Mortgage Arrears – The Scale of the Problem

The Keane Report is just the latest of a series of reports to reject the idea that a blanket debt forgiveness scheme is the solution to the massive mortgage problem that exists in Ireland.  The reports are right; debt forgiveness is not a feasible solution.  Debt forgiven is not debt forgotten and any debt forgiveness scheme would simply transfer the liability from one group (existing mortgage holders) to another group (everyone else).

The latest statistics from the Financial Regulator show there is 777,321 mortgage accounts in Ireland with a  total balance outstanding on them of €115 billion and an average balance of €148,000.  We do not know exactly how many households this covers as some homes may have two (or more) mortgage accounts linked to them because of split mortgages, top-up mortgages and other.

We will get an accurate picture of this when the Census 2011 results are processed by the Central Statistics Office over the next year.  Figures from the 2006 Census indicated that around 40% of households were in owner-occupied homes that had a mortgage outstanding while 35% of households owned their home outright.  The remaining 25% of household were mainly in Local Authority or private rented accommodation.

These figures will have changed as the property boom continued through 2006 and 2007 but it still the case that fewer than one household in two actually has a mortgage.  Half of Irish households have no mortgage debt.

It is also true that not all households with mortgages are in difficulty.  The latest arrears statistics show that there are 55,700 mortgage accounts in arrears of 90 days or more.  These accounts relate to the mortgages of 45,000 households.  This is about 2.5% of the total number of households in Ireland. 

There is €10.8 billion owed on these accounts or an average of €240,000 per household in arrears.  The total amount of arrears owed is €950 million or €21,000 per household.  It is at these households that solutions to the mortgage crisis needs to be targeted with a distinction between households who are in temporary difficulty and will be able to get back on track and households who have unsustainable mortgages that will never be repaid. 

There are also an additional 32,000 households that have had their mortgage restructured which has kept them out of arrears.  These include reduced payments, interest only and term extensions.  It is not clear how successful these measures will be in keeping households out of arrears.

Over the past few years almost 70,000 mortgage accounts have been restructured by the banks.  Many of these have subsequently fallen into arrears but it does show that the banks are willing to engage with borrowers when approached.  These loans have been restructured on a individual basis which shows that the banks have the ability to undertake a case-by-case analysis of troubled mortgages.

It is also important to remember that 90% of mortgage accounts are not in arrears and have not been restructured.  The majority of these are being paid according to the terms of the original mortgage contract and there is the likelihood that some households are actually overpaying on their mortgage.

In September 2009 there was €119 billion owed on residential mortgages in Ireland.  By June 2011 this had dropped to €115 billion.  Although the property market has slowed considerably there was still around €4 billion of new mortgage lending during this period.  All told, there has been capital repayments of around €8 billion on mortgages in Ireland since September 2009 for a repayment rate of around €5 billion per annum.   Most households with mortgages are meeting their commitments and are paying down the capital owed on the loan.

An important issue is the lender used by those who are in arrears.  About two-thirds of the Irish residential mortgage market is made up of loans from the ‘covered’ banks; AIB, Bank of Ireland, PTSB and INBS.  One-third of loans are in non-covered banks such as Ulster Bank, National Irish Bank and Bank of Scotland as well as sub-prime lenders such as Start Mortgages.

While the State has full or partial ownership of the covered banks it only has regulator control over the other banks.  While the covered banks make up two-thirds of the mortgage market they only account for half of the mortgage accounts in arrears.  Half of all arrears are in other banks over which we have no direct control and importantly are not liable for the losses they incur.

Although it is clear that that Irish banks operated to a failed banking model some of the other lenders in the market were even more aggressive.  It was Bank of Scotland who introduced cheap tracker and 100% mortgages to Ireland.  Start Mortgages offered loans to borrowers who were refused loans by the mainstream banks.  It is not surprising the arrears, and hence potential losses, are higher in these banks.

We have provided substantial recapitalisation funds to meet losses in the covered banks.  If a scheme is introduced that forces banks to write-down a huge swathe of mortgages the State will have to provide funds to the non-Irish banks forced to participate.

There are going to be cases where the mortgage will never be repaid regardless of what forbearance measures are introduced.  It is hard to know how many such households there are but a figure of around 20,000 is possible.  These are cases where people have borrowed well in excess of their means and will never be in a position to repay the loan.

Research by the Money, Advice and Budgeting Service (MABS) suggest that two-thirds of clients who present to them with mortgage arrears have  temporary difficulties, with the remaining one-third in a position where the loan will never be repaid.

There are currently 45,000 households in mortgages arrears.  If we assume that one-third of those are unsustainable and allow 5,000 for a further deterioration then a figure of 20,000 unsustainable mortgages is plausible.  This ties in with estimates from New Beginnings.  This is a huge figure and represents 1.2% of all Irish households.