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Dan White: Mortgage timebomb will cause new banks crisis when it goes off

The recommendation that the moratorium on repossessions should be extended by a further year is another sign that the clock is ticking on our €150bn mortgage time bomb.

Last year all of the main banks and building societies agreed not to repossess the homes of people whose mortgages were in arrears for at least 12 months. Now, with the 12-month moratorium about to expire for many of those in arrears, there are fears that the number of homeowners facing repossession could rocket.

For some it has already happened. Entertainer Adele King (better known as Twink) revealed that her family home was about to be repossessed by her lender. Twink's statement came on the same day that the Oireachtas Committee on Social and Family Affairs recommended the 12-month moratorium on home repossessions be extended to 24 months.

The recommendation comes just 11 days after the Financial Regulator extended the 12-month repossession moratorium to all lenders, including the sub-prime lenders, who have been by far the most aggressive in pursuing homeowners.

On the face of it, the Financial Regulator's action to curb the ability of the sub-prime lenders to secure repossession orders should contain the problem.

While no official figures have yet been released, it is estimated that financial institutions secured about 1,000 repossession orders last year, up by a third on the 748 repossession orders granted in 2008.

Unfortunately, these figures are merely the tip of the iceberg.

The most recent statistics from the Financial Regulator show that over 26,000 homeowners, 3.3pc of those with mortgages, were at least three months behind on their repayments by the end of September 2008. This was almost double the 14,000 homeowners who were three or more months in arrears at the end of June 2008.

At the same time as the number of homeowners in arrears has been soaring, house prices have been in freefall and unemployment has started climbing again. Further compounding their misery is the growing proportion of homeowners who are now stuck in negative equity, where the value of their homes is less than the amount which they have borrowed.

Recent research by the ESRI estimated that there were almost 100,000 homeowners experiencing negative equity at the end of 2009. Depending on how house prices perform, that number will rise to somewhere between 200,000 and 350,00 by the end of this year. In other words, by the end of 2010 between one-quarter and four-fifths of all homeowners will be stuck in negative equity.

This combination of falling house prices, rising unemployment and increased arrears is setting the stage for a social, economic and financial catastrophe. Not alone will tens of thousands of homeowners be confronted with the prospect of losing their homes, a tsunami of mortgage defaults will also wipe out the banks.

At the end of December the Irish banking system had lent over €147bn in residential mortgages. When one takes into account that Irish house prices have fallen by at least a third since their February 2007 peak, growing arrears and the increased incidence of negative equity it is clear that the Irish banks are going to have take a massive haircut on these loans.

The 30pc average write-down the banks are taking on their development and commercial property loan books has already forced the government to pump in €11bn of fresh capital and set up NAMA to take €77bn of bad loans off their books.

Will the housing meltdown trigger a second phase of the Irish banking crisis?

Even a 10pc average mortgage write-down, surely an optimistic prediction, would cost the banks another €15bn in loan losses. The mortgage timebomb is already ticking. When it explodes, probably in the second half of this year, it could take the banks and tens of thousands of homeowners with it.


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