PDH mortgages held by unregulated loan owners

Unregulated loan owners have been buying distressed mortgage loans over the past number of years.  Some figures on the numbers and arrears position of mortgage accounts held by non-bank entities (regulated non-bank retail credit firms and unregulated loan owners) have been included in the Central Bank’s mortgage arrears statistics since the end of 2013 and the level of detail provided has improved periodically since then. 

The regulated non-bank retail credit firms includes entities such as Dilosk, Haven, Pepper, Springboard, Start and Stepstone.  The unregulated loan owners are the “vultures”.

Initially, aggregate figures for all non-bank lenders that combined primary dwelling house (PDH) and buy-to-let (BTL) mortgages were provided.  At the start of 2016, separate figures for PDH and BTL accounts were provided and from the second quarter of 2016 these were further broken down by non-bank retail credit firms and unregulated loan owners. 

The table shows the progression of the breakdowns provided and the detail focuses on those PDH mortgages held by unregulated loan owners.

We can see that the total number of mortgages (PDH + BTL) held by non-bank entities rose sharply during early 2014. The number reached 47,000 by the end of the year and has stayed pretty close to that level ever since.

The number of PDH accounts held by non-bank lenders was first provided at the start of 2016 and the figure has remained close to the initial value of 38,000.  From Q2 2016 we have been told the number of PDH accounts held by unregulated loan owners.

This started off at just over 10,000 and the number peaked at just over 12,200 at the end of 2016 and had fallen to 11,300 by the third quarter of 2017, with the total outstanding balance tracking moving from €1.9 billion to €2.4 billion to €2.2 billion over the same period. 

The reason for the recent decline is not provided and it could be, in part, a reclassification issue as the total number of loans (PDH plus BTL) held unregulated loan owners was largely unchanged over the period. The total was 18,200 in Q4 2016 and was 18,100 in Q3 2017. 

At the end of Q3 2017, the average balance on the PDH mortgage accounts held by unregulated loan owners was €190,000.  As it is possible for more than one account to be linked to the same PDH property it is likely that the 11,300 accounts corresponds to around 9,000 properties.

And here are the details of those accounts which are 720 days or more in arrears.

Over 40 per cent of the PDH mortgage accounts held by unregulated loan owners are more than two years in arrears and these accounts make out almost 60 per cent of the total balance due on PDH mortgages to these entities.

The average balance on the accounts more than two years in arrears is over €250,000.  The figures giving the amount do not seem that reliable with a near 50 per cent jump showing for Q1 2017, so there is possibly some measurement or reclassification issue at play.  Taken at face value the Q3 2017 would indicate that the average amount of arrears on PDH mortgages which are more than two years in arrears held by unregulated loan owners was almost €130,000. 

That is an extreme level of arrears and seems incredible.  That would be six full years of missed payments on a 20-year €250,000 loan at an interest rate of six per cent.  There may be some instances of that but to suggest it is the average seems unlikely.

We don’t have much insight into the repossession activities for these entities.  In the Q1 2016 release it was shown that in that quarter between PDHs and BTLs unregulated loan owners and non-bank retail credit firms repossessed 15 properties on foot of a court order and took possession of a further 57 properties via a voluntary surrender arrangement.  Those made up about about five per cent of repossessions and 25 per cent of voluntary surrenders in the quarter.  However, without other observations it is difficult to make any meaning of those.

In recent quarters a table like that above has not been provided and we have only been provided with the number of properties in possession of the entities at the end of the quarter rather than their repossession activity.  The number of PDH properties in the possession of unregulated loan owners at the end of the last three quarters were:

• Q1 2017: 183
• Q2 2017: 186
• Q3 2017: 187

Without knowing the underlying repossessions and disposal amounts nothing can be gleaned from these figures.  It would be useful if the table provided in Q1 2016 was made available for PDH accounts held by unregulated loan owners which would show the level of court-ordered repossessions and voluntary surrenders involving these entities.  Getting some insight into the number of forced sales would also be useful and that applies to all mortgage providers not just unregulated loan owners.

What will happen to the loans held by unregulated loan owners?  It is still not clear but if proposed sales go ahead there is a good chance that they will increase.  After such sales are completed we can expect the numbers to decrease but how that will be achieved (redemptions, repossessions or resales) remains to be seen.

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The national balance sheet

After looking at the improvements household sector financial balance sheet here we consider what is happening to the balance sheet for the entire economy.  Ireland has a bit to go until the presentation of our national balance sheet data reaches the level provided by the ONS for the UK but we can get a good idea of what is going on from the information that is available. 

The national balance sheet essentially comprises four items:

• Non-produced fixed assets (such as land)
• Produced fixed assets (such as buildings, infrastructure, equipment and IP)
• Financial assets (such as deposits, equity and pension savings), and
• Financial liabilities (such as loans)

For Ireland, the CSO provide figures for the latter three but estimates of the stock of non-produced assets are lacking and a broader measure of produced non-financial could be provided with the addition of estimates for inventories, and possibly, valuables.  There are very few countries providing these figures to Eurostat but their number is increasing. 

