AIB at the Oireachtas Finance Committee: Discussion on Mortgage Arrears

Last Thursday AIB appeared before the Joint Oireachtas Committee on Finance, Public Expenditure and Reform to discuss an “Overview of the Banking Sector in Ireland”.  The submissions by AIB prior to the meeting were:

• Opening Statement by CEO David Duffy
• Analytical Presentation
• Response to Questionnaire from Committee

A transcript of the meeting is available here.  The meeting was roughly divided between discussions of AIB’s funding costs and interest rates, and in particular its SVR mortgages, and discussions of AIB’s responses to mortgage arrears.  Here are a couple of extracts from statements made by Brendan O’Connor, AIB’s head of the financial solutions group, on the latter.

Mr Brendan O'Connor:  Those with mortgages over 720 days in arrears represent a large cohort. In AIB, 60% of those have made no payment at all, which represents 7,000 accounts. If that is their maximum affordability, it will not be possible for us to restructure the mortgage. Our responsibility is to help the customer exit the property and we will not go after the residual debt if it is not there. We actually can do nothing unless we have that level of engagement.

AIB has around 11,500 mortgage accounts that are more than two years in years. Because of top-up loans, equity releases and the like this corresponds to around 9,000 properties/borrowers. Of these 9,000 around 5,400 made zero repayments in 2014.  It would have useful if the split of these 5,400 non-payers between PDH and BTL properties was provided.  The AIB representatives stated that they had 7,000 accounts on which no payments were being made but there were no questions put to them by the members of the Committee on this issue.

There were numerous questions about the process AIB engages in with borrowers who do engage.  On this Brendan O’Connor said:

Mr Brendan O'Connor: We make our decisions based on affordability. The only criterion we use is how much somebody can pay. Is there enough there to structure a sustainable mortgage solution? We do not go into matters of policy but affordability for the individual in question. There is always an individual set of circumstances in such cases.

If somebody has some level of affordability that allows for a mortgage restructure, we have a product to allow that to happen. Where someone does not have it, we have a process which allows a voluntary sale for loss and will not pursue the residual debt. The only way we can sustain a restructure is if we have the customer’s information, that they are willing to talk to us and willing to make a payment in line with affordability.

The issue of what happens to the residual debt after a voluntary sale is important. A number times AIB seemed to state that if a borrower engages by  providing financial information but that it is not possible to restructure the mortgage to make it sustainable and affordable any shortfall or residual that might remain after a voluntary sale will be written off.

Mr Brendan O'Connor: To the extent that somebody is involved in a voluntary surrender, where he or she has no affordability and no cash-flow such that we cannot construct a sustainable solution that will allow him or her to keep his or her home, we will look at the residual figure. To the extent that there is no affordability we will write an agreement that states the residual amount will be written off.

Mr Brendan O'Connor: The bank has said that where someone cannot afford their mortgage we will not go after them for the residual debt if they sell the property. In effect, that is the outcome we get if a house goes to possession. It makes more sense for the individual, the borrower and the bank to do that consensually and achieve that outcome rather than go through a possession process. However, I would like to find out how many are in this queue that we can restructure, and that is why we try to get the re-engagement.

This seems pretty clear.  When someone cannot afford their mortgage and undertakes a voluntary sale AIB will not pursue a residual that may remain.  Mr O’Connor also said that this is the outcome if “a house goes for possession”.  However, he was not so clear of what happens the residual after a voluntary sale in this statement:

Mr Brendan O'Connor: Regarding voluntary assisted sales, where someone has no affordability post the sale of the property, we do not go after people for the residual debt. There is not much point. However, we do look at residual debt on the basis of affordability, so to the extent that someone can afford to make some payment to the residual, within those reasonable living expense guidelines etc., we will seek it, and typically a payment for a period that is less than the insolvency period.

