Focus of repossession study questioned by Flac

By Eamon Quinn

The Central Bank has published research which shows distressed mortgage borrowers were more likely to default on their home loans following a court judgement over six and a half years ago.

According to the research, default rates increased after the ruling, known as the Dunne judgment, when lenders were “effectively banned” from taking back properties from their customers.

It found “that borrowers did, in fact, default more than they otherwise would have, if the repossession regime at the time had been legally upheld”.

“The findings offer empirical support to the economic theory of mortgage default and to moral-hazard costs of impediments to repossession,” according to the research. The researcher added: “The views in this paper are my own and do not constitute the views of the Central Bank.”

But the head of policy at the Free Legal Advice Centres (Flac) questioned the focus of the research, saying the Central Bank should “have better things to do” amid the arrears crisis than promoting the idea of moral hazard.

Paul Joyce said the research was not addressing “the real issue” of 31,000 mortgage accounts in long-term arrears, 10 years from the onset of the crash.

In the past, Irish bank chiefs had talked of moral hazard and had argued that the reluctance of Irish courts to sanction property repossessions was hindering the lenders from dealing with the arrears crisis.

But debt advocates, such as Flac, say that taxpayers had pumped in billions of euro to recapitalise the lenders at the depth of the crash and the banks have enough resources to write down debt and solve the arrears crisis for good.

Last week, Oireachtas Finance Committee chair John McGuinness told EU financial services commissioner Valdis Dombrovskis Irish banks were ignoring the commission’s direction to write down household and business debt.

He said they were instead selling troubled loans to vulture funds. The ECB this week said its new rules that will force lenders across the eurozone to set aside more cash for soured loans on their books will likely come into force at the start of April.

The ECB proposal would give banks seven years to fully provision newly soured loans backed by collateral and two years for unsecured debt.

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