The End of WarehousingJuly 25, 2017
Could a recent High Court decision be the death knell for warehousing? At the very least, Personal Insolvency Practitioners (PIPs) now have a vastly stronger position when negotiating on behalf of their home owner clients who are facing negative equity, the threat of losing their home and insolvency.
The front page report in today’s The Irish Times highlights a High Court decision forcing a Bank to accept a Personal Insolvency Arrangement (PIA) which wrote off more than 50% of the mortgage balance (plus other debts) and allowed the homeowners to keep their home.
Up until this decision the normal solution for negative equity and insolvency was for the Banks to only accept the warehousing of a proportion of the mortgage rather than completely writing it off.
What is warehousing?
You won’t find it mentioned in the insolvency legislation. It is a mechanism created by Banks to avoid them having to accept the reality of house values and having to recognise the loss on these over inflated mortgage loans in relation to houses with negative equity.
Example – Mortgage balance €270,000, house value now only €105,000. In additionThe homeowner is also unable to keep up mortgage payments, has other creditors which cannot be paid when due and is facing losing their home and insolvency.
The house cannot be sold as cannot repay the mortgage with negative equity of €165,000. The homeowner seeks insolvency help from a PIP and a PIA is proposed as the best solution.
Warehousing would see the Bank agree to split the mortgage in two. Half would continue on the existing interest rate, the other half (to be warehoused) would be put at 0% interest with no ongoing repayments for a period of time (often only 5 years).
Benefit to the homeowner – short term fix only. In the short term can make these temporarily reduced mortgage payments and stay in the home.
Detriment to homeowner – long term the mortgage still vastly exceeds the house value. When the PIA finishes the homeowner is is still insolvent (as their debts exceeds their assets and unable to ever repay mortgage). Even worse, a number of warehousing arrangements are only for the period of the PIA. Once the PIA finishes the full mortgage is payable. In effect the Bank is only agreeing to reduce payments temporarily.
Big advantage for the Bank – they don’t have to recognise the drop in value so making their balance sheets look better than they really are.
Warehousing, especially if only for a small number of years and/or if not a great proportion of the mortgage loan, is not a long term solution for homeowners facing insolvency.
High Court Decision
The outline facts of this case are a couple’s house value has dropped by almost two thirds to €105,000 with a KBC Bank Ireland mortgage of €286,000. They also have a high level of other debts which they cannot manage. The couple were facing losing their home and could not repay their mortgage and other debts.
The couple did not want to lose their home.
Personal Insolvency Arrangement (PIA) proposal rejected by the Bank who were only prepared to go as far as splitting the mortgage in half, with half being “warehoused” at 0% interest for the life of the homeowners (to be fair to the Bank the indefinite period of time was far more generous than most warehousing arrangements). The problem is that the couple were still left with a mortgage of almost three times the value of their property and arguably they would still be insolvent at the end of their PIA.
The Court appeal process was used to overrule the Bank’s objection to their PIA proposal.
High Court overruled Bank’s objection to the PIA, with the result their mortgage loan must now be reduced to €120,000 with €165,000 of the mortgage to be completely written off rather than warehoused.
This is a stunning victory for homeowners and at the very least gives vastly greater bargaining power for PIPs when negotiating with Banks as they try to agree a PIA which allows clients to both stay in their home and return to long term solvency.
Who knows, maybe in a few years we’ll look back and say this decision was in effect the end of warehousing as we know it.
Are you struggling with unmanageable debts, negative equity or facing losing your home?