Alan Shatter (Dublin South, Fine Gael)

I would like to start by thanking Deputy Donnelly for publishing his Bill. I gave very serious consideration to its content. I want to encourage Members on both sides of the House to use the Friday facilities for Private Members' Bills and I look forward to the time during the lifetime of this Government when a Private Members' Bill is enacted.

I am also conscious that I have limited time. We are distributing a script which I have little chance of completing within the time allotted to me, but I would like to set out very clearly some important issues relating to the Bill. In respect of the work done by Deputy Donnelly and by other Members of the House, I thought it was important that they have the fullest consideration of the provisions presented to us.

The Government shares the concern expressed by Deputy Donnelly in his 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 home owners, while an interdepartmental working group will shortly complete its deliberations on the Keane report and relevant announcements will be made by my ministerial colleagues. 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 30 April. In the intervening period, Members of both Houses have the opportunity, through the deliberations of the Joint Committee on Justice, Defence and Women's Rights, to contribute to the development of this Bill regarding the issue of insolvency generally and in particular, the issue of 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 courts 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. Unfortunately, the Bill is poorly drafted and is both somewhat confused in its approach and lacking in essential detail. Its provisions 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 a serious constitutional problem. 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 who are parties to a civil partnership.

The explanatory memorandum also refers to two court cases, Bank of Ireland v. Smyth 1995 and Anglo Irish Bank Corporation v. Fanning 2009, regarding the jurisprudence on the courts' discretion in respect of orders for repossession. I am familiar with both of these cases and the Deputy's reference to them in the context of the purpose of his Bill - matters to which the court should have regard in a repossession hearing - is mistaken and of no real relevance to the measure we are considering today. The net issue in the Smythcase 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 Fanningcase, 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 thinks that they have any direct 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 crisis began, 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. In the context of courts, the definition includes reference to the District Court. As the District Court does not hear repossession orders, this is something of an irrelevance.

Section 2 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 these proposed factors are intended to be additional to the current options open to the court , which include adjourning proceedings for a specific period before final determination or to make or decline to make an order for possession and 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 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 court's 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, 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 meet future financial obligations. It seems the Deputy 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 currently do not have such jurisdiction and the Bill does not give guidance as to how it could 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 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. This arrangement offers a better and more considered approach and I will return to this matter 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 currently approach repossession applications. The level of arrears on a loan is a matter of specific relevance 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 currently 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 institution's 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 on residential property would essentially become meaningless.

It is clear 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 a friend to facilitate a home purchase.

There would also be a significant risk that if debtors believed repossessions were not possible, mortgage repayments would 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 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? Could a perverse situation 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 home's value could 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 rewrite 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 five 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 institution's ability to enforce its security. In the context of how the property market has developed, I wonder where we are to find such experts with clairvoyant powers as to be able to predict property values five 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 currently relied upon by any court predicting residential property values in five years, 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 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 radical proposal that the court should have regard to the conduct of the lending institution. This is a 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 Court 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, namely, the loan on the home to be repossessed, or the conduct in total over an unspecified number of years of the bank in question towards the specific borrower or from the time 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, ten or 20 years previously? Are the courts to make judgments as to the level of mortgage interest appropriate for a financial institution to charge an individual borrower on a home loan? 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 their liquidity or solvency? 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 a 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? Unfortunately, the Bill has totally failed to address issues of substantial importance. At this stage, it is worth noting that no definition of the word "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 a court. There is no mention of what would be a necessary qualifier, namely, that the matters be relevant to the particular case made for repossession. The court already takes into account matters that appear to it to be relevant to the particular case.

I am conscious that a short time is left to me. I refer Deputies to the rest of the speech, as distributed in the House, which makes specific reference to the option that Deputies will have to contribute to the development of the insolvency Bill and address issues relating to family homes and mortgages and borrowers who are in difficulty. I hope that a constructive engagement will take place on that and, in particular, we make reference to the personal insolvency arrangement which will create the possibility of mortgage debt being restructured and, indeed, in the context of the capital outstanding, on some occasions, that it would be agreed that some of the capital would be no longer payable.

In response to Deputy Calleary, the personal insolvency arrangement requires agreement between both the person who is in financial difficulty and the lending institutions but not all lending institutions' consent would be required because only 75% of those which have lent funding will, of necessity, have to agree to the arrangement. What puts the lending institution under pressure and what is of huge advantage to borrowers is the possibility that if the lending institution does not comply and does not agree in circumstances where it is appropriate that there should be some haircut on the capital outstanding, it could be confronted by the possibility of the borrower seeking bankruptcy and it recovering less than it is entitled to. The borrower would know that if, due to his or her unfortunate financial circumstances, he or she had to go through a bankruptcy process and if he or she behaved honestly, made full and proper disclosures and did not behave fraudulently, then at the end of the three years, he or she would emerge from that process with no debts outstanding and be able to get on with his or her life and rebuild his or her financial security for the future.

I thank Deputy Donnelly for the opportunity to discuss this Bill. As Minister for Justice and Equality, it is my obligation to carefully legally analyse any proposal that comes before the House. I know the proposal he brought before the House was well intended and I hope he will understand that for the reasons given, it is unworkable and the Government, unfortunately, cannot support its proceeding from Second Stage to Committee Stage.

See this speech in context