Greg Connor:"more than 35% of mortgages arrears are strategic defaults"

Brendan Burgess

Brendan Burgess

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Charlie Weston has an article on this which is based on this posting on irisheconomy.ie

How large are strategic arrears in the Irish mortgage market?

It's a good idea to raise the issue of strategic arrears so those who won't pay will not benefit from any favourable treatment.

It seems likely that the proportion of strategic arrears in Ireland is greater than 35%, which was the measured proportion in the USA in 2010.

Ireland has experienced a greater cumulative property price fall than the USA, and its repossession laws are much stricter, which strongly influences upward the proportion of strategic arrears.

Among the buy-to-let subset, the proportion of strategic arrears in Ireland is likely higher than 35%, and may be greater than 50%, reflecting the particular features of this sub-market (wealthier households, a larger proportion purchased near the height of the boom).

Cultural and psychological influences could go either way in a US vs. Ireland comparison so I am using conservative guesses, taking into account the influence of very strict Irish repossession laws.
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His estimate seems to be based on US research, where most mortgages are non-recourse.
 
It's difficult to determine between
- those who deliberately are not paying although they know they can afford to live well and pay...
and
- those who are deliberately not paying because they think -wrongly- that they cannot afford to pay.

The latter is a bugbear of mine. What I mean is :-

I have a few friends and acquaintances who admit that they are behind on their payments- mainly on BTLs. Some have bought new cars, gone on holidays, dine and drink out etc etc.
Basically, they believe that the lenders will do to little to "punish" them. Maybe the banks will take their unwanted properties and write off their debts, or at least come to some arrangement. Nothing too drastic.

These people genuinely believe that without their holidays, cars, dining, VHI, private schools etc they are living in poverty and that the bank debts must take second place.

As far as they are concerned they are not deliberately avoiding paying - they feel they just can't afford it. Yes, they'd like to pay the banks but you know we just can't do without private insurance, our annual vacation, Blackrock school blah blah blah...

I submit that this is a bigger group of people than those in the first group who can afford all the pleasures of life and repaying their debts - but still avoid paying.

As long as people believe that there'll be some sort of "arrangement" between lenders and borrowers both groups will increase. Why be a sucker and pay when nothing too bad will happen ?
This belief will spell disaster for all of us, as the number of those "in dsitress" increases.
 
Prof Connor is a great voice of reason when discussing these issues. His contributions to Prime Time, The Front Line etc. have always been excellent, informed and balanced.

This issue is very difficult to estimate, but I think he has made a few errors in his assumptions here.

Not coincidentally, the dramatic growth in Irish mortgage arrears coincides with the Law and Conveyancing Reform Act of 2009, which made property repossession more difficult and time-consuming, and the subsequent Dunne Ruling,
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Before the 2009 Act, we had almost no repossessions in Ireland. We still have no repossessions in Ireland.

I doubt if the Act itself has changed borrower behaviour. The Mortgage Arrears Code would have been a far more significant influence on behaviour. The Dunne ruling may have had some effect.

He acknowledges the differences between Ireland and the U.S, but assumes that because the strategic default in the U.S. is 35%, then this is a good estimate of the Irish rate. This is wrong for a number of reasons:

  • Irish mortgages are all full-recourse
  • We have 50% of our borrowers on very cheap trackers
  • I understand that US margins are higher to allow for such defaults
  • In the U.S., there is a culture of people going bankrupt, and starting again. We don't have that in Ireland to any extent
Overall, I don't think that the U.S. estimate, which is only an estimate, tells us anything at all about the Irish strategic default rate.

So what is the Irish strategic default rate?

From my own experience of talking to people in difficulty; from reading the contributions on askaboutmoney and from speaking to MABS, the vast majority of people want to pay their mortgage if they can, even if they are in extreme difficulty. This is a biased sample, as the strategic defaulters are less likely to go to MABS or Askaboutmoney for advice.

I have spoken to people in the mortgage arrears divisions of different banks, and for home loans, they think it's much lower than 35% - maybe 10% to 20%. I suspect that the banks tend to overestimate it, so I would guess that it would be around 10%.

I get the impression that between 10% and 20% are paying nothing at all on their mortgages. This would be a resonable proxy for the "won't pays". Most people in difficulty try to pay something.
 
I am not sure that those groups are worthy of distinction, oldnick. If anything the latter group may be more odious than the former. At least the former are being somewhat honest about things!

The attitude that you should be allowed maintain private schooling for your children, holidays and "nice" cars in the face of financial strain really annoys me. These attitudes have been encouraged by the likes of New Beginnings and David Hall.

I hope we see a proper rate of repossessions (particularly but not exclusively on BTLs) starting from Q2 2013 which should focus peoples minds on their financial responsibilities.
 
Most people have figured out that strategic default is not a very good strategy anyway.

It is probably worthwhile in the following situations

  • Where you are going abroad and have no intention of coming back - especially if you are not an Irish citizen
  • Where you are insolvent anyway and will be going bankrupt either in Ireland or England - but is that really strategic default?
  • Where you have tried your very best to deal with the lender and they are just simply not engaging with you - withholding payments may get them to engage.
  • Where you have a joint mortgage in serious difficulty and your joint mortgage holder is refusing to engage
It's hard to estimate how many fall into these categories, but I would think it would be few enough.
 
