Wednesday, March 5, 2014

The CB’s Mortgage Arrears Statistics: Useless?

Yesterday’s release of the Q4 arrears statistics had a stinger that potential mortally undermines the credibility of the figures.  It appeared in the very first paragraph (emphasis mine).

The number of mortgage accounts for principal dwelling houses (PDH) in arrears, fell for the second consecutive quarter in Q4 2013. A total of 136,564 (17.9 per cent) of accounts were in arrears at end Q4 2013, a decline of 3.3 per cent relative to end-Q3, although the size of the decline was impacted by asset sales over the quarter.  

In the Q3 figures there were 141,269 PDH accounts in arrears so the Q4 figures indicate a drop of around 4,700 in the number of accounts in arrears.  That would be good news if it were true but the end of the paragraph tells us that “asset sales” impacted the size of the decline.

It turns out that a bank (well a former bank actually) sold mortgages and such sold mortgages are not reported for the purposes of the Central Bank’s arrears statistics.

It seems the mortgages were a collection of non-performing loans that originated with the now-defunct Bank of Scotland (Ireland) which were sold to a company called Tanager Ltd.  Here is an extract from a December 2013 stock mark announcement from UK bank Llyods (the owner of BOSI):


Lloyds Banking Group plc (the Group) announces today that it has agreed the sale of a portfolio of non-performing Irish retail mortgages (the Portfolio) to Tanager Limited, an entity affiliated with Apollo Global Management, LLC (NYSE:APO), for a cash consideration of £257 million.  The transaction is part of the Group's continued non-core asset reduction programme.

The gross assets subject to the transaction are £610 million.  The Portfolio generated losses of £33 million in the year to 31 December 2012.  The sale proceeds will be used for general corporate purposes and the transaction, although capital accretive, is not expected to have a material impact on the Group, due to existing provisions taken against these assets.

The key points are the gross amount of the loans at £610 million (around €725 million @ €1 = £0.84), that they were sold at a discount of 58 per cent and, most crucially for our purposes here, that the loans were non-performing.  In the Q3 mortgage arrears figure of 141,269 these non-performing loans were included; in the Q4 mortgage arrears figure of 136,564 they were excluded.

If we assume a (high) average mortgage account size of €250,000 then the sale would have involved around 3,000 accounts.  These are non-performing which could relate high LTVs, borrower risks but probably means arrears and the loans could also be spread across PDH and BTL accounts.

Nearly two-thirds of the reduction in the number of PDH accounts in arrears could be because of this sale.  This was the first time that such asset sales were mentioned in the Central Bank’s arrears releases and it is only the Q4 2013 figures (so far) that have been affected by this.

The fact that sold mortgages are excluded from the Central Bank’s arrears figures hugely undermines the value of the series.  The assumption would have been, for me anyway, that the series included all mortgages that originated in Ireland.  For example, when BOSI actually closed in Ireland back in December 2010 and transferred the servicing of its mortgages and other loans to Certus they remained in the CB’s arrears statistics.  There have also been a large amount of mortgages securitised in recent years and they remained in the statistics (though much of this was for self-held bonds).

Differences between the amounts covered in the Mortgage Arrears Statistics and the Credit, Money and Banking Statistics indicated that there was different coverage between the two, i.e. that the arrears statistics were at the level of the borrowers and the banking statistics and the level of the institutions.  For example, Table 18 of the Credit, Money and Banking Statistics show that at the end of September 2013 Irish-Resident Credit Institutions had €95.5 billion of PDH mortgages (€63.9 billion on balance sheet from Table 18.1 and €31.5 billion securitised but serviced by them from Table 18.2).  The Mortgages Arrears statistics cover €108.5 billion.  This €13 billion difference cemented a view that the arrears statistics were more than just banking statistics, or at least were different.

If mortgages can be excluded from the Arrears Statistics just because they are sold it is not clear what value is in the series.  It undermines future attempts to update analysis such as this which used the historical series (which was not affected by such asset sales) to assess the level of aggregate repayments being made on Irish mortgages.  The problem of omitted mortgages will be further exacerbated by subsequent sales such as the impending sale of the INBS mortgage book and possible further sales by BOSI and maybe by Danske. 

Unless the impact of these transactions is explicitly included in the arrears figures produced by the Central Bank it is likely it will be very difficult to tell anything from forthcoming releases.  The Central Bank will know but will they tell us?

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