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Moral hazard in mortgage lending is usually spoken about in qualitative terms because of a lack of hard data as to how many borrowers will strategically default if repossession is not possible for some reason. As a result, it is often cast as a red herring by commentators. A Central Bank Economist has now quantified the effect of one accidental moratorium on enforcement, which resulted from poor drafting of legislation and the High Court judgment in Start Mortgages v Gunn.

Start Mortgages v Gunn

The Land and Conveyancing Law Reform Act 2009 (2009 Act) altered the law around lenders seeking possession of registered land. In so doing, it introduced something of an ambiguity.

The relevant pieces of the 2009 Act came into effect on 1 December 2009 (Commencement Date).

In July 2011, the High Court handed down a decision in Start Mortgages v Gunn. That decision effectively prevented lenders repossessing homes through the courts where:

  • the mortgage was granted prior to the Commencement Date,

  • the property comprised registered land, and

  • the lender had not demanded payment before the Commencement Date.[1]

We have previously noted that Start Mortgages v Gunn resulted in many commentators expressing concern that the lack of consequence was leading some homeowners to strategically default on mortgage obligations.

The quantitative study

Terry O’Malley, a Central Bank economist, has now carried out a detailed quantitative analysis of the effects of Start Mortgages v Gunn.[2]

The analysis compares the default rate in mortgages granted in the period of 180 days either side of the Commencement Date.

The paper simplifies the legal position slightly and works on the basis that all mortgages granted before the Commencement Date were affected. Actually, they were only affected where the property comprised registered land and the lender had not issued a demand before the Commencement Date. However, public perception of the effect of the judgment, and therefore borrowers’ decisions to strategically default, may well have been aligned with this simplified position.

The paper is detailed and merits careful analysis by lenders, risk managers and those proposing moratoria. However, in overview, the paper:

  1. Concludes that decreasing repossession risk reduces the cost of mortgage default, which encourages strategic defaults.

  2. Carries out a detailed evaluation of the impact of the decrease in repossession risk from Start Mortgages on mortgage default and finds that borrowers defaulted at substantially higher rates than they were otherwise likely to do.

  3. Concludes that the moratorium introduced by Start Mortgages v Gunn, caused the rate of default on mortgages granted shortly before the Commencement Date to rise by approximately 0.3 % of the total pool of such mortgages per quarter. This was approximately a 50 % rise over what the rate of default on mortgages granted after the Commencement Date suggests would have been the case if the legislation had not contained the ambiguity.


The ambiguity in the law introduced by the 2009 Act provided an almost unique opportunity to carry out a quantitative ex-post analysis of the effect of a moratorium on enforcement. In particular, the analysis was carried out on a relatively homogeneous population, where approximately half of the population, the loans in the 180 days each side of the Commencement Date, were in effect randomly selected to benefit from the moratorium. Those loans did not differ significantly, other than as to enforceability.

We can see no reason why its basic findings should not extend to the 12-month moratorium on repossession proceedings put in place by the Central Bank’s Code of Conduct on Mortgage Arrears, although figures would naturally vary.

The paper should also assist in making quantitative projections of the effects of other moratoria, both nationally and internationally. It should therefore help to move matters on from the qualitative and philosophical discussions that have characterised this area.

For more information, contact a member of our Restructuring & Insolvency team.

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

[1] As an aside, the introduction of the Land and Conveyancing Law Reform Act 2013 in July 2013 dispelled much uncertainty for lenders and enabled possession proceedings to resume.

[2] Terry O'Malley, 2021. "The Impact of Repossession Risk on Mortgage Default," Journal of Finance, American Finance Association, vol. 76(2), pages 623-650, April. Note there are some working paper versions of this available on the web but the published version contains substantive amendments.

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