Michael Noonan (Limerick City, Fine Gael)

I thank the Members for giving me the opportunity to update the Seanad on the Government's work in tackling the mortgage arrears problem and on its wider banking and economic policies. The timing is particularly opportune given the significant decisions and announcements made last week.

Senators will be aware of the increase in the number of mortgages in arrears and of the difficulty this is posing for many families. Based on data published recently by the Central Bank, there were 76,600 mortgage accounts that were in arrears of more that 90 days at the end of last March. This amounted to 10.2% of primary residential mortgages. This position has unfortunately deteriorated in recent years. In March 2011, 6.3% of mortgage accounts were in arrears and in March 2010 it was 4.1%.

A number of important measures were developed in recent years to protect the genuine mortgage holders who were experiencing difficulty with their mortgage repayments. These include the Central Bank code of conduct on mortgage arrears which requires, among other things, lenders to put in place a mortgage arrears resolution process, provides that a lender must make every reasonable effort to agree an alternative payment arrangement and places a moratorium on legal action by banks against co-operating borrowers. Forbearance is indeed a very worthwhile and an appropriate response to most people experiencing mortgage difficulties. The approach as set out in the code of conduct on mortgage arrears can provide a household experiencing temporary mortgage difficulty with the necessary and important breathing space to allow that household to get back on its feet and resume meeting full mortgage commitments at a future time.

However, the Government also recognised that these measures are not, in themselves, sufficient to address all cases of genuine mortgage distress and that it will be necessary to develop other more long-term and structural responses for appropriate cases. Therefore, within a few months of taking office, the Government established an interdepartmental group and tasked it to investigate and consider the further measures that could be developed to alleviate this increasing problem of mortgage over indebtedness. This group, which was chaired by Declan Keane, produced its report within a very short timeframe and it was then considered by Government last autumn. This report has served as the blueprint for what the Government, the Central Bank and mortgage lenders are doing to address this significant economic and social problem The Government now has a comprehensive and realistic plan to tackle the mortgage arrears problem which it is implementing across Departments and agencies.

The Government's strategy for assisting those in mortgage arrears includes the following key elements - providing comprehensive advice and assistance to those in mortgage difficulty; providing for an approach to better enable problem mortgage debt to be dealt with on a bilateral basis by way of agreement between borrower and lender; rebalancing personal insolvency legislation to strike a fairer balance between debtor and creditor and to provide for more efficient debt resolution mechanisms, and introducing measures to allow families to stay in the home but transfer its ownership to a local authority or approved housing body.

The Government is fully aware that there are no quick fixes or a one-size-fits-all solution to the mortgage problem. Each family in mortgage arrears faces unique difficulties and we must have a range of solutions which can be adapted to properly address individual circumstances. This is a carefully calibrated approach to ensure that help is targeted at those who need it and cannot pay, as opposed to those who can pay but will not meet their obligations. It would not be a fair or an effective use of public resources to provide assistance to those who can well afford to pay their mortgages or other debt obligations. This importance of protecting taxpayers' scarce resources is reflected in key elements of the strategy. None of the measures being contemplated by the Government represents blanket debt forgiveness. It is clear that the vast majority of mortgage holders can and will continue to meet their mortgage commitments and the Government will support such people. Insolvent people cannot avail of taxpayer assistance in order to live a lifestyle which is well beyond the lifestyle of those taxpayers who are supporting them. The Government is committed to ensuring that, where possible, people can remain in their homes. However, this will not always be possible or appropriate and some borrowers who cannot meet their commitments will need to adjust their circumstances to a reasonable level similar to the majority of taxpayers who are assisting them. Given the case by case nature of the borrower-lender relationship, there is no entitlement to one particular solution; the resolution mechanism will vary and will be dependent on and appropriate to individual circumstances.

Personal insolvency reform was identified in the Keane report as a key element in the resolution of the mortgage arrears problem. The publication of the Personal Insolvency Bill is a fundamental part of this overall reform agenda. It will create a modern and fairer approach to dealing with unsustainable debt and will give genuine insolvent debtors the opportunity of a fresh start. This approach is in the best interests of the person and wider society and the economy. The Bill will change the relationship between the mortgage lender and the distressed mortgage holder. It will give a greater balance to the rights of the borrower and the lender and incentivise both parties to come to an agreed solution.

The clear objective of this Bill is to provide much needed relief to genuine insolvent borrowers who cannot meet their commitments as they currently stand and to restore them to the position where they can meet a reasonable level of their liabilities. For individuals who are insolvent without any reasonable prospect of being able to repay their debts in full, the new legislation will allow them to rehabilitate their financial situation over a defined period.

