Brendan Burgess
Founder
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From the Central Bank's report on Standard Variable Rates (PDF Page 16)
Cost of Credit Risks:
Following the financial crisis, the Irish mortgage market is characterised by one of the
highest mortgage arrears and default rates in Europe (Chart 9). The latest mortgage
arrears statistics (Chart 10) show that, as at end of December 2014, of the 758,988 private
residential mortgage accounts for PDH loans in Ireland, 78,699 accounts (10.4 per cent)
were in ninety days arrears or more. In balance terms, this is equivalent to 14.8 per cent
of the total outstanding balance on all PDH mortgage accounts (€104.9 billion).
While banks are beginning to reduce the number of non-performing loans, the extent of
the problem is such that it will take a number of years of sustained improvement to be
addressed. In the meantime, these problem loans leave the banks at risk of significant
impairment charges should the economic situation deteriorate or interest rates increase
materially.
One implication of the high level of non-performing mortgage loans in Ireland, the scale
of negative equity and the heavy indebtedness of so many household borrowers is that
the risk in lending to Irish borrowers must be considered higher than in most other
countries in Europe. While this situation has its roots in the housing bubble and the
crisis, and despite a recovery in the economic environment, the economy remains
vulnerable. The credit-risk premium now considered appropriate in Ireland post-crisis is
much higher than the corresponding premium built into pre-crisis loan pricing. This
reflects elevated expected losses (based on average historic losses) and the need for a
higher provision to meet losses going beyond what is currently expected (the so-called
‘unexpected losses’). Prudent approaches to mortgage pricing that account for risks and
uncertainties should result in banks not offering unsustainably low rates that could lead to
a recurrence of non-performing loans.
Cost of Credit Risks:
Following the financial crisis, the Irish mortgage market is characterised by one of the
highest mortgage arrears and default rates in Europe (Chart 9). The latest mortgage
arrears statistics (Chart 10) show that, as at end of December 2014, of the 758,988 private
residential mortgage accounts for PDH loans in Ireland, 78,699 accounts (10.4 per cent)
were in ninety days arrears or more. In balance terms, this is equivalent to 14.8 per cent
of the total outstanding balance on all PDH mortgage accounts (€104.9 billion).
While banks are beginning to reduce the number of non-performing loans, the extent of
the problem is such that it will take a number of years of sustained improvement to be
addressed. In the meantime, these problem loans leave the banks at risk of significant
impairment charges should the economic situation deteriorate or interest rates increase
materially.
One implication of the high level of non-performing mortgage loans in Ireland, the scale
of negative equity and the heavy indebtedness of so many household borrowers is that
the risk in lending to Irish borrowers must be considered higher than in most other
countries in Europe. While this situation has its roots in the housing bubble and the
crisis, and despite a recovery in the economic environment, the economy remains
vulnerable. The credit-risk premium now considered appropriate in Ireland post-crisis is
much higher than the corresponding premium built into pre-crisis loan pricing. This
reflects elevated expected losses (based on average historic losses) and the need for a
higher provision to meet losses going beyond what is currently expected (the so-called
‘unexpected losses’). Prudent approaches to mortgage pricing that account for risks and
uncertainties should result in banks not offering unsustainably low rates that could lead to
a recurrence of non-performing loans.