Friday, August 19, 2011

Household Borrowings, Repayments and Debt Forgiveness

There is no doubt that the credit market has slowed to a virtual standstill in Ireland.  This was further emphasised by the mortgage data that was released by the Irish Bankers Federation during the week.  Here are the amounts of mortgages issued since 2005.

Mortgage Lending

In the the second quarter of 2011 just €624 million of mortgage lending took place.  This is gown over 90% from the peaks since in 2006.  This pattern is reflected if we look at the monthly mortgage transactions of the banks’ balance sheets from the Money, Credit and Banking Statistics produced by the Central Bank.

Household Loans for House Purchase (Transactions)

The huge monthly increases up to 2007 are evident.  For more recent times it should be noted that the monthly transactions for mortgages on the banks’ balance sheets are negative.  For the second quarter of 2011 these summed to around €600 million.

Given the new mortgage lending that was issued it is probable that the balance of loans that existed at the start of Q2 2011 fell by around €1 billion during the quarter.  It is also likely that most of this is due to repayments rather than write-downs.  Irish households might have huge amounts of debt but in most cases it is being repaid.

Although we only have figures to the end-of March, the mortgage arrears data from the Financial Regulator show that entering Q2 2011, nearly 90% of all mortgages were being paid according to the terms of the original contract.  Some of these may actually be being repaid quicker than the agreed schedule.

This level of repayment is being reflected in the Quarterly Household Sector Accounts also produced by the Central Bank.  Here are the loans of the Household Sector in those accounts.

Household Loans

Again, the rapid rise in indebtedness is evident, but it is clear than since peaking in 2008 household debt liabilities have been decreasing.  This is because repayments on existing loans is greater than the amount of new loans issued. 

Long-term loans make up 95% of the total with about two-thirds of that again being mortgages for owner-occupied houses.  The same mortgage arrears data linked above show that there were €116 billion of owner-occupied mortgages in Ireland.

Household loans peaked at €203.3 billion in the 4th quarter of 2008.  By the first quarter of 2011 this had fallen to €184.9 billion.  The figures above suggest that this fall continued into the second quarter. Even still the level of household debt in Ireland is significantly above international norms, but it is falling.

There are massive debt problems, private and public, in Ireland.  Most of household debt can be repaid.  Some of it will never be repaid, and this could run to many billions – but maybe the problem is “not enormous ”.

A DEBT forgiveness scheme to relieve homeowners in mortgage distress would cost “in the region of €5-€6 billion”, UCD professor of economics Morgan Kelly has said.

While I am not a fan of widespread debt-forgiveness it is useful to note that the stress tests from last March allowed for about €6 billion of losses over the next three years in the covered banks on owner-occupied mortgages.   Although the precise details are not provided the scheme could be funded with the money already provided to the banks.

Maybe we should keep Prof. Kelly in this relatively good mood but I wonder what will happen when he learns that there is €116 billion of owner-occupied mortgages in Ireland rather than “about €55 billion”.  About two-third of this €116 billion are in the covered banks.

UPDATE: Here are more details of the scheme proposed by Prof Kelly.

“The good news is that if you leave investment mortgages out [of total mortgages owed], which are largely the banks’ problem, and look at mortgages people have on their own houses, there are about €55 billion of these out there,” he said.

“A lot of people can’t repay these mortgages and this is causing people terrible agony,” he said.

Prof Kelly made his estimations based on 20 per cent of people having difficulty paying their mortgages. This was the default figure in Florida where there was a similar housing bubble, he said. He estimated that mortgages would need to be halved on average.

“I would reckon that the ultimate cost of this very useful social programme is something in the region of €5 billion to €6 billion.”

I don’t know where the €55 billion figure came from.  The mortgage arrears data from the Financial Regulator show that there was almost €116 billion outstanding across the 782,00 of owner-occupied mortgages in Ireland at the end of March 2011.

If it is expected that 20% of people will get into difficulty, than that is around 150,000 mortgages.  If these people have have an average mortgage of €200,000 then the forecast is there will be €30 billion of mortgages in difficulty.  Reducing these mortgages by half would cost €15 billion.  This is two-and-a-half times greater than the suggested cost of €6 billion.

There is a bit more on mortgage debt forgiveness in this post.