It should be strongly borne in mind that the losses the banks and other creditors have or will incur do not arise from this new legislation. Instead such losses are a consequence of prior lending to an individual that is now insolvent. The reality is that these losses already existed and the legislation only allows for unsustainable debt positions to be resolved in the best interests of the insolvent debtor and also in a way that is fair, in the circumstances, to all creditors. The Bill will give creditors a better opportunity of recovering losses in terms of incentivising individuals to earn in the future from which they can pay a proportion of their income to creditors. While the provisions of the Bill will not come into force until its is enacted by the Oireachtas, the detail of the policy framework for bankruptcy and personal insolvency reform now proposed by the Government will provide a clearer picture for borrowers and lenders alike about the consequences of non-payment and failure to reach agreement.

As Senators are aware, the Minister for Justice and Equality has introduced this important Bill to the Oireachtas. It is hoped to complete Second Stage in the Dail prior to the summer recess and to complete Oireachtas consideration in the autumn session. Steps are already under way to put in place the insolvency service and other systems to deliver this new debt resolution framework. The post of director designate for the insolvency service was advertised in May and the new director, when appointed, will have responsibility to get the new agency up and running without delay.

Personal insolvency reform is only one of the planks of the Government's overall response to the mortgage problem. The Central Bank, as supervisor of credit institutions and having regard to its very important consumer protection responsibilities, also plays a significant role. In particular, its engagement with regulated mortgage lenders, to require these lenders to produce mortgage arrears resolution strategies and implementation plans, is also key. The Keane report placed a strong onus on mortgage lenders to develop a range of innovative but practical solutions and to make them available to their customers who are experiencing mortgage difficulties. The Keane report even outlined a "decision tree" framework approach that could be adopted to indicate the type of solution that may be appropriate and possible having regard to particular customer circumstances. It placed a strong onus on mortgage lenders to develop these solutions and to present them to the Central Bank.

The indicative options suggested by Keane are now well known, namely, split mortgages, trade down mortgages, restructuring of mortgage payments, and forbearance or sale. The report also made it clear that this was not an exhaustive list and that other options could be developed by banks. The process has been a bit slower that had been hoped. It must be recognised that banks have also had to come to terms with the significantly new demands and pressures that arise from the more in-depth engagement that is now required with a much greater number of their customers. It is hoped that, following intensive engagement with the Central Bank, lenders will be in a position to move to providing suitable long-term forbearance options to their customers in genuine distress from a personal debt perspective. The recently published Bill should act as a stimulus for banks to develop and bring forward realistic and sustainable options. It is hoped that the majority of agreements can be done on a bilateral basis and will not require use of the formal provisions of the Personal Insolvency Bill.

The Central Bank has indicated that lenders have now completed, or are completing, the segmentation of their loan portfolio to assess the projected level of different forbearance or modification techniques for the bank. Lenders have also provided details to the Central Bank of their proposed menu of forbearance and loan modification techniques which, it is understood, are broadly in line with the recommendations of the Keane report. I am informed that individual lenders are expected to move to the measured roll-out stage shortly and that they will be required to start fully implementing their complete menu of approaches later this year. It is essential, in the real interests of homeowners that are experiencing genuine mortgage distress, that momentum is maintained and even increased on this work and that banks allocate sufficient operational capacity to effectively implement the process.

Strong progress has also been made on the other elements of the Government's mortgage arrears strategy. The Minister for housing and planning has now formally launched the mortgage to rent scheme on a nationwide basis. Much focus has been rightly placed on enabling people to continue to live in their home, and this is a very important backstop scheme for those with the most distressed mortgages and who would otherwise be eligible for social housing support. The scheme is specifically targeted at those low-income families whose mortgage situation is unsustainable and where there is little or no prospect of a significant change in circumstances in the foreseeable future. The scheme can ensure that the family remains in the home, paying rent, while ownership is transferred to an approved housing body. It is accepted that this is not an easy option for families as it involves the surrender of home ownership. However, it does provide security and continuity to families and in many cases a more affordable way for low-income families to meet their accommodation needs. More than 60 cases are now going through this process and it is expected that up to 100 families will avail of this important scheme this year.

The provision of clear information and advice to mortgage holders is also an important requirement as identified in the Keane report. While the overall objective of the recommendation was immediately accepted by the Government, the details of the way to achieve this did require further thought. In particular, the roles of existing agencies in the area of the provision of public service and financial information and advice, other ongoing developments, not least the advisory role now envisaged for personal insolvency practitioners in the personal insolvency area, had to be considered further to ensure there would be no duplication or confusion of service or responsibility. The Government has broadly agreed a three-pronged framework to better inform and advise at-risk mortgage holders. These initiatives include: an enhanced website under the aegis of the statutory Citizens Information Board - keepingyourhome.ie/ - is in place and provides important information to distressed mortgage holders; a borrower telephone helpline is also provided under the aegis of the board and this will be enhanced next month; and new initiatives to provide one-to-one advice to mortgage holders to specifically provide professional financial advice on long-term forbearance or restructuring proposals that may be offered to them by their mortgage lender - it is intended that this will be in place to tie in with the roll out of solutions by banks under the MABS process.

