Dáil Private Members Bill, Second Stage, 3 February, 2012 Mr. Stephen Donnelly, T.D. Family Home Protection (Miscellaneous Provisions) Bill 2011 Response by Minister for Justice, Equality and Defence Mr. Alan Shatter, T.D.
Check Against Delivery
The Government shares the concern expressed by Deputy Donnelly in his Private Members Bill with regard to individuals and families struggling to discharge repayments on unsustainable mortgages secured on family homes.
The Government has put in place some measures to assist distressed homes owners and an inter-departmental working group will shortly complete its deliberations on the Keane Report and relevant announcements will be made by my Ministerial colleagues. As the House knows very detailed Heads of the Insolvency Bill were published last week and it contains specific measures of relevance to assisting those in genuine mortgage difficulties. The Bill in its final legislative form will be published by the 30 April next. In the intervening period members of both Houses of the Oireachtas have the opportunity through the deliberations of the Joint Oireachtas Justice Committee to contribute to the development of this Bill with regard to the issue of insolvency generally and also with particular regard to unsustainable mortgage debt in respect of family homes.
The motivation behind the Deputy Donnelly’s Bill to seek to offer further elements of protection to home owners in arrears and who may be facing repossession proceedings is well intentioned and laudable. He is seeking to require the court to have regard to certain matters or specified factors detailed in his Bill when an application for possession of a family home has to be determined by the courts. However, the Bill is poorly drafted and unfortunately both somewhat confused in its approach and lacking in essential detail. Its provision give rise to serious constitutional and legal difficulties and could impose time consuming and costly procedures both on the court and the parties engaged in repossession proceedings. It also gives rise to serious constitutional difficulties. Essentially the Bill as presented is completely unworkable.
The Explanatory Memorandum accompanying the Bill seeks, wrongly in my view, to link the normal contractual requirement to repay one’s home loan with the article of the Constitution which refers to the rights of the family in Article 41. It is not appropriate to make this linkage nor would the linkage, if appropriate extend any relevant protection in possession proceedings to any unmarried individual with mortgage arrears or to any unmarried cohabiting couple or to any gay couple parties to a civil partnership. Also, the Explanatory Memorandum refers to two court cases, Bank of Ireland v Smyth 1995 and Anglo Irish Bank Corporation v Fanning 2009 in regard to the jurisprudence on the court’s discretion in regard to orders for repossession.
I am familiar with both of these cases and I have to say unfortunately the Deputy’s referencing of them in the context of the purpose of his Bill – matters the court should have regard to in a repossession hearing - is mistaken and of no real relevance to the measure we are considering today. The net issue in the Smyth case was related to the validity of the consent of a spouse to an application for a mortgage and the consequences of default in the context of specific provisions contained in the Family Home Protection Act 1976.
In the Fanning case, a loan of €7.9 million secured on the house and lands was provided to purchase shares in a telecoms company. A further loan of €505,000 was provided to the borrower for his personal investment purposes. There was default on these loans and the court granted a possession order to the bank. While these cases are interesting in themselves, I cannot believe that Deputy Donnelly seriously believes that they have any relevance to the stated purpose of his Bill.
In general, the Bill proposes that the Court should take account of, a number of factors when determining an application for repossession of a family home. Some of the proposed factors are self evident and are already effectively taken into account by the courts. For example, our Judges, who I believe have dealt very humanely with such applications since the current crises began, do take into account the general circumstances in each case.
Let me now turn to a more detailed consideration of the Deputy’s Bill. Section 1 consists of a short number of definitions. There is no need to refer to the District Court – that court does not hear repossession orders.
Section 2 of the Bill sets out, in paragraphs (a) to (g), a number of matters which, in any proceedings for possession of a family home, the Court may have regard to in determining whether to grant or refuse such application. I presume that these proposed factors are intended to be additional to the current options open to the court to adjourn proceedings for a specific period of time before final determination or to make or decline to make an order for possession, and to give or withhold a stay on execution.
In section 2(a) the court is required to consider any offer, including an offer involving the restructuring of the loan, made by or on behalf of the borrower. In practice courts do consider whether an offer to restructure loan repayments has been made and the capacity of the borrower to make such payments in the context of both outstanding mortgage arrears and the legal obligation on the borrower to make future mortgage repayments. Where financial institutions are in the courts view being unreasonable judges have adjourned cases to afford borrowers in mortgage arrears take the necessary steps to address the arrears that have accumulated. It is a fact, having regard to the relevant statistics, that Irish courts are slow to order repossessions. In fairness, we might also say that Irish financial institutions have also been slow to seek repossessions for a variety of reasons. What is proposed here, however, by Deputy Donnelly appears to go a great deal further than simply requiring the courts to give some time to those in mortgage arrears to make good outstanding payments due and to meet future financial obligations. It seems that Deputy Donnelly envisages the courts restructuring mortgage loans and effectively determining that a portion of outstanding capital should cease to be payable to an individual financial institution. The courts presently have no such jurisdiction and the Bill gives no guidance as to how it might be exercised or on what basis a court could simply reduce the amount of capital outstanding by way of a loan secured on a family home. In its failure to properly address how the court should approach matters in this context the Bill is unfortunately fundamentally flawed. This particular aspect of the Bill also gives rise to profound constitutional difficulty.