Heard an interesting conversation between a couple of guys at the bar of a well-to-do golf club the other day. Both have stopped working. Both worked for themselves, and have made a decision to stop working because of the debt they are in. I dont know the ins & outs of their positions, but effectively they were saying that it wasn't worth their while to go back to work, as they would have to put most of their income towards debt they have.
 
Given the current low level of re-posessions, strategic default is an option if your PDH is in negative equity. Otherwise it makes no financial sense, as arrears will just eat up the remaining positive equity in the property. There are however, a large number of people currently paying IO on their loans, who do fall broadly into the category mentioned by Old Nick above. It's a moot point whether this is a bad thing for the economy, the Banks, or the individuals themselves. I.e. If they are meeting the interest on the loan, their debt position is being maintained. They are spending the excess money, which does in some way help to stimulate the economy. Yes, they will in time have to revert to P&I repayments or make a decision to sell the property, but in my view the emphasis on keeping people (at all costs) in their family homes is misguided. If some people can take a lump off their back by selling their PDH and broadly clearing the mortgage, they have the option of renting a property and this is not necessarily a lower form of lifestyle!!
I would tend to agree with Brendan B's point from my own experience, that strategic defaulters are out there, but are probably only accounting for a low percentage of defaulters.
 
There are 3 couples that I know of who over the last 4 to 5 years have made a stategic decision to withhold in one form or another up to 3 months repayments each year over that period. They are unashamedly doing this even though they are well able to service their mortgages. The all certainly enjoy a very good life style. Two of them in particular have a very good insight on the banking system and the other people have a financial qualification. A summary of their outlook is that they will get a deal sometime into the future by having this track record. They all keep the banks notified of when they are going to miss a repayment or reduce a monthly payment amount. they are not acting in concert but I believe that they are aware of what each are doing. This behaviour sickens me and like a lot of other "high profile bankrupts" they will probably be able to get a professional or two to negotiate on their behalf
 
If people can play the system they will. Make no bones about it there are many won't pays out there that know the banking and legal systems inside out and are simply gaming the banks for their own benefit.
 
Although I dislike this behaviour too, it is absolutely pointless moralising over it. If a property is in negative equity, the bank's loan is unsecured. Where the bank is not getting paid they can either repossess and recognise the loss, or do nothing, in which case strategic defaulting will be a fact of life on some loans.There isn't a third way.
 
Time. I totally agree with you. I have great sympathy for the very genuine people who are in financial trouble and that are doing their best, but there are also a lot of " intelligent scammers" out there as well. I am no supporter of the banks but people who owe them money should be making some sacrifice to pay off all of their borrowings or what they really can afford. There should not be any sympathy for people who put life style before repayment of their borrowings or other money that they owe. If everyone done this there would be no banking system or businesses and the more people that deliberately renege on paying their debts puts the country's recovery further down the road
 
I must say I find it absolutely shocking that people do not think if they borrow they should repay. I would be mortified if I missed a mortgage payment.

How anyone can justify purchasing a car or going on holidays when they have mortgages that go unpaid. Well I really struggle to understand the thinking on this.

About 2 or 3 years ago I was listening to the son of a developer Simon Kelly, he speaks really well, no doubt money carefully spent on eductation (I think he wrote a book) and I guess this is the new way of thinking or justifying. I remember thinking at the time how extraordinary that he could have so much debt but could go into court, live in a mansion and pay school fees but yet the courts accepted this state of affairs, no change of lifestyle, no expectation that one would curtail or compromise one's lifestyle. To me it's a topsy turvey way of viewing things but maybe I'm old hat. Or missed what I call the celtic tiger cub mentality.

More dangerously it's just another step away from deciding I'm not going to pay my decorator, my solicitor or my accountant.

People who cannot repay I understand.
 
It's an interesting area. The closest parallel behaviour I can think of is that of the illegal downloading of TV shows / music / movies. That's another area in which people who would describe themselves as moral, law-abiding people allow themselves to engage in very obviously immoral, illegal behaviour. They wouldn't dream of robbing a DVD out of a retail store, but will download something for free without a second thought. And why? Because they can, it's easy, and there are no real barriers to doing so or fears of any repercussions. There is no man in black standing by the door.

Then they justify it to themselves and others, by railing against the profits the movie business makes, or a music artist or a recording company makes.

Similarly, in Ireland there is a certain class of borrower who feels aggrieved at how they perceive they've been treated since the demise of the Celtic Tiger. Many of them experienced a feeling of being rich, maybe briefly, and since then it's been all bad news. The property or properties they purchased have turned from being things of pride to, almost, things of shame. They will often refer to the immorality of the banks and government in the decisions they have taken as justification, but really this is a moral smokescreen.

They feel they have made bad decisions, or more likely that they have been unlucky and are victims of circumstance, and they are seeking to get something back. Like the illegal downloader, they don't fear any consequence (based on the evidence so far they believe there may be none, or what consequences there are will be positive), and like the illegal downloader they act because there is no man in black at the door.

