Local Authority Mortgages

This post was written by Seamus Coffey

One discussion point from the Financial Regulator’s mortgage arrears statistics is the performance of loans in the state-owned banks (AIB/EBS, PTSB & INBS) which between them have about 50% of the owner-occupier residential mortgage market in Ireland.

There is a small additional group of mortgages controlled by the state and these are local authority mortgages which are provided to eligible people who may not be able to get a mortgage from a bank.  These mortgages are are not included in the FR’s arrears statistics.

At the end of 2011 there was €1,425 million outstanding on these loans which is around 1.25% of the total (see page 64 of the 2011 HFA Annual Report).   A breakdown of the amount by local authority at the end of 2010 is in Appendix Six on page 39 of this audit report.

There are around 22,550 local authority mortgages giving an average balance of around €60,000.  The interest rate charged on these loans is currently 2.75%.

At the end of Q2 2012, 6,280 (28%) of these loans were in arrears of 90 days or more.  This compares to 11% for mortgages in financial institutions.  The pattern of local authority mortgage arrears in 2010 and 2011 can be seen here.

The aggregate balance on the loans in arrears was €204 million in Q3 2011. In 2011, the amount collected at the end of the year as a percentage of the amount due was 71% (see slide 13) but this includes accrued arrears at the start of the year. Excluding accrued arrears, there was a shortfall of around €9.3 million on the repayments of around €100 million due in 2011.

At the end of 2011 the total arrears owing on local authority mortgages was around €33 million.  The shortfall has to be made up by the local authorities to meet their repayment commitments to the Housing Finance Agency who provide the finance for the loans.  Appendix Five on page 37 shows the collection rates of housing loan repayments by local authority in 2010.

The Department of the Environment has produced A Guide of Local Authorities – Dealing With Mortgage Arrears which outlines the steps that should be taken when a mortgage falls into arrears.  Page 15 has a definition of an “unsustainable mortgage”.

A loan may be deemed unsustainable if the full interest is not serviceable on a long term basis.  Short term arrangements may allow for partial payments on loans, even where the full interest is not being met, for a period of up to 36 months cumulatively. If the  balance on the loan is increasing rather than remaining static or decreasing, after a period of incremental short term extensions exceeding 36 months, then the loan appears to be underperforming and might be considered unsustainable.

This is put in terms of the balance increasing which is a better measure of mortgage distress than account arrears.

33 Responses to “Local Authority Mortgages”

  1. Gavin Kostick Says:

    Thanks Seamus,

    Will read properly:

    “There is a small additional group of mortgages controlled by the state and these are local authority mortgages which are provided to eligible people who may be able to get a mortgage from a bank.”

    ‘May not’?

  2. Seamus Coffey Says:

    @ Gavin,

    Thanks!

  3. hoganmahew Says:

    That’s a pretty shocking arrears rate. Is it ‘can’t pay’ or ‘won’t pay’?

    If ‘can’t pay’, were the loans ever repayable? Could local authority mortgages be the Irish equivalent of council houses for votes?

  4. Robert Browne Says:

    Only one thing is certain these figures are going to get worse people are choosing to have their electricity cut off so running up rent arrears is not going to bother them.

    The stock of local authority housing is, in many cases now, no longer being maintained by local authorities and the recession put paid to the plans local authorities had to start selling individual flats and apartments within old blocks to tenants. They saw it as a potential cash cow, still do and are offering 40% to 60% discounts but with few takers for obvious reasons. This coupled with the inability to introduce a congestion charge and the collapse in development contributions has left their funding model in tatters. They are clinging on to the possibility of a big pay day from NAMA and Phil Hogans property tax which Sinn Fein will say they will abolish if they are elected.

  5. Joseph Ryan Says:

    @Hogan
    “That’s a pretty shocking arrears rate. Is it ‘can’t pay’ or ‘won’t pay’?”

