Unmodified Mortgages

The latest mortgage arrears statistics from the Financial Regulator show that there were 83,000 mortgage accounts in arrears of 90 days or more in June 2012.  The numbers on modified mortgages show that 45,000 of these have been adjusted in some way.  We looked at those in an earlier post and saw that around 75% of modified loans are meeting the revised commitments under the restructuring.

What about the other 38,000 of mortgages with 90 day arrears, those that are in arrears but haven’t being restructured?  Is anything being done for them?

From the way the arrears statistics are presented it is impossible to tell how much distress these accounts are in.  As the explanatory notes say:

The arrears figures denote the value of arrears (payments not received by the contractual due date) expressed as equivalent days past due. Partial payments received from borrowers will be credited to the oldest arrears amount which will have the effect of reducing the balance of arrears.

Arrears of over 90 days past due do not necessarily signify that borrowers have not made mortgage repayments for the last three months. For example, a borrower can be making partial repayments on a monthly basis but may still be in arrears of a value equivalent to over 90 days past due. In the same way, arrears of over 180 days past due does not necessarily signify that borrowers have not made mortgage repayments for the last six months.

At the recent Finance Committee sessions with the AIB and BOI the emphasis of the mortgage arrears discussions was on modified mortgages as highlighted in the earlier post.  The 38,000 unmodified loans are likely to contain some borrowers who have entered arrears by missing some payments in the past, but have now resumed making full payments without clearing the accumulated arrears.  This might describe some of the cases but it could be very few.

Here are some indicators on the mortgages that are more than 180 days in arrears.

The number of accounts in this category has increased each quarter since the statistics began.  The inflow peaked in Q4 2011 at 6,749 and has fallen slightly in each of the last two quarters.

Unsurprisingly, as the number of accounts in this category has increased the total amount of arrears owing on them has increased and is now nearly €1.4 billion.  However, the pattern in the average arrears owing per account is less consistent.  By Q2 2011 the average arrears was nearly €21,500.  This group are significantly behind on their mortgage payments and these arrears cannot be allowed to accumulate indefinitely.

The question is whether these arrears are still accumulating. In 2010 and up to the middle of 2011 the average arrears amount was showing an annual increase of around 10%.  Since then this is moderated significantly and in the past two quarters there has been a annual reduction in the average arrears amount.

What does this tell us about mortgages in this category?  Very little.  The average arrears will be brought down by the new entrants to the category who will have arrears just over the lower limit of six months, while continued deterioration in the performance of those already in the category will push the average arrears up. 

It is also the case that the most extreme cases could have had their arrears capitalised into the principal.  In June 2011 there were 8,994 mortgage accounts that had arrears capitalisation applied to them.  By June 2012 that had increased to 10,228.

Also it is clear that something happened in Q4 2011 when the increase in arrears was €80 million.  In each of the three preceding quarters and in the two subsequent quarters the increase averaged €130 million.

The key point is that the arrears statistics don’t tell us what is happening to mortgage accounts now.  The overall trend clearly indicates that things are getting worse, and they will continue to do so, but it impossible to gauge from the arrears statistics how many borrowers are in distress now. 

We know that around 75% of the 85,000 modified mortgages are performing in line with the new arrangements provided for them.  We don’t know anything about the performance of the 38,000 mortgages with 90 day arrears that have not being modified.

What we need is a measure that tells us whether the monthly interest charge on the mortgage is being covered now, not a historical measure of performance relative to somewhat arbitrary contract obligations.  The “who is in arrears?” question in this post highlights the problems with using arrears as a measure of distress.