The Risk Professional: Banks in peril as Irish Court undermines mortgage securities

The full background story was published yesterday by our sister publication BankingInsuranceSecurities.Com yesterday. In summary, a high-quality borrower in Ireland ran into financial difficulty during the financial crisis and defaulted on his mortgage. The lender, a building society, obtained a repossession order, suspended for six months to see if he could sort out his problems.

His challenge to the repossession order is based on an argument that the system of obtaining repossession is based on bald facts of unpaid arrears and that the Order, made by a junior judge called a Registrar, does not examine the wider facts. Those facts include the effect on the borrower including that repossession renders him and his family homeless. He claims that this is in breach of the Constitution (an Irish domestic issue) and that it breaches EU principles of human rights (an EU-wide issue).

The implications of the case for the financial services industry are potentially devastating and may destroy the value of assets in the balance sheets of lenders, causing meltdown in the domestic lending sector.

This is because, if the Court agrees with his arguments, the enforcement of securities becomes uncertain. And a security that cannot be enforced is almost worthless.

The case came before a Judge in the same County Court as the Registrar made the original order. The original Repossession Order is now suspended pending a hearing on the arguments raised. Arguably, that implies that other repossession actions should also be stayed. If courts are persuaded to stay or block all repossession orders, then the entire mortgage asset book of Irish banks is adversely affected.

Arguably, Courts in other countries with a similar system of making Orders, may be persuaded that they should consider adopting a similar stay.

If that happens, then the impact will be felt across much of the consumer lending sector across Europe and other Common Law jurisdictions.

Given that the financial crisis had its genesis in the fact that poor quality lending proved unrecoverable, the risk to the global financial sector of reducing the effectiveness of high-quality lending may prove even more devastating.

The case is a long way from its conclusion. Currently, it is a temporary stay in proceedings in a lower court. To reach the Irish Supreme Court and the European Court of Human Rights will be a long process with many potential stumbling blocks along the way. Even so, banks and other lenders must have regard to the fact that their loan books are now in peril - and with them their balance sheets and, ultimately, their survival.