One of the popular ways for banks to deal with mortgages in difficulty is to “warehouse” some of the mortgage and agree with the borrowers that they may pay what they can afford to pay at the time, and pay off the warehoused amount at the end of the extended mortgage term.
The vexed question of warehousing frequently came up in Personal Insolvency Arrangements, with some banks insisting on warehousing if they were to approve a PIA.
Warehousing poses a dilemma for Personal Insolvency Practitioners, as PIPs are required to restore the Debtors to solvency. How could a PIP say that a debtor was restored to solvency if he had a large “warehouse” amount to pay at the end of the mortgage, particularly if the debtor was over, say, the age of 65 at the end of the mortgage.?
In view of the above dilemma, it was only a matter of time before the High Court provided a ruling on the matter. Such a ruling was given on 22 May 2017 in a case involving KBC bank.
The core facts of the case were that KBC were owed €285,000 on a family home with a value of €105,000. The PIA provided that the mortgage be written down to €120,000, with the balance written off. KBC objected, and stated that its counter-offer of writing off €15,000 and splitting the mortgage into two components: a “live mortgage” of €135,000 and a “warehoused” mortgage of €135,000 bearing interest at 0% should have been incorporated into the proposal.
The court held that there was nothing in the legislation which prohibits the splitting of a mortgage. The court also held that any individual case will “depend on all the circumstances.”
The court concluded, based on the particular circumstances, that the PIA as formulated by the PIP was not unfairly prejudicial to KBC, and affirmed the Circuit Court Order approving the PIA.
Impact of judgment
The judgment confirms that a well thought and reasoned PIA will be difficult for a creditor to object to. It confirms that the PIP has a “reasonable” degree of latitude in formulating PIAs. It also significantly blunts the main tool of mortgage providers, warehousing, going forward.