The measures to address the mortgage crisis are of course part of the wider Government work to repair the banking system and to refocus it on meeting its primary objective which is to fulfil the credit needs of sound businesses and personal borrowers and to provide a secure place for savers to deposit their money.

Within the context of the EU-IMF programme, we have embarked on a major repair programme for our banks. This work is being carried out led by the shareholding management unit of my Department.

The main element of this has been the recapitalisation of the key banks last year to an amount of €24 billion, inclusive of a buffer amount of over €5 billion, as determined through the financial measures programme. This capital need, however, has not been exclusively provided by the State. Other sources, such as internal capital generation, private investment and burden sharing with subordinated bondholders, are also making a contribution. There have been comments recently about the Irish banks possibly needing more capital in the future. These have been made in the context of changing regulatory capital requirements but also in the context of the rising mortgage arrears. Fixing the mortgage arrears problem, therefore, is not only important from a social perspective but also from a banking stability perspective. In this context, it should be recognised that arrears are generally tracking between the base and stress case assumptions in the 2011 financial measures programme and that no additional capital requirement is expected to arise at this time from the mortgage arrears problem. In addition, at a general level, it should be recognised that Irish banks are among the best capitalised in Europe.

A further challenge being addressed is the need to rebuild a stable funding framework for the banking system. We have seen the stabilisation of the deposit base of the Irish banks, and indeed some growth. Most deposits are still covered by a Government guarantee, but the banks recently started recruiting deposits without this guarantee as a first step towards eventually exiting the guarantee scheme.

In parallel with rebuilding funding capability there is the continuing deleveraging of the excess assets of the banks' balance sheets. The extent of deleveraging to date is also a big step towards the fixing of a banking system to meet the needs of the economy.

Turning now to economic prospects, my Department recently published updated economic and budgetary projections. We see GDP growth of 0.7% this year. The indications are that domestic demand remains fairly weak. In particular, consumers continue to save a relatively high portion of their incomes, partly reflecting uncertainty regarding what the future will bring. This is where Government comes in. What we are trying to do is create certainty and boost confidence to reduce the need for excessive precautionary savings, but the recent savings trend also reflects the desire of many households to reduce the burden of debt accumulated during the bubble years. That is entirely natural, and I expect this phenomenon of balance sheet repair to continue for some time.

The external sector is leading the recovery, with exports of goods and services now well in excess of pre-crisis levels. This shows that the improvement in competitiveness, which has been evident in recent years, is standing to us. I believe this demonstrates the inherent flexibility of the Irish economy. Prices and costs in Ireland have fallen significantly, and further improvements are in the pipeline. The strong export performance also means that our balance of payments with the rest of the world moved into surplus in 2010 for the first time in over a decade. A small balance of payments surplus was also recorded last year.

As a small open economy whose recovery is being driven by exports, Ireland will be affected by the soft patch that the global economy is currently going through. However, the composition of our exports and the aforementioned competitiveness improvements will help to offset the potential negative impact of this slowdown. I would emphasise that nearly all forecasters expect that Ireland will record positive GDP growth again in 2012.

On the budgetary front, I am happy to say that based on data for the year to date we remain on track to achieve our budgetary targets. In fact, tax revenue is slightly ahead of our expectations so far this year, with the early indications suggesting that we are within our target commitments.

The outcome of the European Council meeting last week is also a significant and very positive development for our future prospects and the statement that it is, using the words of the Council, "imperative to break the vicious circle between banks and sovereigns" is most welcome. While much work will now need to be done, starting with a eurogroup meeting next week, to build on that and to work out the details, this European Council decision represents a significant policy breakthrough along the lines of what Ireland was seeking, to appropriately address the burden we assumed for dealing with the Irish and wider banking problem. The eurogroup will now commence an examination of the Irish financial sector, with a view to further improving the sustainability of this well-performing adjustment programme.

The decisions and developments of last week, domestically on personal insolvency and at EU level on the wider Irish debt burden, have been of great significance and they suggest that there is now a real opportunity to seize the opportunity to rebuild our economy and put it on a more sustainable footing. Today's announcement that the National Treasury Management Agency is resuming its treasury bill programme shows the significant improvement in market sentiment towards Ireland since this Government came into office.

Looking beyond this year, there are grounds for optimism regarding the medium term prospects for the Irish economy. Our underlying strengths have not disappeared with the crisis. We retain many of the core qualities that underpinned the sustainable, export-led growth that prevailed during the 1990s, and it is now important to use them while this time maintaining a stable banking and fiscal environment.