Long-term mortgage debt relief measures more successful, Central Bank finds

Permanent or long-term debt relief arrangements on mortgages "have substantially higher success rates" than temporary arrangements and are in the best interest of both borrowers and lenders, a new research paper published by the Central Bank has concluded.

"This is particularly true during a crisis such as that in Ireland after the 2008 crash, where borrower income shocks were deep and long-lasting, and negative equity was widespread," the paper's authors Claire Labonne, Fergal McCann and Terry O'Malley have written.

“Ultimately, despite appearing more costly up-front, these arrangements that adequately tackle repayment capacity are in the best interests of both borrower and lender.” Temporary arrangements “might only delay default” in cases where borrowers’ income shocks are permanent.

Financial difficulty

The research technical paper studied household and loan data from 2012 and 2016 and found that borrowers with a “moderate ability” to repay were more likely to receive permanent modifications to their loans than “those in the deepest financial difficulty”.

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Repayment cuts were more generous as borrowers’ capacity to repay weakened, but only if borrowers had some surplus income available to service the mortgage debt. Deeper cuts to repayments and lower payment-to-income ratios led to lower defaults later on.

The analysis reflects concerns at the Central Bank early in the financial crisis that Irish lenders were over-reliant on temporary relief measures such as interest-only periods or temporary payment breaks that failed to resolve the deep negative equity and illiquidity that many mortgage borrowers faced.

This in turn led to worries about banks’ potentially weak level of loss provisioning on defaulted mortgages.

The authors said the loan repayment moratorium policies put in place during the Covid-19 crisis had further highlighted the importance of understanding how debt relief measures should be designed.