I have, in the context of the Personal Insolvency Bill, in respect of secured debt where major financial difficulties arise proposed the use of the non-judicial Personal Insolvency Arrangement or PIA. A PIA I believe offers a better and more considered approach. I will return to the PIA later.
In section 2(b), I am not sure what inference the court is to draw from consideration ‘of the level of arrears on the loan’ or what difference reference to this factor contained in the Bill will make to the manner in which courts presently approach repossession applications. The level of arrears on a loan is a matter of specific relevant in the determination of every court application made for repossession of the family home. Where arrears are substantial and there is no prospect of their being discharged courts presently grant repossession orders. Where there is a reasonable possibility of arrears being discharged courts often adjourn proceedings to afford individuals time to discharge arrears due. If it is Deputy Donnelly’s proposal that the courts should simply refuse to grant an order of possession in circumstance in which there is no realistic possibility of mortgage arrears being discharged, such statutory provision could render a financial institutions security illusory and undermine the credibility of all secured debt. This would disadvantage any new mortgage seekers from being granted home loans by the banks as the concept of security would become meaningless. It is obvious that this provision gives rise to substantial constitutional issues pursuant to Article 43 of the Constitution and also raises issues under the European Convention on Human Rights. Any such provision would not only impact on security held by a financial institution on a family home, purchased subject to a loan but would also impact on security held on a home by any individual who lent money to family or friends to facilitate a home purchase.
There would also be a significant risk, that if debtors believed that no repossessions were possible, that mortgage repayments might cease or be diverted to other expenses. This provision could effectively incentivise those who have sufficient income to discharge mortgage obligations to cease making mortgage repayments. This would have a catastrophic impact on our recapitalised financial institutions and could result in further funds being required to ensure their continuing financial stability and could result in taxpayers having to make good resulting bank losses. It is surprising that Deputy Donnelly of all people would propose such an ill-considered measure.
I remain unclear as to what is meant by the proposal at section 2(c), that the court is to have regard to "the current market value of the home and the amount of the mortgage debt as a proportion of that." What is the court supposed to do having had "regard" to this? Might a perverse situation possibly arise with courts ordering repossessions and sales on the basis of the least damage to the bank’s security being a sale now rather than letting a person remain in his or her family home for fear that the homes value might further reduce in the current volatile and uncertain market. Again, there is a danger that this proposal could very well contravene the Constitution. It could allow the court to retrospectively and unilaterally re-write a valid contract freely entered into between two competent parties some time in the past. Also, what evidence would the court or the mortgagee have to adduce concerning the "current value of the home"? If the home is in negative equity, it is not clear whether this provision is designed to encourage or discourage an order for possession and sale.
The Deputy’s proposal at section 2(d) is somewhat extraordinary and could have far reaching implications for the financial stability of lending institutions if implemented. Section 2(d) would require evidence from an expert as to the expected value of the family home over a period of 5 years from the date of the hearing of the proceeding for possession. This would appear to be impractical at any time, but especially now in the context of current difficult property market conditions. If such a proposal were accepted, it could impact negatively on every financial institutions ability to enforce their security.
I wonder where, in the context of how the Irish property market has developed, are we to find such experts with clairvoyant powers as to be able to predict property values 5 years hence. For example, let us imagine what a property expert in February 2007 would have predicted for values in February 2012. I do not believe there is anyone who can give any credible evidence of any nature that could be presently relied upon by any court predicting residential property values in five years time, as they depend on so many volatile variables many of which are completely outside our control. This proposed factor essentially attempts to rely on prophecy as fact.
Section 2(e) refers to the Code of Conduct applying at the time of the order for possession. This adds little to the current position. In the High Court, the Master always asks for confirmation of compliance with the mortgage code of conduct. Financial institutions operating in this State are required to adhere to the Code of Conduct on Mortgage Arrears as set out in regulations by the Central Bank. I would see little practical point in this House seeking to further legislate on these matters when they are already part of the consideration. The purpose of legislation is not to send particular messages, even if well motivated, where such are not necessary.