Still, what we have gives us a good start and there is a lot going on.  First a look at the broad categories since 2001.

Excluding land, for which figures for Ireland are not available, we can see that total net worth of the Irish economy was just over €240 billion at the end of 2001.  This rose to over €440 billion by around 2006/07 but this was based on inflated valuations and by 2011 net worth had fallen back to €180 billion.  It has recovered since then at stood at €315 billion at the end of 2016, or €66,600 per capita.

Behind this net worth figure the gross amounts are enormous, particularly on the financial side which is influenced by the investment funds linked to the IFSC.  These have huge gross positions but, by and large, the assets and liabilities net off against each other.  We can see this if we look at the net positions by sector.

Unfortunately, we are only give a breakdown of net financial worth by sector.  Ireland is one of seven countries that do not provide a breakdown of produced fixed assets by sector (the other six are Bulgaria, Cyprus, Malta, Romania, Slovakia and Spain).  This means we can’t get net worth (as defined here) by sector but we can track net financial worth by sector.  And it’s quite the roller-coaster.

By 2007, net financial worth of the total economy was a little less than minus €60 billion.  In the nine years since it has deteriorated by over €400 billion.  As we looked at earlier the net financial position of the household sector has been steadily improving and by the of 2016 was up more than €100 billion on its 2007 level.  Over the same period the net financial position of the government sector has deteriorated by €150 billion, with the net financial worth of non-financial corporations going south to the tune of €400 billion.  The position of financial corporations has bounced around a bit but has never gone outside the range +/- €50 billion.

The government doesn’t have a whole lot to show on the balance sheet for its borrowing as a lot of it went to fund current expenditure.  There has been a significant rise in produced fixed assets and it is easy to see that most of this has been bought by the NFC sector so the fixed assets will be matched by accompanying financial liabilities.  The household sector has been deleveraging and there has been very little output of the produced fixed asset it would buy: housing.

Anyway, even though the net financial position of the economy is down €400 billion since 2007, once we account for produced fixed assets that have been acquired we see that the net worth of the economy has gone from €440 billion in 2007 to €315 billion in 2016, a reduction of €125 billion.  Part of this fall and rise will have been due to house prices but it should be noted that the value of dwellings included in produced fixed-assets excludes the value of the land on which the property sits.

Here is what has happened to the nominal net values (i.e. after depreciation) of the main produced, non-financial assets. 

It can be seen that the nominal value of dwellings (excluding site value) fell by €85 billion in the years following 2007 and has recovered about half of that.  The value of other buildings is well ahead of 2007.  In the past two years the stock of fixed assets has surged by €300 billion with most of this due to changes in the suppressed categories dealing with aircraft for leasing and IP licenses.  As most of these are likely linked to financial liabilities they will net out in the overall net worth position.

There might be other items we would wish to see included particularly in relation to contingent or accrued liabilities.  At the sectoral level this might give a different view but in overall terms the net position of the economy would be unchanged as a liability for one sector would be an asset for another.  This would be the case, for example, is accrued pension liabilities to public sector workers were included.  They would be a liability for the government sector and an asset for the household sector.

So where stand us in relative terms compared to the rest of the EU15?

Not great actually, but after the vertiginous drop in 2008 and flatlining from 2010 to 2014 we have been pulling away from the bottom of the pack for the past few years.  The volatility in the Irish series is not seen for any other country.

What would happen if land was included?  Here are the per capita net worths excluding and including land for the four countries which provide such estimates.

Given the changes here it seems probable that Ireland’s per capita net worth would roughly double if the value of land was included, though the relative ranking in 2016 may not be much changed if this was applied across all countries.  Let’s hope we can rise through the rankings in a more sustainable fashion this time.

To conclude here are the main items on the balance sheet in per capita terms for Ireland since 2001.  Click to enlarge.  And note again these values are nominal.

And for the countries of the EU15 (excluding Luxembourg) for 2016.

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Some snapshots of labour markets in the EU15

Here are some snapshots of conditions in the labour markets of the EU15.  They are offered without commentary.

• Self employed with no paid employees
• Temporary employees
• Temporary agency workers
• Shift workers
• Underemployed part-time workers
• Contracts of limited duration
• Precarious employment rate
• Employed persons with a second job
• People working 49 hours or more per week
• Employees at-risk-of-poverty

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Why are the household sector financial transactions accounts of the CSO and the CBoI so different?

Both the Central Statistics Office and the Central Bank of Ireland produce financial accounts for the various sectors of the economy.  At the headline level they say much the same thing.  If we look at the household sector we can see that both report much the same outcomes for the net financial asset position.

However, if we go below the surface we see that how this end-of-year stock position has been reached, particularly for the past few years, differs hugely between the two agencies.  The are two ways in which the stock of assets or liabilities can change:

1. Financial transactions
2. Valuation effects

Both agencies produce financial transactions accounts so we can see how much of the change is due to actual transactions in assets and liabilities rather than valuation or other changes.

