ECB published its opinion (CON/2019/14) on requiring the consent of borrowers to transfers of loans secured by mortgages on residential property. This opinion was issued in response to a request, from the Chairman of the Oireachtas (Irish National Parliament) Joint Committee on Finance, Public Expenditure and Reform, and Taoiseach (Irish Prime Minister), for an opinion on a No Consent, No Sale Bill 2019 (draft law). ECB is concerned that certain provisions of the draft law could result in an increase in non-performing loans (NPLs) of credit institutions and could impede the development of secondary markets for NPLs, thus affecting the financial stability.
The draft law introduces a new rule to the effect that lenders may not transfer loans secured by the mortgage of residential property without the written consent of the borrower. ECB understands that the draft law applies to all transfers of residential mortgages, without distinguishing between the purpose and the means of the transfer. ECB notes that, under Irish law, for credit institutions to issue asset-backed securities (ABSs), covered bonds, or residential (or special residential) mortgage-backed promissory notes, or to create security over pools of credit claims, the underlying residential mortgages must be transferred or, in the case of a security interest, capable of subsequent transfer. ECB is concerned that the draft law would have significant adverse effects on Irish credit institutions’ funding situation and capacity to properly manage their balance sheets. In turn, this is likely to result in additional costs being passed on to other borrowers; it could also result in a significant impact on mortgage pricing and availability and even an increase in non-performing loans (NPLs), all of which are likely to impact financial stability. ECB notes that Irish credit institutions are heavily reliant on mobilizing collateral backed by residential mortgages, in particular ABSs, covered bonds, and additional credit claims (ACCs), to access Eurosystem credit operations. Such ABSs, covered bonds, and ACCs are generally backed by performing residential mortgages, transfers of which are also affected by the draft law.
ECB opines that is worth considering in further detail how the draft law may impact the ability to address high levels of NPLs and why this may raise concerns from a supervisory perspective. It is noted that the other elements of the toolkit available to credit institutions to reduce NPLs include split mortgages, mortgage-to-rent schemes, and voluntary surrender. However, these solutions rely on the engagement of the borrower. The effect of the draft law would be to deprive credit institutions of the possibility of disposing of non-performing portfolios that can be worked out by transferees that have specialized expertise and a specialized business model. Removing this possibility would have serious implications for the balance sheets of credit institutions. The draft law may have an adverse impact on current and prospective Irish borrowers generally.
When pricing mortgages and setting interest rates, credit institutions take account of many factors, including the actual and future cost of funding; expenses and overheads; the cost of capital; and expected credit losses. By depriving credit institutions of an important tool available for the workout of NPLs, additional costs would be generated. These additional costs are likely to be passed on to other borrowers and could result in a significant impact on mortgage pricing and availability—further increasing interest rates charged to borrowers in Ireland, including holders of variable rate mortgages—and potentially leading to higher levels of NPLs. From a procedural perspective, further consideration should be given to the practical implications of the draft law on the process for transferring portfolios of mortgages, whether performing or nonperforming. The provisions of the draft law would mean that a credit institution could only approach borrowers to obtain their consent after the completion of negotiations between the transferee and the credit institution and after the conduct and completion of due diligence in respect of the portfolio.
ECB opines that the draft law must carefully balance the benefits of creating well-functioning secondary markets against the need to protect borrowers. The draft law would impede the transfer of NPLs off the balance sheets of credit institutions and impede the development of secondary markets. If credit institutions (or secondary market purchasers of assets) are deprived of efficient tools to work out NPLs in an effective and timely manner, the result could be unnecessarily high levels of NPLs and private-sector debt, which in turn have an adverse impact on financial stability and could undermine future credit supply. The implementation of the draft law would entail financial costs for the banking sector. Given the scope of the draft law and the importance of mortgage portfolios in total credit institution assets, these factors would have a negative impact on profitability, capitalization, and future lending capacity of the affected credit institutions and ultimately may have implications for financial stability.
Related Link: ECB Opinion (PDF)
Keywords: Europe, EU, Ireland, Banking, Securities, Credit Risk, NPLs, Asset-Backed Securities, Financial Stability, Secondary Market for NPLs, Residential Mortgage, ECB
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