    Not that shocking. Remember that these are mortgages “which are provided to eligible people who may not be able to get a mortgage from a bank”.
    So the comparative group should be sub-prime mortgagees.

    We should also remember that BTL mortgages have a reportedly very significant arrears rate but somehow the powers that be seems less concerned with those arrears.

  6. Brendan Burgess Says:

    ” Page 15 has a definition of an “unsustainable mortgage”.

    A loan may be deemed unsustainable if the full interest is not serviceable on a long term basis. Short term arrangements may allow for partial payments on loans, even where the full interest is not being met, for a period of up to 36 months cumulatively. If the balance on the loan is increasing rather than remaining static or decreasing, after a period of incremental short term extensions exceeding 36 months, then the loan appears to be underperforming and might be considered unsustainable.

    This is put in terms of the balance increasing which is a better measure of mortgage distress than account arrears.”

    Hi Séamus

    Fully agree with this definition.

    The fact that people may not be able to pay off their mortgage in full and own their home mortgage-free on retirement, does not mean that their mortgage is unsustainable.

    If someone can pay the interest on their loan, their loan is sustainable at the moment.

    People will argue that they may have to sell their home when they retire if the mortgage is not paid off and that they will be homeless. But they don’t make that argument about people who have been renting all their life.

    It would be nice if everyone could live in their own home, mortgage-free on retirement, but that is not possible. If a borrower can service the interest on their loan, they need no further intervention such as “split-mortgages”, “debt for equity” etc.

    I am glad that the DoE recognises this, even if the banks don’t.

  7. David O'Donnell Says:

    some lite relief!

    Jens Weidmann, the president of the Bundesbank, Germany’s central bank, spoke up and called for a radical change of course. Banks must be more strictly prevented from “exposing themselves to solvency risks of states,” he said.

    http://www.spiegel.de/international/europe/tacit-bond-arrangement-between-governments-and-banks-endangers-system-a-868971.html

    Good ol Jens - never a dull moment!

  8. David O'Donnell Says:

    CARTOON OF THE DAY - DUBLIN CALLING

    EU Budget:
    Rubbery figures
    23 November 2012The Guardian London

    http://www.presseurop.eu/en/content/cartoon/3072001-rubbery-figures

  9. DOCM Says:

    @ All

    Off topic (but essential reading).

    http://www.ft.com/intl/cms/s/0/6d9cad18-3585-11e2-bd77-00144feabdc0.html#axzz2CwOPelQe

    This is not a North-South divide but a Franco-German one (with unpredicatble consequences).

  10. DOCM Says:

    @ All

    And there is more!

    http://www.ft.com/intl/cms/s/0/018e8a9c-3599-11e2-bf64-00144feabdc0.html?ftcamp=published_links%2Frss%2Fworld_europe%2Ffeed%2F%2Fproduct#axzz2CwOPelQe

    Behind all this rubbish is the reality that Germany would continue to be relieved of 75% - or something close to it - of its share of the cost of the UK rebate with France, Italy and Spain(!) stuck with the bill.

    Once again, Merkel has demonstrated that she can run rings around her opponents.

  11. Yields or Bust Says:

    If this is the Brendan Burgess that I believe it to be then I’m not surprised with the post above as its in line with the twaddle that you’ve been spouting on this issue for the past number of years.

    “The fact that people may not be able to pay off their mortgage in full and own their home mortgage-free on retirement, does not mean that their mortgage is unsustainable.

    If someone can pay the interest on their loan, their loan is sustainable at the moment. ”

    The paragraph above sounds like a David Drumm quote from a 2006 Anglo conference call.

    Repaying interest only on a loan in no way means the loan is sustainable – far from it.

    The basis on which you make that argument assumes a couple of significant “good times ahead” arguments most of which are plain nonsense.