Here is the household sector financial transaction account of the Central Bank for 2012 to 2016 where annual figures are got by summing over the four quarters in each year.

Over the five years in question the net financial asset position of the household sector increased by around €90 billion.  The financial transaction account of the Central Bank indicates that just over €50 billion of this is due to financial transactions with households:

• putting an extra €12 billion on deposit
• adding €2 billion to their equity investments
• contributing a net €11 billion to private pension plans, and
• repaying €27 billion of debt

The other €40 billion was due to valuation effects which was almost entirely arose in pension funds with the value of these rising from €70 billion at the end of 2011 to €122 billion at the end of 2016 (which far exceeds the €11 billion of net transactions into them).

And now let’s look at the household sector financial transaction account published by the CSO.

Here, instead of being €50 billion, the net financial transaction of the household sector for 2012 to 2016 are put at €16 billion.  That’s quite the difference.  But for most items the differences are relatively small.  According to the CSO’s accounts the household sector:

• put €11 billion extra on deposit
• contributed a net €13 billion to private pension plans
• and repaid €27 billion of debt

But the numbers for equity transactions are hugely different.  The Central Bank had the household sector adding about €2 billion to their equity holdings while the CSO show the household sector making net sales of €36 billion – a difference of €38 billion!  And of this almost all relates to unlisted shares.  A previous discussion of the household accounts published by the CSO is here with the final part dealing with this issue of unlisted shares.

The balance sheet position of unlisted shares given by CSO and the Central Bank has been almost identical for the past few years.

There isn’t a smidgen between for the past few years which is quite something given then one figure is based on €2 billion of net acquisition transactions since 2012 (the CBoI) and the other figure is based on €36 billion of net sales transactions since 2012 (the CSO).

Why does all this matter? It matters for the savings rate.  Per the Central Bank numbers much of the improvement in the financial position of the household sector has been made by ongoing savings transactions such as adding to deposits and private pension plans and make repayments on loan liabilities.  Per the CSO numbers this activity has had a much smaller impact and almost all of the improvement has been due to valuation effects particularly for pension funds and unlisted shares.

Looking at this issue in chart form here is the net financial transactions reported by both agencies.

This divergence didn’t arise on the liability side:

But as the tables above have shown all the difference has arise on the assets side:

Why the difference?  The CSO produce far more than the Financial Accounts and are seeking to reconcile the outcomes with those in the Non-Financial Accounts.  In particular, they are looking for a reasonably good relationship between net financial transactions and net (lending)/borrower at the bottom of the capital account.  And they have it:

This capital account shows that from 2012 to 2016 the household sector was a net lender of a cumulative €7 billion and that in 2015 and 2016 household current expenditure on consumption and capital expenditure on fixed capital formation exceeded household disposable income.  The Irish household sector is a net borrower once more.

But as the balance sheets show this five-year period corresponds to a time when households:

• added around €11 billion to their deposits
• made €12 billion of net contributions to pension funds, and
• repaid €27 billion of debt.

How did households afford these €50 billion of financial transactions when there was only €7 billion of net lending available?  Well according to the CSO the household sector did this by selling €36 billion of unlisted shares – though this is probably the balancing item where the necessary reconciliation is dumped . But why is it necessary?

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Very low work intensity by tenure status

It is not hard to see why the issue of “jobless households” is something worth keeping an eye on from an Irish perspective.  Here are figures for the EU15 since 2003.

A while back we looked at the breakdown of this by household type.  Conclusion: Ireland has unusually high rates of jobless households for all household types. Here we will look at the differences by tenure status.

There may be a compositional force for the overall level of jobless households at play here.  We can see that in 2016 Ireland has the highest overall level of people living in jobless households (18.2 per cent).  For each tenure status Ireland ranked third worst (or joint second in the case of tenants paying less than market rates). Thus if Ireland has a similar population composition by tenure states we might expect to be ranked third worst in 2016 rather than worst in overall terms.

If we look at it in levels, for both types of owner occupiers we see that Ireland is only a couple of percentage points above the arithmetic mean of the EU15.  For tenants paying the market rate Ireland is seven percentage points above the mean for the EU15 and for tenants paying less than the market rate Ireland is 15 percentage points above the mean.  The relative size of these groups may matter.

We did look at the composition of the entire population by tenure status in an earlier post which gave a broad sweep though many of the housing and housing costs measures in the SILC.  Here is the table from that post but it is for the entire population not those aged under 60.

Ideally we would like this table for the population aged 60 and under but this does not appear to be available from Eurostat.  This population aged 60 and under will likely have a smaller proportion of owner-occupiers and, in particular, owner-occupiers which no mortgage or loan than the overall population. 

So we can’t be definitive but it seems likely that around half of the people living in jobless households in Ireland live in households who are tenants paying less than the market price (mainly local authority tenants).  It is impossible to tell the nature or direction of any causal relationship, or even if there is one, from the headline figures here.

Here is how the levels of jobless households in Ireland have varied by tenure status since 2003.

And to conclude here are the levels for tenants paying less than market price across the EU15.

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