Brendan Burgess
Founder
- Messages
- 52,187
An article of mine was published on Tuesday, but has not appeared online yet. So here is what I submitted. The paper version might be slightly different due to sub-editiing.
Gloomy pundits making crisis of mortgage drama
We have had a long history of underestimating our financial problems in Ireland, so it’s a brave journalist who dares to suggest that the Central Bank is overstating the problem. Laura Noonan is to be congratulated for challenging the Central Bank to provide more meaningful information and for criticising the gloomy pundits.
It was to be expected that one of these “gloomy pundits”, Stephen Kinsella, would respond critically. He calls for analysis and common sense. In an article he co-wrote in November 2010, he proposed mortgage debt forgiveness with an “expected total cost to the entire system of circa €37 billion to €49 billion.” As the total home loan book at the time was €115 billion, debt forgiveness of €49 billion would involve writing off 43% of everyone’s mortgage, whether they were in negative equity or not or whether they were in arrears or not. It is extraordinary how someone who has in their own analysis abandoned all common sense, can set a much higher standard for others.
But he is not alone in grossly overstating the problem. Other Commentators have said that we are facing a “tsunami of defaults” and a “timebomb”. One suggested that “the cost of mortgage defaults will dwarf the cost of the bank bailout to date”. Depending on how you calculate it, the bank bailout has cost the taxpayer around €50 billion, so for mortgage defaults to “dwarf” it, they would have to cost around €100 billion. .
The mortgage arrears problem is a very serious problem for the borrowers, for the lenders and for the taxpayer who will pick up the tab for the state owned banks. But in formulating policy and legislation we have to try to get a balanced look at the true situation, avoiding the extremes of pessimism and optimism.
We have a serious mortgage arrears problem and it has been getting worse. But just how bad is it? At the end of March 2012, there was a total of €113 billion outstanding on home loans. The total arrears at 31 March was €1.3 billion. That €1.3 billion has accumulated over 5 years. That is a huge number. But it’s still less than the amount the national debt is increasing by every single month. Think about that – the national debt is increasing each month by more than the mortgage arrears have increased by over 5 years. We have a serious problem on our hands with mortgage arrears, but we have a national crisis with the national debt. In fact, if we did not have the national debt problem, we would have the financial flexibility to deal with the mortgage arrears more generously..
The taxpayer has spent around € 50 billion bailing out the bank depositors. By comparison, bailing out €1.3 billion in mortgage arrears would be small beer. Of course, while €1.3 billion would wipe the arrears accumulated over five years, it would not solve the problem as fresh arrears would continue to accrue.
The big problem with the Central Bank’s figures is that the level of “arrears” is not a very useful measure of the problem when it comes to mortgages. With 10 years remaining on a mortgage, around 70% of the monthly repayment goes to repaying capital. The remaining 30% is interest. A borrower who is paying the interest in full every month could still be in the arrears statistics. All this means is that they are not paying off their loan as quickly as they had originally planned. This is by no means a crisis for them or their bank. Many of the people in the arrears statistics are actually paying more than the interest on their loan. They are paying off some capital each month, but they are not doing so according to the original schedule, so they are in arrears. On the other hand, someone who has agreed a payment moratorium with their lender may be in real trouble, but they are not in the arrears statistics as they are not technically in arrears.
As Ms. Noonan correctly pointed out, the Central Bank statistics don’t capture this information so it’s difficult to assess the problem. The thrust of her article that the figures overstate the crisis is absolutely correct.
The Central Bank should replace the arrears statistics with a report on the number of people whose mortgage balance outstanding today is higher than it was 12 months ago. Someone is really in trouble if they are permanently unable to service the interest on their mortgage.
Let’s see if we can figure out how many households are in real trouble.
The Central Bank reports that there were 77,630 mortgage accounts in arrears at the end of March last. But as many households have top up mortgages which are counted as separate accounts, the actual number of households in arrears was around 60,000. Of these, around 20,000 own a house which is currently valued at more than the mortgage outstanding.