Although this is unclear AIB did write off a significant amount of mortgage debt in 2014 – €461 million – the bulk of which it can be assumed came at the end of voluntary sale processes.  Although a conclusion that results in loss of ownership is bad, in circumstances where the borrower cannot afford the mortgage, it should be accompanied with a write off of any residual that may remain.

AIB’s representatives were questioned on their motives for issuing legal proceedings against a significant number of borrowers.  The reason why a bank issues legal proceedings is that it wants to take possession of the house, however, taking this action does lead to significant re-engagement.

Mr Brendan O'Connor: There are some interesting re-engagement levels. We are actively seeking an adjournment in 50% of cases where there is a court date because we have had re-engagement. At certain stages in the process, we tend to get re-engagement and, certainly after we give the regulatory letters, we get re-engagement of about 50% at every stage.

We actually have 800 people in the court process at the moment who are on a test period, so while they will appear in the legal numbers, they have re-engaged. They are on a test payment period and when that test payment period is over, we would expect them to come out of the legal process.

We have brought 2,000 people back from more than two years in arrears who are no longer in arrears when, previously, they would have been in the legal process. It does drive an intensity of engagement and our observation is that it leads strongly to people coming back to the table.

Brendan O’Connor outlined four stages the banks go through when dealing with non-engaging borrowers in arrears who fail to complete and SFS and indicated that at all stages around 50 per cent of borrowers re-engage.

Mr Brendan O'Connor: The week a borrower goes into arrears, he or she receives a letter informing him or her of being in arrears with a standard financial statement, SFS, which we ask him or her to fill out. That is the process by which we judge affordability. If we get an SFS, we will make an offer to the borrower based on the financial detail that come out of that.

Throughout the entire process, to the extent that the borrower does not follow that up, we send out another letter, known as a Provision 28 letter, which states that we need to keep this moving to the extent that if the borrower does not engage with us, we will have to deem him or her non-co-operating. That is followed by what is called a P29 letter. Approximately 50% of those who get a Provision 28 letter engage then.

A P29 letter states one is non-co-operating. At that stage, approximately 50% of those who are still left in that bucket engage. If a person has not engaged by then, at which point he or she has had a quite significant amount of time, he or she will go into the legal process. Approximately 50% of the borrowers engage before it gets to civil bill stage, and after civil bill stage, as I stated earlier, in approximately 50% of the cases that go to court, we are actively seeking adjournments.
It is all about engagement. We ourselves have various channels in the Irish Mortgage Holders Organisation. To the extent that one engages, one will get an offer.

Thus the stages at which 50 per cent re-engage at each point are:

1. Letter stating that non-engagement may lead to the borrower being deem as “non-cooperating”
2. Letter stating that the borrower is now classified as “non-cooperating”
3. Decision made that the bank will enter the legal process to seek possession of the property
4. Issuing of civil bill to begin legal proceedings and listing of case for court date.

It is also possible that there may be re-engagement if the legal proceedings conclude with the granted of a possession order by the courts but the extent of that, if any, was not stated. 

AIB have indicated that if they make a decision to go down the legal route with 5,000 borrowers around 2,500 will re-engage and a civil bill will not be issued.  Of the 2,500 borrowers who have a civil bill issued to them and have their case listed in court around 1,250 will reengage at that stage and AIB will seek to adjourn the legal proceedings.  Thus of the 5,000 borrowers where the bank decides to go down the legal route the bank will go to court to pursue the order for possession in around 1,250 instances.  It will be a decision of the court whether the orders for possession will be granted.

Finally, Brendan O’Connor stated the circumstances that lead to the bank’s decision to pursue the legal route:

Mr Brendan O'Connor: The other issue that was raised was the tsunami of repossessions. That was misrepresented in the media today. For anybody to be in the position where we are in a court repossession discussion or in the court process would require them to not have engaged or repaid us anything in a number of years. In those cases, significant numbers will not end up in repossession territory at all because I think we have about 50% who re-engage.