Section 2(f) makes a quite radical proposal, that the Court should have regard to the conduct of the lending institution. This is a very wide ranging concept. Would the Court have to judge or investigate the totality of the practices of the bank from the moment the home loan was approved? Is this what the Deputy intends? Or is he asking that there should be a full investigation of the totality of the conduct of the bank or lending institution in respect of all banking matters over the past one or two decades at each repossession hearing? Is it proposed that in an individual case the circuit or high court should embark on some form of general banking inquiry? Or is it proposed that the court explore the general conduct of the lending institution with regard to the borrower in respect of one specific transaction, that is the loan on the home to be repossessed or the conduct in total over an unspecified number of years of that bank toward the specific borrower or from the time when the specific borrower first opened an account with the institution concerned? Is the court to explore the lending financial institutions relationship, if any, with the vender (be it a developer or an individual) who sold the home to the borrower five, 10 or 20 years ago. Are the courts to make judgements as to the level of mortgage interest appropriate for a financial institution to charge an individual borrower on a home loan and is it intended that the courts enter into the realm of making decisions about the liquidity of financial institutions and the extent of the liability that should fall on the state or on taxpayers to ensure that their liquidity or solvency and how are the courts to deliberate on any such factor?
Also, why is the conduct of the lender only to be examined? Are there no circumstance in which the conduct of a borrower is to be addressed? What about the borrower who fraudulently misleads a financial institution as to his or her real income or true assets? What about a borrower who entered into a mortgage arrangement with no intention of making any repayments of any nature whatsoever? Again, unfortunately this Bill has totally failed to address issued of very substantial importance. At this stage it is worth noting that no definition of conduct is included in section 1.
Section 2(g) mentions any other matter that the Court shall, in its opinion, consider proper to take into consideration. This is potentially a very expansive requirement which could result in a completely extraneous matters being introduced for consideration by the court. There is no mention of what I believe would be a necessary qualifier, that is that the matters be relevant to the particular case made for repossession. In reality, the court already takes into account matters that appear to it to be relevant to the particular case.
Let me now turn to the issue of reform of personal insolvency which is relevant to our debate today. Deputies will be aware that along with my colleague the Minister for Finance, on Wednesday 25 January I launched the Personal Insolvency Bill which provides for the comprehensive reform of our insolvency law and practice. The very detailed Heads of the Bill are available on my Department’s website.
The Heads have been referred to the Joint Oireachtas Justice Committee with a request for its preliminary observations by 1st March. This will afford Members of the Committee and also Members of both Houses who wish to attend a meeting of that committee, time to consider the proposals and to give their own input also into the substantive provisions that the Government ultimately adopt. The Bill in legislative form is to be developed on a priority basis, so that it can be published by the end of April - in line with the revised commitment in the EU/IMF Programme of Financial Support for Ireland. The Bill will also fulfil the relevant commitment in the Programme for Government.
The Personal Insolvency Bill constitutes the most radical reform of our Insolvency laws since the foundation of the State. In developing the Scheme of the Bill, we took into account not only the extensive recommendations of the Law Reform Commission (December 2010) but also, the Cooney Report (November 2010), the Keane Report (October 2011) and other relevant reports, with a view to formulating proposals for the comprehensive reform of bankruptcy law and the creation of a new non-judicial debt settlement system.
The Personal Insolvency Bill proposes to provide, for the first time, a non-judicial system for the settlement of debt. Three new non-judicial debt settlement systems are being introduced, subject to relevant conditions in each case. These are:-
· a Debt Relief Certificate to allow for the full write-off of qualifying unsecured debt concerning debtors with "no assets and no income" up to €20,000, after a one-year moratorium period;
· a Debt Settlement Arrangement for the agreed settlement of unsecured debt of €20,001 and over; and
· a Personal Insolvency Arrangement for the agreed settlement of both secured and unsecured debt of €20,001 and over.
The PIA provides for a unique and specific mechanism to assist in resolving difficulties confronting thousands of home owners with mortgage arrears who are genuinely incapable of discharging their monthly mortgage repayments. Use of this mechanism has the potential for agreed debt settlement arrangements being put in place which will enable people to continue residing in their homes and avoid judicial bankruptcy.
Reform of our bankruptcy laws will result in the reduction in the period of automatic discharge of bankruptcies from the current 12 years to 3 years, subject to certain conditions. This represents, I believe, a reasonable consensus as to the appropriate period particularly if the bankrupt person has been fully compliant and not behaved fraudulently in any way. Given that our neighbouring jurisdictions operate perhaps the most liberal bankruptcy discharge regime in the world, the Government had to be conscious of not incentivising forum shopping.
I feel it would be useful in the context of this debate, to refer to the mortgage law reforms in the Land and Conveyancing Law Reform Act 2009 Act.
Part 10 of the Land and Conveyancing Law Reform Act 2009 – which came into force on 1 December 2009 – has already updated and reformed mortgage law in this jurisdiction. In particular, it has improved the safeguards for borrowers in the case of housing law mortgages.
