Professor Patrick Honohan:

I thank the Chairman for inviting me to discuss progress and developments in regard to implementing the mortgage arrears resolution targets. When I was last before the committee in September, I noted that there were indications the mortgage arrears resolution process was working and, while there was still some way to go, momentum was building. Based on the evidence of recent months, that momentum has been established and we are starting to see progress by all banks in working to address mortgage arrears issues. It is still fair to say, however, that full resolution across the system will take a significant amount of time.

Under the mortgage arrears resolution targets imposed by the Central Bank last year, the banks are required to meet quarterly targets on the resolution of mortgage arrears. To date, we have received returns from the banks for three quarters, and we reported the outcomes of our first assessment in November. We recently concluded our audit and assessment of a sample of the banks' end-2013 target returns, which the committee discussed recently with the various institutions. Based on the information submitted, the banks have proposed sufficient numbers of solutions to meet the targets of proposing solutions for 50% of arrears cases and concluding 15% of them. I am aware that the term "concluding" risks becoming slightly Orwellian; as we know, there is still a lot to be done where a case is treated as "concluded". I am conscious of avoiding terminology that might mislead people and, as such, I am starting to think of these cases as "confirmed" as much as "concluded". Having said that, we might be best to keep with what has been published.

Our audit effort on this occasion was channelled towards what we viewed as the highest-risk areas. We focused on examining the areas and issues which have caused us most concern and which the banks must address now if they are to build a sustainable, long-term process to deal with arrears. The audit process involved examinations of individual loan files, based on institution-specific samples, distinguishing, for example, between situations where a bank could be perceived as still relying on short-term solutions and where a bank seemed to be relying on what might be called "bulk campaigns", that is, offering similar solutions across the board for a range of cases rather than tailored solutions. We zoomed in on such practices where we saw them as potentially being a problem.

I would summarise our findings by saying that although we noted a number of areas of deficiency in the course of the audit, as I will mention below, by and large, the evidence is consistent with a process which is working more or less to target. We should bear in mind, however, that the targets are limited and our conclusion does not mean everything is sailing perfectly. A number of key issues emerged in the audit, all of which have been communicated to the banks to address. First, in some banks, communications with borrowers on proposed sustainable solutions were too frequently verbal in nature and did not provide sufficient clarity to borrowers in respect of the ultimate solution proposed. Second, there is evidence that despite the requirements for proposed solutions to be sustainable in the long term, short-term loan modifications are still too prevalent in some banks. Third, affordability assessments were often not evident on files reported as sustainable. In a sense, this is a technical breach in that the assessments might actually have been done but were not evident on the files. We want to ensure, however, that the banks are doing them properly. Fourth, in a limited number of cases we found issues of potential breaches of the code of conduct on mortgage arrears, CCMA, relating to the timing of the letters in advance of legal proceedings for repossessions commencing. The code of conduct is an important underpinning to the targets process. The process is a prudential action and the code of conduct is there to protect the borrower. The two work in tandem. The Central Bank will commence a review of CCMA compliance in the second half of the year and these findings will be taken into account as part of the targets review.

We are communicating the specific issues and actions identified for each bank, including actions arising from our wider insights into the effectiveness of their strategies to resolve mortgage arrears. While these issues are significant and it is important that action is taken to address them, they should not impede progress on dealing with arrears cases. We expect the banks to continue to progress cases to sustainable and long-term solutions. In the meantime, we will continue to review their operations and strategies and where there are deficiencies or we believe things should be done better, we will let them know. Addressing mortgage arrears was never going to be a short-term issue. Our view has always been that it would take time to tackle the issues and a number of years to work out. We are now at a point were progress is evident and, notwithstanding specific areas for improvement by banks, we are moving along the right path. Mortgage arrears remain a significant priority for the Central Bank and we will continue our programme of intensive oversight of the progress made by the banks.

We are now at a point were progress is evident and, notwithstanding specific areas for improvement by banks, we are moving along the right path. Mortgage arrears remain a significant priority for the Central Bank and we will continue our programme of intensive oversight of the banks' progress.