Friday 24 November 2017

Irish banks are facing much higher mortgage losses than first thought

Dan White

Dan White

WHILE it ruled out across-the-board write-downs, last week's interdepartmental report on mortgage arrears gave some indication of the scale of the problem facing the Irish banks. Based on even the most optimistic assumptions, they are looking at huge mortgage losses.

According to the report, clearing the negative equity on Irish mortgage books, both with the domestic and foreign-owned banks, would cost up to €14bn. To which one can only say, with average house prices having fallen by at least 40 per cent since their 2007 peak and €115bn of private (that is, non-investor) residential mortgages outstanding, that looks very much like a low-ball estimate.

That's the bad news. The (relatively) good news is that half of all arrears are with foreign-owned banks.

On the basis that the proportion of negative equity held by the foreign-owned banks is broadly similar this means that clearing the negative equity of the Irish-owned banks' mortgages would cost €7bn.

Given the extra capital that has been pumped into the Irish-owned banks, €24bn this year alone, this means that they should be able to absorb a hit of this size, particularly if it was spread over a few years.

However, the interdepartmental report had nothing to say on the subject of tracker mortgages, which on their own have the capacity to cost the Irish-owned banks several billion euro more. Throw in the fact that the negative equity estimate looks hopelessly optimistic and the Irish-owned banks' mortgage losses are likely to be significantly higher than the numbers contained in the report would indicate.

Sunday Indo Business

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