    Namely that there will exist a market for your house at retirement and the current lending bank will allow any potential negative equity difference (most likely for noughty purchasers) to be lent to the retiring selling individual(s) and the retirement income (most likely severely diminished from previous expectations) is sufficient to repay the negative equity loan, pay a market rent and live. This is also, don’t forget, set against a current regime where interest rates are at historic lows. Sorry to be so blunt but your argument is plain wrong and indeed does follow the DoF belief and Governments generally, that a loans principal never has to be repaid – just simply rolled over. Nonsense squared.

    One of the primary reasons why people buy houses in the first instance is to avoid ongoing rental costs during their retirement.

    Those that rent for most of their lives normally avoid the costs of house ownership i.e. general housing upkeep, the over sized principal cost of mortgage loans, purchase costs such as stamp duty, legal fees etc. and now property taxes. These are huge savings for those that rent and particularly over the past decade when property prices compared to their only true long run value metric namely, the capitalised rental income value, moved further and further apart suggesting that those who didn’t buy from about 2001 to date have made monumental savings compared to their equivalent house buying brethren.

    In addition, those that have rented during the past decade don’t have the spectre of the negative equity noose around their neck, this is quite useful when jobs and economic survival are most likely situated elsewhere, with those in negative equity unable for the most part to participate. Those buying folk over the past decade are for all intents and purposes, economically stranded, at home. So, I don’t have too much in the way of sympathy for the renters over the past decade as they have avoided the property ownership onslaught, particularly those living outside the main cities.

  12. Joseph Ryan Says:

    @Yields/ @Seamus Coffey

    re: The definition of an ‘unsustainable’ loan.
    Local Authority Definition:
    The above definition is perfectly legitimate from the point of view of a local authority. The interest on the loan is being serviced, and paying an amount equal or possibly greater that the rent that would be received, if the local authority foreclosed on the mortgagee. The interest is also in excess of the cost of funds, though I must say I am surprised by how low that is from the link provided by Seamus.
    http://www.environ.ie/en/DevelopmentHousing/Housing/News/MainBody,28895,en.htm.
    This definition is clearly at odds with the normal definition of an unsustainable loan as provided by a bank or by any private institution, that will not have the responsibility to rehouse the tenant and can, in good times at least, sell the house to a mortgagee who will pay both capital and interest.

    Local authorities are not banks and it would be incorrect to extend a perfectly good definition an unsustainable loan for local authority purposes to non local authority institutions.

    @Seamus
    The question of bank interest margins, and in particular the interest income portion of that figure continues to puzzle me.
    You quoted some, no doubt authentic figures, on your blog re the interest rate
    “In the household sector mortgages (the bulk of loans) have a weighted average interest rate of 2.90%. Term deposits from households had a weighted average interest rate of 3.35%. The figures for business are 3.12% for loans and 2.60% for deposits.”

    What is not clear is whether the average interest rate (mortgages 2.9% and business 3.12%) is measured by the formula (interest received / total respective loan book).
    If so, then the calculation of the numerator is extremely important.
    As I understand it, banks omit interest due if the loan is deemed unsustainable (I am very much subject to correction here). This leads to a situation where the ‘interest received’ classification of banks is not in fact a clearly defined item, but could be a item of some subjectivity.
    [Some accounting rules suggest that if interest was greater than three months overdue, then the interest is no longer recorded in the 'interest received' category, thereby under-recording interest and understating bad debts. I have no idea if the banks apply these rules.]
    Clearly such an under-recording of ‘interest’ approach would have profound effects on the calculation of weighted average interest rate in the present time when we have much higher levels of interest due but not received.

    My interest in this is banks are currently blaming ELG for poor interest margins. Yes, ELG costs them money, but it is a type of CDS after all. But another reason for the fall in interest margins may be the poor method of calculation of the number itself.

  13. Joseph Ryan Says:

    @DOCM

    “Once again, Merkel has demonstrated that she can run rings around her opponents.”

    Steady on there!

