Banks will have to be more aggressive in repossessing properties in the buy-to let sector, the Governor of the Central Bank Patrick Honohan warned tonight while ruling out a widespread debt forgiveness programme as unaffordable.
Speaking this evening in Limerick, Mr Honohan stressed that although public policy should aim to avoid the repossession of family homes “where this is unnecessary” when it came to investment properties “there are many circumstances in which there is less reason to be inhibited about repossessing”.
He claimed that it was “surely now past time for the banks to be dealing more proactively with the situation of over-indebted buy-to-let borrowers no longer able to service the debts they assumed in order to take investment positions – now loss-making – in property,” he said.
Describing the State’s mortgage debt crisis as a “matter of immense national importance” he said “achieving the right balance between realism in what can be collected and prudence in managing the limited but adequate capital resources that have been provided to the banks” by the Government was vital.
Mr Honohan said the topping-up the banks’ balance sheets by the State had given them a “capital buffer” to absorb potential losses for the next few years, but he warned that it was “not enough for any broad strategy of debt forgiveness”.
He said government policy should be focused instead on helping families avoid the loss of their homes “where this is not necessary”. And he cautioned against “creating a perverse incentive for those who can afford to pay their debts to exploit the system at the expense of the rest of society”.
He said “unnecessary debt forgiveness could quickly erode that buffer, placing a further burden on the Government finances, which they are in no condition to absorb.”
Mr Honohan called on banks to “work out their problem loans in a measured and realistic way that deals promptly and sensitively with the unrecoverable, but does not shrink from ensuring that affordable debts are properly pursued.”
He accused the banking sector of failing to develop efficient systems of dealing with the personal debt crisis and warned that it was in danger of driving drive people unnecessarily into new insolvency procedures set to become law later this year.
He said legislation aimed at tackling the State’s personal debt crisis should only be used as a last resort and in most cases banks and debtors should be able to resolve issues independently of the legal system.
He suggested that only cases which are “impossible to resolve in bilateral negotiation, including some situations of complex indebtedness involving multiple creditors” should need to avail of the new personal insolvency legislation.
Mr Honohan said it would be a “major and complex task for the banks to implement at sufficient scale a programme of effective engagement with troubled borrowers” but claimed that “early engagement, fair procedures, tailored forbearance or rescheduling adapted to individual debtor circumstances” would be central to the development of a sufficient response.
He said the Central Bank was reviewing the Code of Conduct for Mortgage Arrears to see if any elements need to be refined to avoid hampering the fair and effective bank engagement with borrowers.
He said it was n the long-term interest both of the banks and borrowers that the banks continue to ramp- up their capacity to engage with and process such debtors in order to determine, on the basis of actual and prospective income, what repayment they can realistically be expected to service fully, repossessing the collateral where necessary.
He said that while this may involve the banks in having to manage a portfolio of repossessed buy-to-let properties, it was “not an insurmountable task and should in any event facilitate the improved functioning of the property market and getting closer to a market-clearing price by bringing to the market (in an orderly and managed way) many of those properties which at present are implicitly hanging over it as an excess supply.
