Stephen Kinsella: Taxpayer's bill will go through roof if landlords can't pay the mortgage
Professor Patrick Honohan scared the crap out of his audience at a university conference earlier this year. The Central Bank Governor insisted banks start dealing with buy-to-let or investment mortgages, arguing "there are many circumstances in which there is less reason to be inhibited about repossessing buy-to-let properties. Where loan delinquency relates to pure investment-type 'buy-to-lets', it is surely now past time for the banks to be dealing more proactively with the situation of over-indebted buy-to-let borrowers no longer able to service the debts they assumed in order to take investment positions – now loss-making – in property".
A friend was in the audience, and was very worried at the end of the speech. He's a doctor, with a good job, and several underperforming buy-to-let properties, some of which he inherited. He began as an accidental landlord and then expanded during the boom.
He is not alone. The average Irish landlord has between 1.6 and 2.1 properties. Less than 1pc of the landlords in Ireland have more than 10 properties, implying there are a lot of small-time landlords with two, three or five properties, many of which are obviously now either underperforming or actively contributing to their owner's insolvency.
What is saving many landlords with mortgages is the relative stability of the rental market and the extremely low cost of servicing these mortgages at present.
Both of these factors are subject to change at any time.
The doctor's practice is, essentially, keeping him above water, but there are arrears outstanding on some of these properties. He can't change his prices because of the need to service these mortgages. His worry is that the personal insolvency legislation, which he is waiting for, will damage his practice. He's also terrified of people finding out about his situation. He's a rational investor and understands he took a gamble that didn't pay off. He's concerned, like many other people, about what to do and where to go next.
It's very, very likely his story is replicated across the professional classes in Ireland – the lawyers, accountants, doctors, and others who had the disposable incomes and credit histories to afford more than one investment property during the Celtic Tiger boom years. On the surface, everything looks fine, but in reality these individuals are barely solvent.
Of course, there are others in equally distressed situations, but the 'plight' of the buy-to-let investor isn't being given much airtime or printing ink because, quite simply, there isn't an ounce of sympathy for those who gambled and, for the moment, seem to have lost.
The importance of the buy-to-let investor sector is their size and scale. While 10.9pc of private residential mortgages are in arrears of 90 days or more, the buy-to-let sector is much worse. The arrears rate was running at 20pc in the last quarter on loans worth about €29bn. From 2010 to 2011, the number of non-performing loans in the buy-to-let sector jumped from 10.2pc to 25.1pc.
There is no doubt some of these mortgage holders will be restructured. In fact, Justice Minister Alan Shatter estimates 12 people per day, on average, will avail of this service in 2013. And they represent not one, but several mortgages at a go. That is the core of the problem. We have many people with smallish combined loans of, say, €2m, all trying to work out a solution whereby their core incomes are protected as much as possible.
It's likely that many of those buy-to-let mortgage holders with debts of €20,000 to €3m will try to enter the personal insolvency process once it is set up.
Remember that someone must realise the debts owed to the banks, and in Ireland this means the taxpayer. The Irish banks are some of the best capitalised banks in Europe, but they can't take a large-scale buy-to-let default without running straight back to the taxpayer for more money.
Under the new legislation, so-called debt settlement arrangements will allow the buy-to-let investor to remain in their home, with their standard of living more or less intact. They will work out their debts with the banks over a period of five years.
When it comes to healing the balance sheets of Ireland's banks, the doctors may end up doing more harm than good, but the problem must be addressed as soon as possible by those in power.