Matthew Elderfield on Mortgages
This post was written by Seamus Coffey
Financial Regulator, Matthew Elderfield made a speech yesterday to the Harvard Business School Alumni Club of Ireland. The speech dealt with several aspects of the ongoing mortgage crisis and can be read here (pdf here).
Two extracts worth considering are below the fold but there are lots of interesting elements to the speech.
First on the mortgage arrears crisis in general.
Our view is that mortgage arrears are likely to continue to rise throughout 2012. Also, as I will explain, it will likely take some time before the stock of arrears cases in the unsustainable category are resolved through loan modification, bankruptcy or non-judicial settlement mechanisms. This is not a problem susceptible to quick fixes or silver bullets but is going to take more time before the exact scale of the problem becomes clearer and certainly many years before it is resolved.
While the number of arrears and restructured cases is growing, the vast majority of customers are still meeting their mortgage obligations. This is in spite of the fact that many of them are in fact in negative equity: 40% of owner occupier homeowners are in negative equity but about 93% of negative equity borrowers are not in fact in arrears. This is an important point: negative equity does not equal arrears. Affordability is the key factor, at least at present. This is important from a policy perspective: frankly the Irish taxpayer does not have the financial resources to somehow eliminate or reduce negative equity in the mortgage market, either directly or through the banking system, but it does not need to do so in order to tackle arrears. Negative equity will I fear remain an unpleasant reality for many borrowers for years to come, but it is encouraging that in the vast majority of cases where customers can still afford to pay their mortgage that they are doing so. The biggest practical problem for home-owners with negative equity comes when they need to move house; as I will explain shortly, the Central Bank intends to take action to make it easier to obtain so-called negative equity mortgages, to help those who may need to move and can afford to but who are in negative equity
And second on the issue of unsustainable mortgages.
I have mentioned unsustainable mortgages a lot – why are they so important? For a few reasons, I think. Let me start with consumer fairness. If a homeowner has a massive gap between their mortgage payments, even on an interest only basis, and what they can actually afford currently or prospectively, after taking a realistic assessment of future income and employment, then I am concerned that the very limited or transitory relief provided by standard forbearance techniques could just be putting that person deeper in debt. The homeowner may be building up a bigger and bigger shortfall, for example through interest capitalisation, which will eventually be owed when ownership of the home is ultimately lost. In other words, kicking the can down the road in the most difficult cases – where families are borderline insolvent - is unfair by adding to debt if there is in fact no realistic prospect that the standard forbearance is ultimately going to work.
For the borderline insolvent homeowner, loan modification will have consequences, perhaps such as partial loss of ownership or remaining liability for the warehoused component. Certainly there will have to be a commitment to stick to a very tight budget and to make significant adjustments to living standards. And it is important to be clear that there is no legal obligation on banks to modify loans in all cases and in some cases repossession or voluntary surrender will take place. In particular, delinquent borrowers who refuse to engage realistically with the lenders to reach and comply with an affordable modified payment plan can expect those consequences. Quite clearly this is not a question of mean-spirited lenders. The capital injected by the Government into the banks is to cover loan losses that cannot be avoided. It has not been calculated to provide for relief in respect of loans that borrowers are able to service.