Brendan Burgess
Founder
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- 52,192
[FONT="]Jon Ihle has an article in the Sunday Business Post (doesn't seem to be online) suggesting that there is a hidden time bomb for the taxpayer in buy to let mortgages. [/FONT]
[FONT="]
There is very little hard information on arrears on buy-to-lets as there is on home loan arrears. I have seen no rigorous analysis or discussion of the issue, so this is my analysis. I would welcome corrections or suggestions as to issues I am overlooking.
[FONT="]What is the potential exposure ?[/FONT]
[FONT="]Figures from the Stress Tests[/FONT]
|Total|AIB|ILP|EBS
Notional loan balances|16,187|7,356|6,900|1,930
Central Bank 3 year losses - base case|1,621 (10%)|844|629|148
Central Bank 3 year losses - stress case|2,428(15%)|1,216|996|216
Blackrock Lifetime losses - stress case|4,338(27%)|1,879|2,128|331[FONT="]Bank of Ireland has €7 billion of buy-to-let, but as the government owns only 15% of Bank of Ireland now, any losses on these will hit the shareholders and not the taxpayer.[/FONT]
[FONT="]Factors which make the losses on buy to lets higher than on home loans[/FONT]
[FONT="]Borrowers prioritise paying their home loan over other debts[/FONT]
[FONT="]Mortgage Interest Supplement is available to help home owners [/FONT]
[FONT="]Factors which make the losses on buy-to-lets lower than on home loans[/FONT]
[FONT="]Generally interest rates are higher for buy-to-lets than for home loans, because they were seen as riskier. While this might push up the default rate, it means that the lenders are losing less money on the performing mortgages. [/FONT]
[FONT="]If a person loses their job, they might not be able to pay their home loan. But if the owner of a buy-to-let loses their job, the rent should cover at least part of the mortgage repayment. For a buy-to-let to get into difficulty, the borrower has to lose their job and their tenant. Of course, if they lose their job, they may well stop paying the mortgage on the buy-to-let and use the rental income to replace their lost salary. And many investors have multiple buy-to-let properties, so their salary won’t be sufficient to support the repayments on all of them.[/FONT]
[FONT="]The borrowers don’t have the protection of the Mortgage Arrears Code [/FONT]
[FONT="]Buy to lets usually required a higher deposit than home loans[/FONT]
[FONT="]Buy to lets were usually cross securitised against the home or some other property[/FONT], although the cross-secured property is often now in negative equity.
[FONT="]But aren’t arrears much higher on buy to lets?[/FONT]
[FONT="]Generally mortgage terms for buy to lets were shorter than for home loans – a maximum of 25 years compared to 40 years for home loans[/FONT][FONT="], so the repayments would be higher and consequently the arrears would be higher. [/FONT]
The reported arrears on home loans are lower partially because a lot of borrowers in difficulty have had their mortgages rescheduled, and so are not in arrears.
The lender is under no pressure to reschedule buy-to-let mortgages
[FONT="]I know many people in arrears on investment properties. They may well be in arrears of 6 months or more. But that does not mean that they have paid nothing in 6 months. Most of them assign the rent to pay the mortgage and in most cases, it’s covering the interest, even if it’s not meeting the scheduled repayment. [/FONT]
[FONT="]The effect of cheap tracker rates[/FONT]
[FONT="]It is estimated that 60% of buy-to-lets are cheap trackers. This is probably a bigger source of future losses for the lenders than defaults. Although they were generally a bit more expensive than home loan trackers, they were often very cheap e.g. PTSB’s Professional Investor Mortgage charged 0.75% above ECB. [/FONT]
[FONT="]The banks have some scope for increasing the rate in exchange for rescheduling the mortgage. [/FONT]
[FONT="]Some uncertainties [/FONT]
[FONT="]The classification of owner occupied vs. buy-to-let is not clear cut. Many of the buy-to-lets are actually classified as home loans. People traded up but kept their first home and let it out without telling the lender. But this makes the figures for home loans worse. All the buy-to-lets are actually buy-to-lets and presumably were classified as such from the start. [/FONT]
[FONT="]In what circumstances could the Blackrock lifetime losses of 27% come to pass?[/FONT]
[FONT="]It’s very difficult to conjure up a set of circumstances where there might be 27% losses on the buy-to-let book. All of the following would have to happen together [/FONT]
[FONT="]If house prices collapse, but the rental market remains reasonable, then there won’t be huge losses. If there is a dramatic rise in unemployment, then there may be a collapse in the rental market and a further collapse in house prices. [/FONT]
[FONT="]Arrears may well rise higher than 20%. But not all loans in arrears will lead to losses. Most buy-to-lets in arrears are actually paying something and many are paying at least the interest on the loan. [/FONT]
[FONT="]So what is the range of losses which can be expected? [/FONT]
|Expected|Harsh
% of buy to lets repossessed|5%|20%
% with 100% mortgages|80%|100%
Loss on sale of property|40%|60%
Loss on €16bn mortgage book|2%|12%
Total loss for taxpayer|€320m|€2 billion [FONT="]
This further assumes that the cross-securitisation on the family homes are worth nothing and that the lenders don’t recover any of the mortgage shortfall even though the mortgages are all fully recourse. [/FONT]
[FONT="]So it seems that the Central Bank’s three year stress test losses of €2.4 billion are more than adequate. [/FONT]
[FONT="]What about the losses on cheap trackers? [/FONT]
[FONT="]These were provided for separately in the stress testing. The banks had to make provision for future losses. The cheap trackers contributed to these future losses and seem to be adequately provided for. [/FONT]
[FONT="]
[/FONT]
[FONT="]Obviously it’s a big problem for the people who bought residential investments [/FONT][FONT="]but I question whether it is as serious a problem for the taxpayers. I want to tease out the implications of the problem for the state owned banks. I am not too worried if Bank of Scotland or Ulster Bank faces big losses in this area. [/FONT]
There is very little hard information on arrears on buy-to-lets as there is on home loan arrears. I have seen no rigorous analysis or discussion of the issue, so this is my analysis. I would welcome corrections or suggestions as to issues I am overlooking.