The reformed provisions apply to mortgages created by deed after 1 December 2009. In order to avoid legal challenge, these reforms could not be applied retrospectively to mortgage contracts created before that date. Any curtailment of lender’s rights in respect of mortgage contracts freely entered into by the parties prior to the coming into operation of the new law would have precipitated prompt constitutional challenges.
A significant feature of the reforms contained in the 2009 Act is the much broader discretion given to the courts when dealing with applications for repossession or sale of mortgaged property in the event of default.
Under section 97 of the 2009 Act, a lender may apply to court for an order to take possession of mortgaged property where default has occurred. The court may, if it thinks fit, order that possession be granted on such terms and conditions as it thinks fit.
Under section 100, a lender may apply to court for an order authorising the power of sale and on such application the court may, once again, if it thinks fit, grant such an authorisation subject to conditions.
In the case of housing loan mortgages, applications by lenders under sections 97 and 100 must be made to the Circuit Court in the first instance. This is intended to reduce the burdens involved in having to defend such proceedings in the High Court.
Section 101 of the 2009 Act contains supplemental provisions in relation to applications under sections 97 and 101. It states that that where it appears to the court that the borrower is likely to be able within a reasonable period to pay any arrears, including interest, the court may adjourn the proceedings for such period or periods as it thinks reasonable.
Unfortunately, for the reasons already mentioned these reforms apply only to post 1 December 2009 mortgages.
I share the legitimate concerns of Deputy Donnelly. His general insights or rather those of the New Beginning organisation, are useful to have as we bring forward our proposals on reform.
However, the issues involved here are varied and complex and we must not be misled into believing that there are easy solutions. We must also bear in mind that our consideration of the reform of the law in regard to personal insolvency does not take place in what might be described as a normal economic context. Rather, we are doing so as we struggle to come to terms with the consequences of an easy credit fuelled property boom, bubble and bust. Our banking system has had to be rescued from collapse and is now primarily in state ownership and largely dependent on continuing financial support from the ECB.
Deputies should take these wider external circumstances into consideration in contemplating solutions to this very difficult problem. We cannot allow ourselves to be seduced into thinking – however much we sympathise with the plight of persons struggling to deal with over-indebtednesses – that there are simple measures that can be taken that will deal with the problem. There are no "back of the envelope" solutions nor is there any magic bullet. All solutions will have significant consequences and potential costs.
In conclusion, I would like to repeat that I, and my Government colleagues, are and remain deeply concerned to promote measures to alleviate as far as possible the difficulties experienced by home owners in repaying mortgage debt. The budget last December contained measures in that regard in respect of increased mortgage interest relief for those home owners who bought their properties in the most recent years at the peak of the boom and who have been worse hit.
The Code of Conduct on Mortgage Arrears is being applied by the financial institutions in their dealings with those in mortgage arrears and is being monitored by the Central Bank.
Arising out of the Keane Report significant progress has already being achieved by the inter-departmental steering group in a number of important areas. The Department of Environment, Community and Local Government has reached an advanced stage in the development of a pilot "mortgage to rent" scheme. In addition the Central Bank is engaging with licensed mortgage providers in the development of mortgage arrears resolution strategies and plans that will ensure mortgage providers have real options for borrowers experiencing significant repayment difficulty. As already referred to, the proposed Personal Insolvency Arrangement in the Insolvency law reforms announced provides an innovate approach to the settlement of unsustainable secured credit such as a mortgage. Taken together, all of these measures are and will provide hope and assistance to homeowners in difficulty.
Despite the genuine difficulties being experienced in making mortgage repayments by many people who as a consequence of our unprecedented economic difficulties and their own personal circumstances dramatically and unexpectedly changing, the number of home repossession orders made by our courts is relatively small. The number of repossession cases (both new cases and orders) in the High Court showed a decrease in 2011 from 2010. New cases for possession (of all types of real property) in the High Court dropped from 583 in 2010 to 480 in 2011. High Court orders for possession (of all types of real property) decreased form 326 in 2010 to 281 in 2011.
It is the case that Circuit Court orders for possession showed an increase in 2011 to 353 (289 residential and 64 non-residential) from the 2010 total of 306 (of all types).
While I share the Deputy’s undoubted concern about individuals and families who due to their individual financial circumstances are experiencing difficulty in discharging their home loan repayment obligations I do not believe enacting a Bill which requires the courts to consider unnecessary, unworkable and constitutionally flawed factors in determining home repossession applications will in any way improve the situation. The reality is that this Bill could make matters worse and not better. It is important that we find the correct balance between the interests of both the home owner and the financial institution. Unfortunately the Deputy’s Bill does not do so.
It is for those very valid legal and practical reasons, that the Government must oppose the Deputy’s Bill.