The aftermath of the coronavirus pandemic, rising interest rates and a cost of living crisis have led to an increased focus on the ability of borrowers to repay loans. In particular, the difficulties faced by ‘mortgage prisoners’ have been widely discussed at government, regulator and industry level. In this article, we look at the complexity of addressing the issue of ‘mortgage prisoners’ and possible solutions.

What is a ‘mortgage prisoner’?

A ‘mortgage prisoner’ is a category of borrower who typically is up to date with payments but unable to switch to a new lending arrangement due to the characteristics of their loan or their borrower risk profile. The risk to the ‘mortgage prisoner’ on a variable rate mortgage is that repayments may become unaffordable and their loan may enter into arrears. The underlying loan may have been sold by the original lender and may now be held by a non-bank lender, such as a credit servicing firm.

The Central Bank of Ireland (CBI) reported that at the end of March 2023:

Non-bank entities[1] held 16 per cent of all principal dwelling house (PDH) mortgages outstanding and 76 per cent of all PDH accounts in arrears over one year, and
Non-banks held 71 per cent of all buy-to-let (BTL) accounts in arrears and 84 per cent of BTL accounts with accumulated arrears greater than ten years.[2]

Non-performing Loans

At European level, banks have been incentivised to decrease the number of non-performing loans, or NPLs, on their balance sheets to increase bank lending to the economy and to reduce risk for the banking sector. Measures introduced include requiring banks to put aside sufficient resources for NPLs (the Prudential Back Stop), and introducing the Credit Servicers Directive[3] to enhance the secondary market for NPLs.

In Ireland, there has been a corresponding regulatory focus on ensuring protection for borrowers in the event of a loan transfer. For example, borrowers whose loans (performing and non-performing) are transferred will benefit from the CBI’s codes of conduct.

However, the issue of the ‘mortgage prisoner’ has increased focus on consumer protections in the event of the transfer of loans to non-bank lenders.

Paths forward

Government focus

In August 2023, the Minister for Finance met with representatives of the banking and mortgage sector to discuss how customers could be assisted at a time of rising interest rates. The Minister has stated that a priority is for the regulatory framework to support borrowers in the mortgage switching process.

It should be noted that further measures could be considered by government to address this issue. Government equity loans, whereby the government offers an equity loan to a borrower in arrears to reduce LTV levels or repayments and government mortgage guarantee schemes to facilitate higher LTV lending have also been suggested as possible solutions to address the ‘mortgage prisoner’ issue.[4]

Industry focus

In June 2023, the Banking and Payments Federation of Ireland (BPFI) and the Money Advice and Budgeting Service (MABS) rolled out a nationwide campaign for customers which included a new online resource DealingWithDebt.ie. The BPFI and MABS also expanded their joint framework agreement on mortgage arrears to include all customers from the pre-arrears stage to late-stage arrears.

Alternative repayment arrangements

Lenders may consider a permanent or temporary reduction in interest rates as part of alternative repayment arrangements, or ARAs, with a borrower in arrears. Recent media reports state that a well-known credit servicer has announced an ARA to include a fixed interest rate at a discounted rate for a period of up to two years.[5]

Asset management companies

At European level, it is acknowledged that asset management companies may play a role in providing relief to banks. This approach would enable them to remove NPLs from their balance sheets provided those asset management companies are properly designed and accompanied by supporting policy measures.

Conclusion

Protecting the ‘mortgage prisoner’ while fulfilling EU expectations that banks reduce their NPL stocks will be a nuanced challenge to resolve. However, the options outlined above show that concrete solutions are being explored and there is an appetite in industry, government and regulators to resolve this issue.

For more information, please contact a member of our Banking team.

The content of this article is provided for information purposes only and does not constitute legal or other advice.

[1] Retail credit firms and credit servicing firms.

[2] https://www.centralbank.ie/statistics/data-and-analysis/credit-and-banking-statistics/mortgage-arrears

[3] Directive (EU) 2021/2167 of the European Parliament and of the Council of 24 November 2021 on credit servicers and credit purchasers and amending Directives 2008/48/EC and 2014/17/EU

[4] https://www.lse.ac.uk/geography-and-environment/research/lse-london/documents/Reports/LSE-mortgage-prisoners-final-report.pdf

[5] https://www.irishtimes.com/business/2023/09/08/pepper-unveils-interest-rate-discount-scheme-for-struggling-mortgage-customers/