There is also the factor of common public sentiment. This remains on the whole biased toward "people", and against "business". So in any dispute between a person and a bank, or a person and a recording company, public opinion falls overwhelmingly on the side of the person. That the person may be undeserving, conceited, dishonest and totally in the wrong is secondary. People = good; Banks = bad. This is ably illustrated by the few high profile eviction cases where, egged on by an often moronic and lazy media, the inexcusable is excused. This is further comfort to those who might strategically default - they do not fear public opinion. They might be embarrassed if their personal circumstances were known (though based off some of the anecdotal evidence above it seems many of them may be beyond embarrassing) but they know that at a macro level there is a deep well of misguided goodwill to be exploited. "The banks ruined the country, and now they want my house!"

This attitude and behaviour has been fostered, facilitated and indulged by politicians, regulators, banks and the court system. Occasionally it has been further compounded by pure incompetence (the lacuna in the Land and Conveyancing Act).

I'm not sure if Ireland has seen much serious psychological study yet to assess the impact on a society that endures huge economic shocks, but I think there is a wealth of interesting information there to be found on decision-making and moral relativism and so forth.
 
mugga said:
I don't understand how someone who won't pay but could pay can get away with it--surely if a bank is going to 'let someone off' with part of their debt they will check into their assets and income and that of their partner if married?:confused:
I too know someone who has been underpaying for quite a while in the hopes of debt relief although they could pay in full.
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How could a bank find out such information? They have no statutory powers.
 
How could a bank find out such information? They have no statutory powers
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No, obviously they can't! However the strategy appears to be one of "waiting for debt forgiveness to kick in". This really makes no sense unles the debtors actual financial position (excluding partners) is such that the Bank has no real option of any ultimate recovery, other than the sale of the property. Do people still believe that there is some prospect of a form of universal "debt forgiveness" being introduced?
 
Some people are simply squireling away money out of sight of the banks and withholding mortgage payments on the other side of the equation. This keeps them in the lifestyle they built up during the bubble and which they now don't want to let go.

They believe the banks will strike a deal and write off part of the debt....thats the basis of their actions. They don't think the debt will be parked and left aside for 20/30 years....they simply believe that by not paying their mortgage regularly/at all, they will receive substantial write downs. And 1 things for sure...they feel very very confident that there will be no repossessions of the Family home and most likely not of the Buy to Lets either (only the really hopeless cases in this latter category will have to give up some or all of the BTL's)
And they'll have a nice war chest to wheel out once the deal is done....to invest in more property,get the latest Range Rover etc.
 
Delboy said:
And they'll have a nice war chest to wheel out once the deal is done....to invest in more property,get the latest Range Rover etc.
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And I hope that such people never get away with their oh so clever plan. And I certainly don't want to pay for it. Hopefully the banks will get clever with finding where all this squirrelled away money is. Plus the new insolvency regime seems to have some stings in it, in addition to being quite a long drawn out process.

I have no problem with anyone going bankrupt who is plainly broke. The other one's outlined on here make me sick. But more fool me maybe. Time will tell. I will not change my belief that if you borrow you repay. But I'm probably seen as old hat in my viewpoint. And it's looking more and more that one can not voice such opinions in the current climate. Everybody's at it etc and where did we hear all that before.
 
Surely when people walk into the bank with thier 'poor me' story, the bank will ask for verification of all their debts.
With the 'Dunne' ruling being changed, they are going to get harder on people in 'suspect arrears'.
Anyone faking their situation and strategically defaulting will be flushed out quickly.
It's one thing saying you can't pay.
It's another proving it.

As a previous poster point out, the holiday, the car and so on is still been expected by some.

When they actually get examined, they will get told to cut a lot more than they have which will show they can pay the mortgage,
or more than they claim they can pay.
Then they get told to go away and pay up or the bank will get harder.

Are these people not leaving themselves open to being 'found out' when they go in with their waffle?

Are they not going to put themselves in a worse position with their lender by having their cards
marked when they are found out to be be both telling lies and have made little effort to really cut the cloth to suit the table?

I really think a lot of 'strategic defaulters' are in for a big shock when they chance their arm with their lender.

Q: How could a bank find out such information? They have no statutory powers.
No powers needed. The request of the customer and the circumstances leave them all the power they need to get the information.

Meeting with lender.
Morning Mr. X.. So you want a writedown do you?
Yes Mr. Lender - I can't pay my mortgage (tissue in hand)
Right so - your salary is Y and your mortgage is not being paid (partly/fully).
Kindly show us where every single euro of your salary goes?

Most people get paid on the books.
Very hard to make money vanish and just give the blanket excuse of debt.
 
Again how is a bank supposed to verify someones salary? They are not the revenue.
 
I think your all giving the banks too much credit here for intelligence. They're not going to go looking through each defaulters finances with a fine tooth comb...some they might, most they wont. And even those they do check will still get away with it if they try hard enough.
I can just see it happening....this is Ireland
 
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