This leaves around 40,000 households in negative equity and arrears of over 90 days. Around 30,000 have loans to current values of between 100% and 150%. A problem, but one which they will probably recover from, especially if they have a cheap tracker mortgage.
Around 10,000 households are in serious arrears and have loans in excess of 150% of the value of their property. These 10,000 unsustainable mortgages are the biggest problem. These loans will never be repaid – they can never be repaid. The banks have lost this money – recognising this loss won’t cost them anything further. The money is gone.
Mortgage accounts in arrears at 31 March 2012 |77,630
Households in arrears at 31 March|60,000
In arrears and in positive equity|20,000
In arrears with an LTV between 100% and 150%|30,000
In arrears with an LTV >150%|10,000
How much will mortgage defaults cost the taxpayer?
I have done detailed analysis elsewhere, but here is a quick summary. At present, there are mortgages totalling €15 billion in arrears. Of these, around €6 billion can be attributed to the state owned banks AIB, EBS and PTSB. Around €2 billion of these actually have equity in their homes, so the banks won’t lose much if anything on them. So that leaves the state owned banks with around €4 billion of mortgages which are in arrears and in negative equity. Most of these will recover in time, but let’s say €2 billion will have to be repossessed and the property will have to be sold. The maximum loss from these is €2 billion which will be reduced by whatever the houses sell for. At the last recapitalisation, these banks provided for €4.5 billion in losses on home mortgages. So that leaves a further €2.5 billion of a buffer for those who are not currently in difficulty who might get into difficulty later. Whatever else the banks have to worry about, they do not need to make any further provisions for losses due to home loan defaults.
How much more will defaults cost the taxpayer?
Value of mortgages in arrears at 31 March 2012|€15 billion
Mortgages in arrears - state banks at 31 March |€6 billion
Of which - in positive equity|€2 billion
In negative equity but will recover|€2 billion
In negative equity but won't recover|€2 billion
Already provided for in the stress tests|€4.5 billion It is very important that our legislators and policy makers have a clear and balanced understanding of the extent of the problem so that the solution can be appropriate. They should not be bounced into inappropriate legislation by poor statistics or by excessively alarmist commentators.
Gloomy pundits making crisis of mortgage drama
We have had a long history of underestimating our financial problems in Ireland, so it’s a brave journalist who dares to suggest that the Central Bank is overstating the problem. Laura Noonan is to be congratulated for challenging the Central Bank to provide more meaningful information and for criticising the gloomy pundits.
It was to be expected that one of these “gloomy pundits”, Stephen Kinsella, would respond critically. He calls for analysis and common sense. In an article he co-wrote in November 2010, he proposed mortgage debt forgiveness with an “expected total cost to the entire system of circa €37 billion to €49 billion.” As the total home loan book at the time was €115 billion, debt forgiveness of €49 billion would involve writing off 43% of everyone’s mortgage, whether they were in negative equity or not or whether they were in arrears or not. It is extraordinary how someone who has in their own analysis abandoned all common sense, can set a much higher standard for others.
But he is not alone in grossly overstating the problem. Other Commentators have said that we are facing a “tsunami of defaults” and a “timebomb”. One suggested that “the cost of mortgage defaults will dwarf the cost of the bank bailout to date”. Depending on how you calculate it, the bank bailout has cost the taxpayer around €50 billion, so for mortgage defaults to “dwarf” it, they would have to cost around €100 billion. .
The mortgage arrears problem is a very serious problem for the borrowers, for the lenders and for the taxpayer who will pick up the tab for the state owned banks. But in formulating policy and legislation we have to try to get a balanced look at the true situation, avoiding the extremes of pessimism and optimism.
