Friday, August 19, 2011

Jumbo Mortgages. Take Two.

These issue of €1 million+ mortgages is back in the news today following a presentation by Prof Morgan Kelly to the Irish Society of New Economists yesterday.  He first made the claim of 10,000 million plus mortgages in his Hubert Butler lecture in Kilkenny two weeks ago and which was examined on this site here and I also have a piece here.

An article in today’s Irish Times provides a fresh defence of the claim.

Yesterday he told a meeting of the Irish Society of New Economists in Dublin that this “anecdote” had “taken on a life of its own”.  He had been called “irresponsible” for using it.  “I read this in a newspaper a year ago, it has to be true,” he joked.

Prof Kelly said he had since used econometric calculations to analyse how many of these large investment mortgages there were, concluding that the anecdote “seems to be correct”.

Yesterday he said the investors probably took out more than one mortgage so it was 10,000 mortgages not 10,000 people who owed €11 billion.

Prof Kelly also calculated that two-thirds of investor loans were interest-only.  “These interest-only loans seem to concentrate among investors, and my guess would be this is large properties.”  This large number of interest-only investor mortgages was “ bad news” for the Irish banking system and the taxpayers, he said yesterday.

These investors “typically bought property that was designed for investors”.  Prof Kelly predicted “very large losses” on these properties.  Demand for property was driven by the flow of lending from banks. “The flow of lending to these investors is only 1 per cent of what it was back at the peak,” he said.

“There is no demand for this stuff, so I think there is going to be very large losses on these things.

This time the focus is on investment or buy-to-let mortgages.  In most cases the most important demand for these properties is in the rental rather than real estate market.  There may be some investors who bought investment properties for resale but the majority would have been bought to rent.

The most recent Daft report indicates that rents have fallen by an average of 25% since 2007.  This would be bad news for investors but it is cancelled by the drop in interest rates, particularly tracker rate mortgages. 

The key ECB rate has fell from 4.25% in July 2008 to 1.00% in May 2009.  It now stands at 1.50%.  This is still lower than at any time during the 2002 to 2007 period.  Recent indications are that further rate increases by the ECB will be put on hold. 

If two-thirds of these loans are interest only as claimed then the repayments on these loans will have fallen by more than the drop in rent.

We can get an insight into the residential investment market in Ireland from an interview  in The Irish Examiner with Hubert Kearns, chairman of the project agency which handles the collection of the Non-Principal Primary Residence charge of €200 on behalf of the country’s local authorities.  This includes all second properties and not just those for investment.

One of the most surprising features of the new tax regime was the level of compliance, about 80%, for the self-declaration tax on non-principal private residence (NPPR).

"There was a very high level of compliance by people before the due date both last year and this year. Another thing that surprised us is that there is a very large number of individuals who own a sizeable number of properties.
"There are 99,000 people with one property, but there are 35,000 people who have between two and 10 properties and who have paid the charge on two to 10 properties. In effect, this means of course that they own between three and 11 properties.

"And the figures go up, 970 people have between 12 and 21 properties; 230 people have between 22 and 31 properties and 100 people have between 32 and 41 properties."

Although there are 35,000 people who have paid the charge on between two and 10 properties, it is likely that most of these are in the range of two to four and are unlikely to have mortgages of more than €1 million.  Still there could be a couple of thousand people with five to 10 properties.

There is 1,300 people who paid the charge on more than 10 properties.  There is no doubt that a sizeable proportion of this group could have one (or more) mortgages in excess of €1 million.

If we look at the banks we see that the covered banks had a buy-to-let loan book of around €24 billion as reported in the stress tests.  The loan balances for AIB, BOI, PTSB and EBS are summarised in this table.  There was also about €600 million of buy-to-let loans in INBS.  Click to enlarge.

Loan Balances

Of the total buy-to-let loan book of €24 billion it is hard to imagine that €11 billion would be concentrated in fewer than 10,000 people.  It could be the case though.

The stress tests allow for €6.3 billion of loan losses in buy-to-let loans.  The “three-year loss provision” of the Central Bank means that capital was provided for around €3.5 billion of losses between now and 2014.

Unlike owner-occupied mortgages we do not get data from the Financial Regulator on arrears for buy-to-let loans.  The banks themselves have given us an insight into this. It’s not pretty.  When announcing their half-year results AIB said.

