Seamus Coffey: Those who can never pay back their mortgage need to be given a way out
The focus in recent weeks has been on the sovereign debt crisis that has now fully engulfed the eurozone. Ireland has its own debt problems with a public debt that continues to balloon as the crisis develops and a huge household debt overhang from the credit excesses in the previous decade.
On Friday the Financial Regulator released the latest quarterly update of the Mortgage Arrears and Repossessions Statistics. On first glance it makes for pretty grim reading but it is useful to dig into the numbers for principal primary residences in a little more detail. This will show that while the problem is serious it is not as catastrophic as some commentators are claiming.
At the end of September there were 773,420 residential mortgage loan accounts in Ireland with an aggregate balance of €114.4 billion outstanding. Of these 62,970 accounts were in arrears of 90 days or more. This is 8.1pc of the total number of loans but arrears make up 10.8pc of the total balances outstanding.
The numbers continue to deteriorate each quarter and there is no indication that this will ease any time soon. This time last year 5.1pc of loans by number and 6.6pc of mortgage balances were in arrears. Almost three-quarters of loans in arrears have been in arrears for six months or longer, while nearly one-half have been in arrears for more than a year.
It is important to distinguish between mortgage accounts and households. Many households have more than one mortgage loan secured against their principle primary residence. The 63,000 loan accounts in arrears of more than 90 days corresponds to around 49,000 households. This is fewer than 3pc of the total number of households in Ireland.
The banks have also been making huge attempts to try and keep mortgages out of arrears. There are 69,735 loans that have been restructured by the banks in some form. That is nearly one-in-ten of all mortgage accounts. It clear that the banks are willing to be flexible with a lot of borrowers in the current environment. There are 36,000 restructured accounts that have avoided falling into arrears.
Although market-level figures are not provided by the Financial Regulator, a sample analysis by the Central Bank from December 2010 showed that around 10% of loans are in arrears of less than 90 days. Most of these recover before the official arrears period begins at 90 days and the Central Bank have said that there has been a slowdown in rate of growth of early arrears in 2011.
Between loans that are in arrears, loans that have avoided arrears because of restructuring and loans in short-term arrears it is clear that over 20c of mortgage accounts are showing some level of distress. This corresponds to around 135,000 households.
Even with the scale of mortgage arrears problem the number of repossessions remains extraordinarily low. In the three months to September there were 162 possessions. Of these 119 were instances where the property was voluntarily surrendered or abandoned. There were just 43 forced repossessions in the quarter.
There are 175,000 mortgage accounts in some difficulty but there is also around 600,000 mortgages which are not in any arrears and have not being restructured. Capital repayments are being made on most of these.
Two years ago there was €118.6bn of outstanding balances on all owner-occupied mortgages in Ireland. This has now fallen to €114.4bn. Over the same period over €5 billion of new mortgage credit was issued. There is some mortgage lending occurring but when compared to the €40 billion of new mortgage lending in 2006 the drop in lending is around 95%.
Although there may have been some mortgage write downs by the banks, the greater bulk of the reduction in mortgage balances will have been because of repayments. Given the figures above it can be seen that in the last two years about €10bn of capital repayments have been made on mortgages. Over the same time the amount of arrears has increased by €720m. For every €1,000 of mortgage repayments that are missed nearly €15,000 of capital repayments are made somewhere else.
Even with the level of repayments that are being made the extent of the mortgage arrears problem is growing and we have yet to see an adequate response to it. There are several reasons why a “quick-fix” solution has not, and should not, be introduced to deal with this crisis.
The first is the location of the arrears. Research by the Central Bank shows that 50pc of residential mortgage arrears by loan balance are in the covered banks (AIB+EBS, BOI and PTSB). About 40pc of arrears are in other banks (Ulster, National Irish, Bank of Scotland, etc.) and 10% of arrears are in subprime lenders (Start Mortgages etc.).
We have complete ownership of some of the covered banks as was displayed when the government moved to get AIB to reduce its Standard Variable Rate on mortgages after the recent ECB interest rate cut. The State owns 99.8pc of AIB. Although representations were made to Bank of Ireland, the bank did not reduce its variable mortgage rate. Bank of Ireland is covered by the guarantee but is only 15pc state-owned.
In my opinion the banks should be free to set their own prices but the incident does highlight the limited control the government has, even over some of the covered banks. Outside of regulatory control the State cannot exercise any control over the non-covered all of which are foreign-owned.
The State has provided recapitalisation money to cover residential mortgage losses of up to €5.7bn over the next three years in the covered banks. No money has been provided to the foreign-owned banks and these contain half of all mortgage arrears.
The sub-prime mortgage market is in complete meltdown. At the end of September there was around €2.1bn of residential mortgages with subprime lenders. Of these it is estimated that €1.2bn are in arrears. In the entire market about 11pc of loans by balance are in arrears but this differs by type of lender.
In the sub-prime market the level of arrears is close to 60%. In the non-covered banks 12.4pc of mortgage balances are in arrears. The covered banks have the best performing loan books with 8.6pc of mortgage balances in arrears. It is also the case that there will be differences by individual lender within each group.
We cannot get the non-covered banks to write down mortgage debt just because we think it would be a good idea. Unless a proposal can be equally applied to the covered and non-covered banks it cannot be fairly implemented.
A second important consideration is the equity position of the households in arrears. A loan-level analysis by the Central Bank has shown that almost half of households with mortgage arrears are actually in positive equity, with around one-third having positive equity of more than 20pc in their homes. These people are not in arrears because they have negative equity; they are in arrears because they cannot meet the monthly repayment. A debt write-down will have little impact in helping these people.
Across the entire mortgage market the Central Bank estimate that between one-quarter and one-half of households in mortgage arrears have positive equity in their homes, with most of these having at least 20% equity. This group can absorb further house price falls and may have sufficient equity to exit their current mortgage at no additional cost.
The group that are in real danger are those who are in negative equity and in mortgage arrears. Using September 2011 house prices this group is estimated to be contain between 25,000 and 37,500 households. The deteriorating trend in house prices and mortgage arrears means the number of households in danger will increase.
However, it is likely that some people in this group will be able to get back on track but it is undeniable that there are many borrowers who have unsustainable mortgages – loans that will never be repaid.
Some commentators have claimed that there are 200,000 mortgages in serious trouble. There are not. There are many mortgages in some trouble, but there are probably around 20,000 to 30,000 households in serious trouble who need a dramatic intervention.
Further analysis by the Central Bank shows that 44pc of people who fall into 90 days arrears return to performing mortgages over time. There are some people who will never recover but these differences across borrowers show why many of the “sound-bite” solutions to the mortgage crisis cannot work.
We need to offer some relief to those who find themselves in a position of being unable to meet their mortgage commitments for a temporary period. The banks have been reasonably helpful in this regard in offering interest-only periods, reduced payments, term extensions or payment holidays on nearly 70,000 mortgage accounts. For many this will be sufficient and, in time, they will be able to get back on track with their repayments.
For those who have unsustainable mortgages a process needs to be put in place to allow these mortgages to be ended. These people will have to forego ownership of their homes but they will also lose the burden of debts that they could never repay. After a short period they will be in a position to make a fresh start. We need to accept that repossessions are part of the solution to this crisis and that the banks will have to face up to the losses they will make on these mortgages.
The Keane Report offered some suggestions along these lines but it is still not clear how these would actually work. The mortgage crisis has gone unchecked for too long. The work by the Central Bank has provided the detail to allow us to understand the scale of the problem. We now need to see some action that will help us to fix it.
Seamus Coffey is a lecturer in economics at UCC and a blogger at http://economic-incentives.blogspot.com