  1. Seamus

    A few points

    1. Do you have data as to what makes up the seemingly very large gap between between long term household loans of €184.9 billion and the €116 billion in owner occupier mortgages? It seems like an awful lot of 'other' long term loans.
    2. The paydown on household loans appears very large. Taking interest at approx 4% on the original €203 over the 27 months above, the total cash paid seems to be about €36 billion or an annual payment of €16 billion to both servvice and deleverage these long term loans.Well over 10% of GDP.
    3. I still do not think the bank provision against mortgages is adequate. The total mortgage value in arrears is over €9.5 billion (all banks). However restructured but not in arrears account for a further €5 billion, indicating people very close the edge who have just been 'restructured' and are managing to pay.
    4. I also wonder( just not clear) if data is not being obscured by the note that Arrears "excludes cases where the property has been realised but an amount remains outstanding on which the lender is seeking repayment". So, has this 'bad-debt' been fully reserved for? And if so where?

    5. Mortgage restructuring is very simple and easily achievable without moral hazard or public protests. A State shared or full State ownership system. Leave the householders in the houses. There is no other socially responsible way to do this. Even all the existing bank cases etc are simply lining the pockets of the legal profession. Maybe that is why it is still continuing!

  2. Hi Joseph

    1. I would guess BTL investment loans would provide a good portion of the gap. Long-term in these accounts just means longer than one year so there is a lot of loan categories that could be included.

    2. Gross savings in the household sector is about €12 billion per annum. Add €4 billion to that for interest and you get €16 billion. This doesn't leave any for deposits but they have not been increasing recently.

    3. We will have to wait to see how this plays out. We are now four years into the crisis but nearly 90% of mortgages are still being repaid according to the original terms. This figure will fall but I think we have left the worst of the employment losses behind us. What we need is the missing employment growth to allow some people to get back on track. No sign yet.

    4. There is a moratorium on this happening on the moment so it is likely not a huge problem. It will become more important though.

    5. Something needs to be done but there doesn't seem to be any agreement on what it should be.

  3. Seamus
    On a somewhat related matter:

    A figure that was quoted by Donal de Buitleir from a SILC 2007 report said that 80% of all households own their own homes.
    Another SILC (2009)report figure is referenced (page 2) in a paper by Kelly, McCarthy, McQuinn (Central Bank May 2011). This puts mortgaged households at 25%. But as the number of houses in the country are approx 1.7 million, this should mean the total mortgaged households of approx 425,000. But the factual number of mortgages is 786,000.
    There could of course be and probably is more than one mortgage per household. But surely not almost two mortgages per household.
    On the other hand the SILC may be incorrect.

    On a more optimistic note, it does mean that if X% of all mortgages are in difficulty, the percentage of households in difficulty may be somewhat less as there would be more than one mortgage per household.

    Just a thought.

  4. Hi Joseph,

    I think there are some problems with these numbers. I looked into it at the time the article was published and was involved in some email exchanges that included the Central Bank.

    The Central Bank report included the following sentence:

    "Of the 5,608 households surveyed in 2007, about 80 per cent own their own homes, while mortgaged households represent over one quarter of the total sample of households."

    The 80% includes those who have and don't have a mortgage, others are in rented accomodation. Donal de Buitleir took the latter part of this sentence for his article.

    Here is the response from the Central Bank who, in a manner of means, admit that this is incorrect.

    "It does appear that there is an undercount on the number of mortgagees in our sample relative to the total population (a comparison with the census data for 2006 suggests this). Furthermore, our analysis uses information on the original mortgage amount reported by respondents and therefore does not include the repayment burden associated with equity withdrawals that might have occurred after the original mortgage was taken out."

    It is correct to say that 80% of people own their own home, but 60% of these are mortgaged. Around 45% of all households have a mortgage, not 25%.

    With 6.3% of mortgages in arrears, there are around 3% of households in difficulty.

  5. Seamus

    Thank you very much for that clarification.
    About 3% of all households. While it is difficult for those households, it is nowhere nearly as large a national problem as I thought.

  6. @Joseph,

    This is why I find the introduction of broad solutions rather unnecessary. We have a substantial problem of unsustainable mortgages but the solution should be targeted here.

    I don't know how many unsustainable mortgages are out there, but I'd guess somewhere in the range of 20-60,000. In these instances a debt resolution scheme should be introduced where the balance remaining is reduced or written off after ownership of the property has been taken over by the bank.

    At an average write-down of €100,000 the upper end of the range above would imply a loss of €6 billion for the banks.