in substantial negative equity. Many of them were seduced into taking out a mortgage by the aggressive marketing and promotion tactics of the banks. In many cases, the banks failed to adequately stress-test borrowers. There is a social and moral imperative on the banks to help those who are in difficulty with their mortgages. Mortgage holders are customers. They are not there to be squeezed for the last drop. The family, social and economic consequences of not taking action are too high.
The report under consideration should be taken in conjunction with the strong remarks made by the Governor of the Central Bank and, particularly, the very extensive speech made by the deputy Governor, Mr. Matthew Elderfield, in Cork recently. The Governor of the Central Bank has made it clear to the covered institutions that they have been provided with sufficient capital to deal with future losses on their mortgage books. The Central Bank and the Government are at one. It is high time the banks got on with the job in hand. Where mortgages are manifestly unsustainable, it is time they were written down. In his speech in Cork Mr. Elderfield set out in clear terms the vigorous approach the Central Bank would take in forcing the lending institutions to act more decisively and fairly. He was particularly severe in his criticism of the sharp practice of banks which raised interest charges on standard variable mortgages in an attempt to compensate for their losses on tracker mortgages.
There is no one solution which will work in all cases. The residential mortgage sector is multi-layered and complex. The stresses in the mortgage sector are a consequence of falling prices, falling incomes, rising unemployment and exceptionally low levels of activity in the housing market. According to the latest Central Bank report, the total number of mortgages is approximately 777,000, with a total value of just over €115 billion. We are speaking about a very large number of mortgages and a very large amount of capital. Within this figure is a wide variety of mortgages in type, size and duration. Analysts have estimated, for instance, that 25% of the residential mortgage market comprises buy-to-let mortgages. Third parties guarantee many mortgages; this is particularly the case with regard to mortgages taken out by younger people at the height of the property boom when parents acted as guarantors for their children.
The Government's position is very clear. We have three priorities: we want to keep people in their homes where this is the clear wish of the mortgage holder; we want to reduce the burden on homeowners facing mortgage servicing difficulties; and we want to redress the power balance between lending agencies and mortgage holders. Steps have been taken to date, but much more needs to be done.
I have been critical of the implementation strategy adopted by the banks in respect of the modest proposals made by the Cooney group which, as Members are aware, reported late last year. It is simply unacceptable that it has taken the banks more than eight months to implement the sensible idea that up to one third of mortgage interest could be set aside for two years for those persons who find themselves in this position. The Central Bank has published, and is strongly enforcing, a code of conduct on mortgage arrears. The bank has recently updated that code and has published a useful guide for mortgage holders who are encountering difficulty. Much more needs to be done to explain the rights of people in this position.
Earlier this year a mortgage arrears resolution process was put in place to outline the procedures that should be followed by lenders and borrowers and more than 69,000 mortgages have been restructured to date. It is disturbing to note, however, that 30,000 of these restructured mortgages have gone into arrears. Clearly the banks are not being realistic in their restructuring proposals. A restructuring proposal should have the capacity to last for a reasonable period of time. In any restructuring plan the ability to pay and a reasonable disposable income are essential ingredients.
The Keane report suggested a series of measures which will help some mortgage holders who are in difficulty, including a mortgage-to-rent scheme, a mortgage leasing scheme, a split mortgage scheme and a trade down scheme. The Government is moving rapidly to implement some of these suggestions on a pilot basis. Other measures such as debt for equity and shared ownership options may benefit some people and these will also be considered. The report also proposes a new independent mortgage advisory agency which would act as an advocate on behalf of mortgage holders during negotiations with lenders. Such an agency will help to redress the power imbalance which currently exists between lender and borrower.
Early in the new year the Government will bring forward major reform proposals in the area of personal bankruptcy. This legislation will be of benefit to those who have unsustainable debts, including unsustainable mortgage debts. In drafting the legislation careful consideration will have to be given to the danger of providing perverse incentives to either borrowers or lenders. In the meantime the prospect of legislation may be an incentive to lenders to move with more urgency in resolving mortgage arrears.
The interdepartmental group rightly points out that mortgage arrears are influenced by three factors, namely, affordability, negative equity and future prospects. Affordability is obviously the key metric in any discussion of mortgage arrears. Changes in people's ability to pay their monthly mortgage obligations will be strongly influenced by changes in employment status, salaries and tax rates. The prospects for some of the people who are currently experiencing difficulties will change for the better in the future. As the Keane report notes, predicting how incomes, interest rates and house values will change in the future is by no means an exact science. As the economy stabilises and growth returns, job prospects and salary levels will get better. Improved mortgage affordability will be a consequence of a stronger economy.
The other factor which is key to changing the outlook is a fully functioning residential property market. In 2010 the number of new mortgages was equivalent to the same number given out in 1971. This is a clear sign that the market is now dysfunctional. Nobody wants a return to a boom and bust cycle in residential property but it is in the clear interest of mortgage holders and the wider economy that we have a property market which functions at sensible levels of activity. Confidence is critical to this. Confidence will return when a clear resolution is found to the sovereign debt crisis and the associated banking crisis in Europe. Confidence will also be boosted when people see that the Government is showing the capacity and the determination to deal with a difficult economic situation.
The Government will also have to carefully investigate lenders' capacity or willingness to provide new mortgage finance. Without adequate levels of mortgage finance the residential property market will remain severely constrained. The Keane report is not the last word on residential mortgages. The Government is open to new ideas from other parties and Senators and we welcome suggestions from interested groups outside the Houses of the Oireachtas. As part of our discussions on the budget we will be examining what further measures might be taken. The Government is fully aware of the scale and depth of the problems with residential mortgages. Comprehensive data on arrears are now being provided on a quarterly basis and we will work through the issues in a sensible, determined and fair way.