Mortgage to Rent Scheme offers hope to defaulting home owners

Our Property Team provides practical advice on how the "Mortgage to Rent" scheme operates and what the advantages are for both homeowners and financial institutions. The high level of indebtedness and arrears that has arisen amongst personal borrowers in relation to their family homes has been well documented. The Central Bank confirmed that at the end of June the number of accounts in arrears of over 90 days in respect of their private dwelling houses was 90,343 (11.8 per cent of total). Whilst it is a very pressing issue for the householders/ individuals concerned, in that they have little or no prospect of repaying the debt and retaining ownership of their family homes, it is also a matter which is impairing the balance sheets of banks that lent the money and are unlikely to  ever recover the bulk of these funds except  by seeking repossession orders and ultimately evicting the defaulting borrowers. The Mortgage to Rent Scheme involves a series of transactions resulting in the householder changing their status from house-owner to tenant and moving from paying a mortgage to paying rent. A key element under the scheme is that the defaulting borrower remains in their home. HOW THE SCHEME OPERATES The scheme operates through local authorities and/or housing agencies  acquiring the PHD of defaulting borrowers from the Bank and renting the properties back to the householders concerned. The steps involved include;

1. The defaulting house owner applies to their lender to establish that they are eligible for the scheme,
2. The lender will assess the capacity to repay and a decision has to be made by the bank that it is willing to agree a sale to a housing agency / local authority at a market value that is below the level of debt secured against the property and thus recover a part of the loan secured on the property.
3. The bank will enter into a residual debt agreement with the houseowner in relation to the remainder of the debt after the sale proceeds have been applied against the mortgage debt.
4. The householder signs a residual debt agreement acknowledging a continuing liability for any shortfall on the debt after the sale
5. The householder voluntarily surrenders the house to the bank who can then proceed to sell the property to the housing agency.
6. The householder receives independent legal advice on the consequences of each of the steps in the process.
7. The householder will pay rent going forward to the local authority /housing agency.
8. The local authority / housing agency will also be responsible for the maintenance / upkeep of the property going forward and enter into a letting agreement with the householder.

POTENTIAL DEBT WRITE-OFFS? Part of the debt of the householder which remains after the sale  is  “parked” with no interest accruing.  Into the future a decision will  have to be made by the banks to write off the remaining debt after a period with the possibility that the borrower would repay a defined portion over a period to qualify for a write off. This is similar to arrangements under insolvency  provisions. BENEFITS OF THE PROPOSED SCHEME For the Householder The housing agency rent will be a sustainable  rent and thus will enable the individual to have a manageable rent payment. The householder will have the opportunity of remaining in their house.   The maintenance of the property will also pass to the housing agency /local authority. There is a possibility that the householder may be able to buy back the property into the future, subject to an improvement in their circumstances. The Banks A part of the total debt will be recovered on the sale and thus the banks’ balance sheet will be improved. There is also a social dimension for the bank in that the householder can remain in their home albeit with a changed status. Local Authority /Housing Agency If this scheme is not implemented there is a strong likelihood that householders who lose their homes will look to local authorities to house them. This solution resolves this problem and enables the local authorities /housing agencies to address a social need while acquiring housing stock at current market prices. There is a possibility that some of this housing stock will be sold back to the individuals into the future as their personal circumstances improve. Conclusion The phrase  “win/ win” is often miss-used but a mortgage to rent scheme has a number of very tangible social and economic benefits. The increasing house prices in the Dublin poses a challenge to the Mortgage to Rent Schemes as it means that  housing agencies are finding it more difficulty to negotiate purchases at realistic valuations. The mortgage to rent scheme is one that should be actively promoted to assist defaulting home owners bring resolution to the level of defaulting homeowner debt sitting on the balance sheets of the banks.