Brendan Burgess
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Summary
While it is hard to forecast mortgage arrears, the most likely outcome is a gradual and small increase from the present level.
However, if the Irish state defaults or leaves the euro, many more would be unable to pay their mortgage.
We should face up to the fact that around 10,000 people would be better off surrendering their homes as they have no hope of repaying their mortgage, ever.
The current level of arrears on home loans ( excludes investment properties)
As of 31 March 2011 per [broken link removed]
|31 March 2010|31 March 2011
Number of mortgages in arrears over 90 days| 21,187|49,602
Number of mortgages restructured and not in arrears|n/a|39,662
Total restructured or in arrears||89,264
Total number of mortgages|791,047|782,429
% in arrears over 90 days|2.7%|6.3%
% in arrears or restructured||11.5%
% paying according to the original agreement|88.5% Many of those who are in arrears are paying something towards their mortgage. The media sometimes reports that 6.3% of people have made no payment on their mortgage in over 90 days. This is not correct. Some of them are paying nothing, but most are actually paying something.
We don’t know how many are in arrears between 0 and 90 days. I would guess that it is a further 5% or so. In normal times, the level of arrears between 0 and 90 days is not hugely relevant as people have temporary problems and usually sort them out quickly. Given that most people going into early arrears these days, would probably move into the 90+ days arrears eventually, this information would be very useful.
Why is the level so low?
Given the following factors, one would expect much higher arrears levels:
The following factors are keeping the level of arrears low
At the peak of the market, the ECB rate was between 3% and 4%. Borrowers were stress tested for rises of up to 2%. So, in theory, someone who borrowed €300,000 in 2006 should be able to sustain a rise in ECB rates up to around 6%. The ECB rate is currently 1.25% although this is expected to rise to 2% by the end of 2011.
Some single people who bought houses at the top of the market are able to rent out their houses as the rental market is strong in many parts of Ireland.
The biggest factor in arrears levels is the level of unemployment
If a person has a job, they can usually pay their mortgage. They may struggle. They may have to reschedule. They may not be able to withstand the full interest rate rises when they come, but most will pay some or all of their mortgage.
If a person loses their job, they typically have some savings and may get a lump-sum redundancy payment. They can usually pay their mortgage for around 6 months. After their savings run out, they can’t pay the €1,100 monthly repayment. In 18,000 cases, the state is paying most of the interest through MIS. If they don’t qualify for MIS, they will fall into arrears.
So to predict the level of arrears accurately, one has to first predict unemployment accurately. The consensus view seems to be that unemployment has peaked but will stay high for some time before falling. If that is so, then the level of arrears will stay around the same as it is now.
Other factors are important, but less important than unemployment
Someone who borrowed €300,000 on a 30 year mortgage in 2006 at ECB + 1% has repayments today of around €1,100 per month. If the rate they pay increases to 5%( ECB + 1%), their repayments will rise to €1,600 per month. If they are sill working, they will still be able to pay the €1,100, so they may fall into arrears but they will still be paying most of their mortgage. In practice, they will either cut down elsewhere and maintain the increased repayment, or else they will reschedule the mortgage and pay it off over a longer time period.
If they are not working, they can’t pay the mortgage, even if the rate is only 2.25%.
Borrower behaviour and the impact of negative equity
Back in November, Morgan Kelly predicted massive strategic default
If the bankruptcy legislation is changed so that those in serious negative equity can effectively hand back their keys, then we may well see a change in borrower behaviour. To go bankrupt, a borrower would have to be unemployed and in serious negative equity. Some will quit their jobs if they think that they can escape negative equity, but not many. The risk that hundreds of thousands might strategically default should not stop us amending the legislation for the many people who genuinely have unsustainable mortgages and need a fresh start.
200,000 borrowers are in negative equity, but only 6% of all mortgages are in arrears. So, assuming that a higher proportion of those in negative equity are in arrears, it's probably still only around 20,000 who are in negative equity and who are in arrears. We tend to think that becasuse house prices have fallen 50%, people have 200% loans to value. In practice, most people did not get 100% mortgages, most did not buy at the top of the market, and many have paid off some capital.
The biggest threat is state default and massive economic disruption
If the bailout works and Ireland continues to function, then the level of arrears may rise gradually, but it won’t come anywhere close to the levels predicted by the stress tests.
We live in a high salary, high welfare, low tax state. This is funded by borrowing from the Troika. As long as we can continue borrowing, most people will be well paid and will be able to pay their mortgages. The state can afford to pay MIS to those who have lost their jobs.
If the state defaults, all bets are off. If we are no longer able to borrow, we will no longer be able to pay the public servants and mortgage arrears would skyrocket. If we choose to cut public service pay by 30% and increase taxation to avoid default, then arrears would also rise significantly, but not to the same extent.
I don’t know what would happen if the euro collapses or if Ireland leaves the euro. It is likely that people’s savings in Irish banks would be significantly devalued. If that is correct, then so would people’s mortgages.
My forecast for arrears at the end of 2012
|Current|Expected |Pessimistic| if Ireland defaults
Arrears| 50,000|60,000|80,000|?
Rescheduled|40,000|50,000|80,000|?
While it is hard to forecast mortgage arrears, the most likely outcome is a gradual and small increase from the present level.
However, if the Irish state defaults or leaves the euro, many more would be unable to pay their mortgage.
We should face up to the fact that around 10,000 people would be better off surrendering their homes as they have no hope of repaying their mortgage, ever.