[FONT="]What is the potential exposure ?[/FONT]
[FONT="]Figures from the Stress Tests[/FONT]
Notional loan balances|16,187|7,356|6,900|1,930
Central Bank 3 year losses - base case|1,621 (10%)|844|629|148
Central Bank 3 year losses - stress case|2,428(15%)|1,216|996|216
Blackrock Lifetime losses - stress case|4,338(27%)|1,879|2,128|331
[FONT="]Factors which make the losses on buy to lets higher than on home loans[/FONT]
[FONT="]Borrowers prioritise paying their home loan over other debts[/FONT]
[FONT="]Mortgage Interest Supplement is available to help home owners [/FONT]
[FONT="]Factors which make the losses on buy-to-lets lower than on home loans[/FONT]
[FONT="]Generally interest rates are higher for buy-to-lets than for home loans, because they were seen as riskier. While this might push up the default rate, it means that the lenders are losing less money on the performing mortgages. [/FONT]
[FONT="]If a person loses their job, they might not be able to pay their home loan. But if the owner of a buy-to-let loses their job, the rent should cover at least part of the mortgage repayment. For a buy-to-let to get into difficulty, the borrower has to lose their job and their tenant. Of course, if they lose their job, they may well stop paying the mortgage on the buy-to-let and use the rental income to replace their lost salary. And many investors have multiple buy-to-let properties, so their salary won’t be sufficient to support the repayments on all of them.[/FONT]
[FONT="]The borrowers don’t have the protection of the Mortgage Arrears Code [/FONT]
[FONT="]Buy to lets usually required a higher deposit than home loans[/FONT]
[FONT="]Buy to lets were usually cross securitised against the home or some other property[/FONT], although the cross-secured property is often now in negative equity.
[FONT="]But aren’t arrears much higher on buy to lets?[/FONT]
[FONT="]Generally mortgage terms for buy to lets were shorter than for home loans – a maximum of 25 years compared to 40 years for home loans[/FONT][FONT="], so the repayments would be higher and consequently the arrears would be higher. [/FONT]
The reported arrears on home loans are lower partially because a lot of borrowers in difficulty have had their mortgages rescheduled, and so are not in arrears.
The lender is under no pressure to reschedule buy-to-let mortgages
[FONT="]I know many people in arrears on investment properties. They may well be in arrears of 6 months or more. But that does not mean that they have paid nothing in 6 months. Most of them assign the rent to pay the mortgage and in most cases, it’s covering the interest, even if it’s not meeting the scheduled repayment. [/FONT]
[FONT="]The effect of cheap tracker rates[/FONT]
[FONT="]It is estimated that 60% of buy-to-lets are cheap trackers. This is probably a bigger source of future losses for the lenders than defaults. Although they were generally a bit more expensive than home loan trackers, they were often very cheap e.g. PTSB’s Professional Investor Mortgage charged 0.75% above ECB. [/FONT]
[FONT="]The banks have some scope for increasing the rate in exchange for rescheduling the mortgage. [/FONT]
[FONT="]Some uncertainties [/FONT]
[FONT="]The classification of owner occupied vs. buy-to-let is not clear cut. Many of the buy-to-lets are actually classified as home loans. People traded up but kept their first home and let it out without telling the lender. But this makes the figures for home loans worse. All the buy-to-lets are actually buy-to-lets and presumably were classified as such from the start. [/FONT]
[FONT="]In what circumstances could the Blackrock lifetime losses of 27% come to pass?[/FONT]
[FONT="]It’s very difficult to conjure up a set of circumstances where there might be 27% losses on the buy-to-let book. All of the following would have to happen together [/FONT]
- · [FONT="]A further collapse in house prices [/FONT]
- · [FONT="]A collapse in the rental market [/FONT]
- · [FONT="]A dramatic rise in unemployment [/FONT]
[FONT="]If house prices collapse, but the rental market remains reasonable, then there won’t be huge losses. If there is a dramatic rise in unemployment, then there may be a collapse in the rental market and a further collapse in house prices. [/FONT]
[FONT="]Arrears may well rise higher than 20%. But not all loans in arrears will lead to losses. Most buy-to-lets in arrears are actually paying something and many are paying at least the interest on the loan. [/FONT]
[FONT="]So what is the range of losses which can be expected? [/FONT]
% of buy to lets repossessed|5%|20%
% with 100% mortgages|80%|100%
Loss on sale of property|40%|60%
Loss on €16bn mortgage book|2%|12%
Total loss for taxpayer|€320m|€2 billion
This further assumes that the cross-securitisation on the family homes are worth nothing and that the lenders don’t recover any of the mortgage shortfall even though the mortgages are all fully recourse. [/FONT]
[FONT="]So it seems that the Central Bank’s three year stress test losses of €2.4 billion are more than adequate. [/FONT]
[FONT="]What about the losses on cheap trackers? [/FONT]
[FONT="]These were provided for separately in the stress testing. The banks had to make provision for future losses. The cheap trackers contributed to these future losses and seem to be adequately provided for. [/FONT]