One in five of its 44,000 Irish buy-to-let mortgages was in arrears or had been restructured to help borrowers at the end of June, compared with one in 12 of the bank’s 126,000 home loans.

The stress test loss of €6.3 billion in the adverse scenario would require about €12 billion of defaults in buy-to-let mortgages assuming that, on average, the property repossessed is worth 50% of the loan value.  That is a default on half the loan book.

The buy-to-let loan book is a mess but we still lack evidence that these 10,000 jumbo loans exist.

UPDATE: This morning we have had some useful information on whether the banks have 10,000 mortgages of more than €1 million on their books.  The numbers come from the website and can be seen here.  A fairly robust defence of the numbers was provided over on Namawinelake in this comment.

The numbers provided by the banks seem more realistic to me.  Although it seems to be “sources within the banks” rather than an official publication, the evidence is that the covered banks have about 2,500 mortgages on their books of more than €1 million.  This includes owner-occupied AND buy-to-let mortgages.

If 20% of these loans defaulted the banks are looking at losses of around €250 million.


  1. There are a couple of points to note about investment mortgages:
    1. Stamp and deposit were often garnered by refinancing/topping up PPRs - so there is a double cost there.
    2. Many were fixed initially interest only, but are being moved to repayment. The evidence for BTL trackers is limited.
    3. An interest premium was paid initially for investment mortgages. This premium has anecdotally widened.
    4. Gross yields during the peak were around 2% - this translated to a near negative real yield given running and financing costs - these were leveraged plays on capital appreciation.

    Having said all that, we simply don't know. The suspicion must be that we are being pushed the "PPRs aren't too bad" line so hard because BTL is simply awful.

    Personally, I think it is unlikely there are 10,000 individual mortgages in the 1-2 million range for single properties. I do, however, think it is likely that there are 10,000 individuals who have total mortgage debt in the range of 1-2 million with multiple properties. Many of these are not much different from what we have seen go into NAMA, so they are 'worth' maybe 30% of their outstanding value.

  2. Hi yoganmahew,

    Thanks for that. I just threw some these thoughts togethe and may revise if I get a chance.

    1. This is undoubtedly true.

    2. I think there would be some BTL on tracker loans. PTSB are up to their necks in trackers so it's likely they issued some BTL trackers. I'm not sure about AIB and BOI though.

    I remember reports of PTSB BTL mortgage holders being moved from interest-only to repayment and not being happy about it. In Ireland, it actually makes sense to have an interest-only BTL mortgage as 75% of the interest cost can be offset against rent for income tax purposes.

    3. Looking at advertised rates this appears to be the case.

    4. If any investor bought an investment property with a yield of 2% they only have themselves to blame. Again I can remember reports in the papers working out the implicit subsidies landlords were providing their tenants because the mortgage repayments were far in excess of the rental income.

    I too agree that there are unlikely to be 10,000 €1 million plus mortgages out there. Whether there are 10,000 people who have such debts is very hard to know. It could be true, but like most of this debate for the past fortnight we're only guessing. Not that be forced to do so is stopping us!

  3. "Not that be forced to do so is stopping us! "
    Indeed and what else can we do? Ignoring the subject is not an option.

  4. Seamus, the issue I have is that a lot of investors did buy investment properties at that yield. The trouble is a lot of them didn't care about yield because their interest was speculative. In 2006 which, it could be argued, is just short of the absolute top of the market, 40% of new builds went to investors. We could have avoided a lot of problems with a hefty CGT on property as it would have reduced unsustainable demand.

    Even allowing for the tax advantages of offsetting the interest; interest only repayments are of value in a rising market because any capital repayments could, perhaps, be invested elsewhere. I don't think the benefits are so cashable in a falling market where the property is less than the outstanding loan secured on it. Interest is a viable business expense in other European countries and 75% tax offset is maybe lower than it is elsewhere.

    It would not surprise me to know that there are a large number of investors in the rental supply market with outstanding debts in excess of one million - given the way pricing in Dublin was at the end of the bubble period, it may even be conservative to limit the estimate at 10,000. Three apartments would have done it in many parts of the city. I just don't know that I really want to be socialising those losses per se. Not without a hefty quid pro quo anyway.

    I'd be interested to see what impact such a move would have on bank balance sheets as well. I don't see it being positive in the grand scheme of things.