Bane Ceannais na hEireann Central Bank of Ireland erorystem Michael MeGruth T.D. Dail Eireann Leinster House, Kildare Street, Dublin 2 14 January 2015 clot Dear Deputy MeGrath, Thank you for your correspondence of the 15! December. 1 will deal firstly with some statistical issues related to the Residential Mortgage Arrears and Repossessions Statistics publication which you reference in your letter. ‘These are particularly important for modification arrangements involving arrears capitalisation. + The Central Bank (CBI) is exploring avenues for publishing gross flows, but there are ‘@ number of statistical issues with the gross flows data, particularly for cases where restructures straddle more than one forbearance option. In the case of arrears capitalisation, around one third of restructures are combined with some other forbearance option. Notwithstanding the statistical caveats, our statistics show that in the first three quarters of 2014, the average net quarterly change in the total number of PDH accounts in arrears was approximately minus 6,200. The data on gross flows, however, imply an average decline of around 19,200 accounts per quarter. This decline was partly offset by new arrears cases, averaging 13,000 accounts per quarter. The average number of new arrears capitalisation restructures put in place was around 4,900 per quarter, Therefore, the majority of resolved arrears cases have not relied on the capitalisation of arrears. + I accept that the data raises some concems about the sustainability of arrears capitalisation resolutions. However, it should be borne in mind that the Residential Mortgage Arrears and Repossessions Statistics include some historic arrangements implemented prior to the introduction of the Mortgage Arrears Resolution Targets (MART). Modifications agreed pre-MART often were more akin to short term forbearance and accordingly, these are more likely to have re-defaulted, thereby inereasing the number of restructures which are not ‘meeting the terms of thearrangement’. Data for recent quarters has shown a steady increase in the number of proposed resolutions meeting the terms of the restructure arrangement. ‘These have risen from 79.3 per cent to 82.2 per cent between Q4 2013 and Q3 2014 for PDH ‘morigages. The equivalent figures for arrears capitalisation are 57.9 per cent and 68 per cent for 04 2013 and Q3 2014 respectively. which would indicate a move towards more sustainable solutions, © Ibis worth noting that three-quarters of all restructures do not involve capitalisation of arrears (or, alternatively. combine arrears capitalisation with another forbearance arrangement) and that the overall re-default rate on restructured PDH accounts was just below 18 per cent at end-Q3 2014, You also raised concerns about the sustainability of restructures involving arrears capitalisation, The CBI does not preseribe resolution solutions for distressed borrowers on a case-by-case basis as such decisions must remain the clear responsibility of the lender. It is at the discretion of exch lender to decide which type of arrangement best suits a borrower, based on a full assessment of the case. However, the CBI has published clear guidelines on the criteria 10 be applied by lenders, both from a prudential and consumer perspective. ‘The published Intemal Guidelines on Sustainable Mortgage Solutions! (the Guidelines) set out a number fundamental principles and considerations for lenders in arriving at sustainable solutions for the borrower. + Inthe case of arrears capitalisation, the Guidelines state that: For the capitalisation of arrears, the lender has assessed and can evidence that the borrower's verified income and expenditure levels are sufficient enable them service the revised loan repayment on an affordable basis for the duration of revised repayment schedule and the borrower has. been performing against the revised arrangement for 6 months before arrears are capitalised. + The Guidelines also require proof of affordability: 4 ferm extension or capitalisation that includes increases in repayment level over time will not be considered sustainable unless the lender can demonstrate that a verifiable, or otherwise credible and conservative, cause exists to believe that the borrower will be in a position 10 meet those repayment levels’ (see section 2.2 Assessment of Affordability). In addition, the Code of Conduct on Mortgage Arrears (CCMAY* requires lenders to ensure that the alternative repayment arrangements that are offered are affordable and sustainable. As such, the completion of affordability assessments is a key step set out in the Mortgage Arrears Resolution Process (MARP) in the CCMA. Specifically, it should also be noted that ; nt ow/industry-sectors/erect-instituto rna020Guldeline 20: 20sustainablex<20Mortgage620Arrenrss2050lutions.odl *hepi// www conten te/publiciformation/Documents/ 20) 3%20CoMA. pathe CCMA requires a lender to document its considerations of ea option examined, including the reasons why the options(s) offered to the borrower is/are appropriate and sustainable for his/her individual circumstances and why the option(s) considered and not offered to the borrower is/are not appropriate and not sustainable for the horrower's individual circumstances. Lenders must maintain full records of all the steps taken, and of all the considerations and assessment required under the CCMA and must produce all such records to the Central Bank on request. Notwithstanding progress made to date, the CBI continues to have concems that some restructures offered by banks may not be sustainable. Accordingly. the CBI iy monitoring Propesed and concluded solutions by requiring lenders to report monthly to the CBI on Progress in addressing mortgage arrears. The CBI will continue to monitor “Terms Being Met” under MART and is targeting its inspection activity where we have concemas that actions being tken are not sulficient to sustainably resolve loan arrears. In that regard, the ongoing MART audits have targeted restructures where there are concerns that actions being taken are not sufficient to sustainably resolve loan arrears. Given the default rates quoted for arrears capitalisation, there is a particular focus on this type of resolution in these audits, Please let me know if I can be of further assistance. Yours sincerely, 5