Brokers group wants ban on full recourse mortgages

According to the Irish Brokers Association (IBA), while full recourse mortgage lending is well established throughout Ireland, the practice has exacerbated the property implosion and the financial crisis facing homeowners throughout the country.

A full recourse mortgage means the mortgage holder is fully liable for the total debt due on the loan agreement, over and above the actual value of the property.

“Essentially this means that if a mortgage is taken out on a property with a hugely inflated value, as with most mortgages in Ireland in the boom years, then even if the value of that property drops dramatically, even by 50pc, the mortgage holder is left to bare full responsibility and the banks do not pay any price for their imprudent lending practices,” explained Ciaran Phelan (pictured), CEO, Irish Brokers Association.

“The mortgage holder cannot simply short sell the house, repay the bank and move on, as is the case in the US. In fact, he/she has to carry the cross of that mortgage for the rest of their lives. This practice hugely undermines confidence for those affected, resulting in a curtailment of consumer spending and an extended recession.”

Underwriting mortgages
According to the IBA, while the past cannot be changed the industry should learn from its mistakes and implement changes to safeguard the Irish public from a financial crisis such as this further down the line.

It is calling for banks to underwrite mortgages based on two key factors - the borrower’s ability to meet the monthly repayments and the security offered which they say is a reasonable proposition.

Similar to HP (hire purchase), financial recourse on mortgage agreements should be ring-fenced to the security provided, the IBA added.

Balanced lending structures
“Most Irish borrowers have become desensitised to this type of mortgage lending regarding it as the norm just as the ancients Romans regarded being thrown to the lions as being a perfectly acceptable punishment for their crimes. We need to move on and adopt more balanced lending structures that exist in other (recovering) economies such as the US,” Phelan said.

“We need to realise that it is because of full recourse mortgage lending that we are now faced with a situation whereby due to the crash in property prices thousands of people are left owing much more than their property is worth and by law the bank can go after the family’s other assets or funds to recover the debt,” he added.

Overhaul of mortgage system
The IBA is suggesting that a non-recourse system be put in place whereby the loan is secured by a pledge of the actual property, but for which the borrower is not personally liable beyond that asset.

According to the association, if such a system was in place, it is highly doubtful then that lending institutions would return to their habits of approving high loan to value ratios.

“Young first-time buyers throughout the country are now burdened with massive debts from which many may never recover. While these couples and singletons have to take responsibility for signing the contracts which granted the banks huge powers over them as mortgage-holders, it also has to be contended that the banks were fully complicit and should also suffer the consequences. However, there is little evidence of any acknowledgement by lending institutions in their actions or in any new loan offers being issued. The only party who appears to be paying for the property downturn are the mortgage holders,” Phelan said.

“Ireland’s archaic debt laws simply exacerbate the situation 10 fold and ensure that many of those affect may never recover financially.” 

Pictured: Ciaran Phelan, CEO, Irish Brokers Association