High Court ruling to assist mortgage holders secure bank debt write offs

A recent significant High Court judgment may affect banks’ capability to split mortgages and park debt and insolvent homeowners will have a greater chance of being able to secure the write-off of unaffordable mortgage debts following this High Court judgment.

The ruling emerged after a legal battle between KBC Bank Ireland and a Drogheda couple who fell behind on a €285,647 mortgage on their three-bedroom semi-detached house after both lost their jobs for a time.

The personal insolvency arrangement agreed by the court means the couple, Colm and Paula Callaghan, who are in their late 30s and have three young children, can write off about €242,000 worth of debt, including €165,000 due to KBC.This will leave them with a €120,000 mortgage from KBC on a home currently worth €105,000.

The bank had appealed an earlier ruling by the Circuit Court granting the couple this deal. KBC wanted the mortgage to be written down only to €270,000.  This amount would then have been split in two, with the Callaghans continuing to make repayments on €135,000 of the debt. The remaining €135,000 would have been declared “inactive”and not subject to interest payments at the present time. It could be repaid later in the couple’s lifetimes, or from the sale of the house after their deaths.

Siding with the earlier judgment in the Circuit Court, Ms Justice Marie Baker rejected the bank’s objection, arguing that KBC’s proposal was “kicking the can down the road.”

More than 54,000 mortgages totalling €10.9 billion in outstanding debts were in arrears of more than 90 days at the end of last year, according to the Central Bank.

Ms Justice Baker’s ruling is expected to strengthen a customer’s hand in negotiations with banks that want to “freeze” some part of a mortgage for up to several years. This has been a preferred option for many lenders.

Instead, customers will be in a better position to push for a full and final settlement, including a possible write-off of a much larger sum of debt, within a shorter time frame – an outcome that could see Ireland’s banks having to sustain significant losses more quickly.

This is hugely significant. Banks will have to revisit ‘warehousing’ as a go-to option as a result of this judgement.

The High Court rejected the bank’s proposal to “warehouse” almost half of an insolvent couple’s mortgage for repayment at a later date because a formal deal to resolve all their debts was a “once in a lifetime solution”.

In a judgment that has major implications for how banks deal with insolvent debtors, Ms Justice Marie Baker ruled against KBC Bank Ireland’s proposal to “freeze” €135,000 of a couple’s €285,000 mortgage to be repaid at some future date, even though the lender was permitting them to stay in the home for the remainder of their lives.

The bank had appealed an earlier ruling by the Circuit Court granting the couple this deal.  Ms Justice Baker said the bank’s proposal was unreasonable and unfair as the repayment of the inactive part of the mortgage did not rest on “any anticipated ability to pay in the future and is entirely on the hazard”.

While not ruling out warehousing arrangements in other formal debt deals, the judge said KBC’s proposal in this case was speculative in nature and based on assumptions and conjecture regarding the living conditions of the couple “far into the unknown future” when they will be in their 60s.

“While the counterproposal made by KBC may seem attractive and to some extent benevolent, it is capable of creating circumstances amounting to insolvency at the end of the mortgage term in approximately 23 years’ time,” she wrote in her judgment.

Splitting bad mortgages and “warehousing” part of the debt for repayment at a later date is a popular form of restructuring for banks as it maintains the prospect of being repaid most or all of their debts.

The court ruling means it could prove more difficult for banks to exclude some mortgage debt from write-offs within the normal five-year term of a personal insolvency arrangement.

“It is the first case that has really started to deal with the warehousing issue.  

Personal insolvency practitioners (PIPS), who advise insolvent borrowers, welcomed the ruling for bringing clarity to whether banks can include split mortgages and warehousing deals in personal insolvency arrangements.  PIPs don’t like warehousing because it does not provide certainty. It leaves a chunk of debt hanging over someone like a sword of Damocles to be dealt with at a later date.

KBC Bank Ireland said it did not comment on individual cases.