We have a serious mortgage arrears problem and it has been getting worse. But just how bad is it? At the end of March 2012, there was a total of €113 billion outstanding on home loans. The total arrears at 31 March was €1.3 billion. That €1.3 billion has accumulated over 5 years. That is a huge number. But it’s still less than the amount the national debt is increasing by every single month. Think about that – the national debt is increasing each month by more than the mortgage arrears have increased by over 5 years. We have a serious problem on our hands with mortgage arrears, but we have a national crisis with the national debt. In fact, if we did not have the national debt problem, we would have the financial flexibility to deal with the mortgage arrears more generously..
The taxpayer has spent around € 50 billion bailing out the bank depositors. By comparison, bailing out €1.3 billion in mortgage arrears would be small beer. Of course, while €1.3 billion would wipe the arrears accumulated over five years, it would not solve the problem as fresh arrears would continue to accrue.
The big problem with the Central Bank’s figures is that the level of “arrears” is not a very useful measure of the problem when it comes to mortgages. With 10 years remaining on a mortgage, around 70% of the monthly repayment goes to repaying capital. The remaining 30% is interest. A borrower who is paying the interest in full every month could still be in the arrears statistics. All this means is that they are not paying off their loan as quickly as they had originally planned. This is by no means a crisis for them or their bank. Many of the people in the arrears statistics are actually paying more than the interest on their loan. They are paying off some capital each month, but they are not doing so according to the original schedule, so they are in arrears. On the other hand, someone who has agreed a payment moratorium with their lender may be in real trouble, but they are not in the arrears statistics as they are not technically in arrears.
As Ms. Noonan correctly pointed out, the Central Bank statistics don’t capture this information so it’s difficult to assess the problem. The thrust of her article that the figures overstate the crisis is absolutely correct.
The Central Bank should replace the arrears statistics with a report on the number of people whose mortgage balance outstanding today is higher than it was 12 months ago. Someone is really in trouble if they are permanently unable to service the interest on their mortgage.
Let’s see if we can figure out how many households are in real trouble.
The Central Bank reports that there were 77,630 mortgage accounts in arrears at the end of March last. But as many households have top up mortgages which are counted as separate accounts, the actual number of households in arrears was around 60,000. Of these, around 20,000 own a house which is currently valued at more than the mortgage outstanding.
This leaves around 40,000 households in negative equity and arrears of over 90 days. Around 30,000 have loans to current values of between 100% and 150%. A problem, but one which they will probably recover from, especially if they have a cheap tracker mortgage.
Around 10,000 households are in serious arrears and have loans in excess of 150% of the value of their property. These 10,000 unsustainable mortgages are the biggest problem. These loans will never be repaid – they can never be repaid. The banks have lost this money – recognising this loss won’t cost them anything further. The money is gone.
Households in arrears at 31 March|60,000
In arrears and in positive equity|20,000
In arrears with an LTV between 100% and 150%|30,000
In arrears with an LTV >150%|10,000
How much will mortgage defaults cost the taxpayer?
I have done detailed analysis elsewhere, but here is a quick summary. At present, there are mortgages totalling €15 billion in arrears. Of these, around €6 billion can be attributed to the state owned banks AIB, EBS and PTSB. Around €2 billion of these actually have equity in their homes, so the banks won’t lose much if anything on them. So that leaves the state owned banks with around €4 billion of mortgages which are in arrears and in negative equity. Most of these will recover in time, but let’s say €2 billion will have to be repossessed and the property will have to be sold. The maximum loss from these is €2 billion which will be reduced by whatever the houses sell for. At the last recapitalisation, these banks provided for €4.5 billion in losses on home mortgages. So that leaves a further €2.5 billion of a buffer for those who are not currently in difficulty who might get into difficulty later. Whatever else the banks have to worry about, they do not need to make any further provisions for losses due to home loan defaults.
How much more will defaults cost the taxpayer?
Mortgages in arrears - state banks at 31 March |€6 billion
Of which - in positive equity|€2 billion
In negative equity but will recover|€2 billion
In negative equity but won't recover|€2 billion
Already provided for in the stress tests|€4.5 billion