The current level of arrears on home loans ( excludes investment properties)
As of 31 March 2011 per [broken link removed]
Number of mortgages in arrears over 90 days| 21,187|49,602
Number of mortgages restructured and not in arrears|n/a|39,662
Total restructured or in arrears||89,264
Total number of mortgages|791,047|782,429
% in arrears over 90 days|2.7%|6.3%
% in arrears or restructured||11.5%
% paying according to the original agreement|88.5%
We don’t know how many are in arrears between 0 and 90 days. I would guess that it is a further 5% or so. In normal times, the level of arrears between 0 and 90 days is not hugely relevant as people have temporary problems and usually sort them out quickly. Given that most people going into early arrears these days, would probably move into the 90+ days arrears eventually, this information would be very useful.
Why is the level so low?
Given the following factors, one would expect much higher arrears levels:
- Reckless lending by the mortgage providers
- 100% mortgages
- interest only mortgages
- lending up to 9 times a person’s salary
- huge prices paid for houses during the boom and consequently huge mortgages
- Around 200,000 borrowers in negative equity
- 14% unemployment
- major cuts in salaries in both the private sector and the public sector
- major increases in income taxes
The following factors are keeping the level of arrears low
- Very low interest rates
- Many people built up savings during the good years or paid off some of their mortgage
- Comparatively high salary levels in Ireland
- Very high redundancy payments
- Comparatively high social welfare rates in Ireland
- Most of the houses bought at the boom were bought with cheap trackers so the repayments are very low
- Generous Mortgage Interest Supplement which probably keeps around 18,000 people out of arrears but in the rescheduled group.
- Unemployment is probably lower among those with mortgages
- Mainstream Irish lenders did not give sub-prime loans
At the peak of the market, the ECB rate was between 3% and 4%. Borrowers were stress tested for rises of up to 2%. So, in theory, someone who borrowed €300,000 in 2006 should be able to sustain a rise in ECB rates up to around 6%. The ECB rate is currently 1.25% although this is expected to rise to 2% by the end of 2011.
Some single people who bought houses at the top of the market are able to rent out their houses as the rental market is strong in many parts of Ireland.
The biggest factor in arrears levels is the level of unemployment
If a person has a job, they can usually pay their mortgage. They may struggle. They may have to reschedule. They may not be able to withstand the full interest rate rises when they come, but most will pay some or all of their mortgage.
If a person loses their job, they typically have some savings and may get a lump-sum redundancy payment. They can usually pay their mortgage for around 6 months. After their savings run out, they can’t pay the €1,100 monthly repayment. In 18,000 cases, the state is paying most of the interest through MIS. If they don’t qualify for MIS, they will fall into arrears.
So to predict the level of arrears accurately, one has to first predict unemployment accurately. The consensus view seems to be that unemployment has peaked but will stay high for some time before falling. If that is so, then the level of arrears will stay around the same as it is now.
Other factors are important, but less important than unemployment
- Interest rates
- Salary levels
- Tax rates
Someone who borrowed €300,000 on a 30 year mortgage in 2006 at ECB + 1% has repayments today of around €1,100 per month. If the rate they pay increases to 5%( ECB + 1%), their repayments will rise to €1,600 per month. If they are sill working, they will still be able to pay the €1,100, so they may fall into arrears but they will still be paying most of their mortgage. In practice, they will either cut down elsewhere and maintain the increased repayment, or else they will reschedule the mortgage and pay it off over a longer time period.
If they are not working, they can’t pay the mortgage, even if the rate is only 2.25%.
Borrower behaviour and the impact of negative equity
Back in November, Morgan Kelly predicted massive strategic default
There is little evidence of this as yet. There will always be some people who will want to escape paying their mortgage. But most people can still pay their mortgage and they continue to do so. Most people still value their good credit record and their job.
If the bankruptcy legislation is changed so that those in serious negative equity can effectively hand back their keys, then we may well see a change in borrower behaviour. To go bankrupt, a borrower would have to be unemployed and in serious negative equity. Some will quit their jobs if they think that they can escape negative equity, but not many. The risk that hundreds of thousands might strategically default should not stop us amending the legislation for the many people who genuinely have unsustainable mortgages and need a fresh start.
200,000 borrowers are in negative equity, but only 6% of all mortgages are in arrears. So, assuming that a higher proportion of those in negative equity are in arrears, it's probably still only around 20,000 who are in negative equity and who are in arrears. We tend to think that becasuse house prices have fallen 50%, people have 200% loans to value. In practice, most people did not get 100% mortgages, most did not buy at the top of the market, and many have paid off some capital.
The biggest threat is state default and massive economic disruption
If the bailout works and Ireland continues to function, then the level of arrears may rise gradually, but it won’t come anywhere close to the levels predicted by the stress tests.
We live in a high salary, high welfare, low tax state. This is funded by borrowing from the Troika. As long as we can continue borrowing, most people will be well paid and will be able to pay their mortgages. The state can afford to pay MIS to those who have lost their jobs.
If the state defaults, all bets are off. If we are no longer able to borrow, we will no longer be able to pay the public servants and mortgage arrears would skyrocket. If we choose to cut public service pay by 30% and increase taxation to avoid default, then arrears would also rise significantly, but not to the same extent.
I don’t know what would happen if the euro collapses or if Ireland leaves the euro. It is likely that people’s savings in Irish banks would be significantly devalued. If that is correct, then so would people’s mortgages.
My forecast for arrears at the end of 2012
Arrears| 50,000|60,000|80,000|?
Rescheduled|40,000|50,000|80,000|?