    Resolution of Euro crisis has failed.
    EZ and EU growth has failed.
    Last weeks Greek ‘deal’ failed.
    This weeks Budget negotiation failed.
    The Euro is failing
    The EU itself is in danger of failing.

    Merkel herself, is centre stage in all these failures, together with Schaeuble.
    Pyrrhic diplomatic victories will not obscure Merkel’s or Germany’s role in all these failures.

  14. DOCM Says:

    @ Joseph Ryan

    The two views are not incompatible cf.

    http://www.euractiv.com/priorities/eu-leaders-close-budget-deal-news-516246

    N.B. Embedded link to compromise on the table when talks broke down (taking commentators by surprise, it would seem).

    Paragraph 118 remains unchanged from an earlier leaked version.

  15. Wendy Says:

    I have one of these mortgages, and I was interested in this part:

    The shortfall has to be made up by the local authorities to meet their repayment commitments to the Housing Finance Agency who provide the finance for the loans.

    The interest rate on these loans is variable. It normally tracks the ECB rate, but the last ECB cut was not passed on. As I understand it the HFA is required to be self-financing and so will not pass on cuts when to do so when would prevent it from operating on a break-even basis.

    My question is, are local authorities actually making up the shortfall to the HFA or could this be the reason why the HFA is apparently operating at a loss at the moment (or was at the time of the last ECB cut)? If the latter, then the arrears rate is preventing other LA mortgage holders from availing of interest rate cuts which will surely only increase the arrears rate further?

  16. OMF Says:

    People will argue that they may have to sell their home when they retire if the mortgage is not paid off and that they will be homeless. But they don’t make that argument about people who have been renting all their life.

    This argument is fine in densely populated regions like German, East Coast US, and London, where land and houses are scarce and there is a robust and well regulated rental market.

    It doesn’t work in Ireland where there are hundred of thousands of vacant homes, empty field, a declining population, and where there are so many cowboy landlords that the rental market resembles Dodge City more so than a safe place to rent for life.

    Yes, we can in theory move to 80 year/inter-generational mortgages. However in my opinion this will not be sustainable, not because home owners will be unable to pay, but because only those homeowners who bought in the last ~10 years will ever be placed in such a situation. The demographics of the country won’t support 80 years mortgages as standard, and I can’t see a two-speed system working without causing social/political unrest.

    In my own opinion, the solution for unsustainable mortgages is either bankruptcy, or retrospective non-resource mortgages in this country. Let the debtor walk away. Take their assets and place them in a 3 year bankruptcy if required, but let them walk away and start again. Ireland needs to start again.

    The banks can drown in the debt left behind. It’s good enough for them.

  17. DOCM Says:

    @ All

    With apologies for trespassing on the patience of those dealing with the subject matter of this thread. The only defence is that the credit conditions for Irish homeowners are intimately linked to the wider horizon.

    John Downey has very perceptive item in today’s Indo.

    http://www.independent.ie/opinion/analysis/eu-budget-mess-could-be-a-great-opportunity-for-euro-hero-enda-3304341.html

    As Napoleon said;

    “Give me generals who know something about tactics and strategy, but best of all give me generals who are lucky.”

  18. Joseph Ryan Says:

    @DOCM

    I cannot see much opportunity for Ireland in the EU presidency, unless we do like everybody else and put on list of demands on the table. Of course siding with the German / English view of cutting the Commission administration down to size could be a revenge of sorts.
    The article seems to think that Ireland should be a good honest broker. I doubt such a strategy is going to get us anywhere, except pats on the back!
    How about compensation for chalara fraxinea, imported from the Netherlands, that will devastate the countryside for 50 years. Seriuosly. It will do hundreds of millions of damage as well as landscape damage.
    Is there a link to Merkel’s closing press conference following EU budget summit?

  19. Brendan Burgess Says:

    “This definition is clearly at odds with the normal definition of an unsustainable loan as provided by a bank or by any private institution, that will not have the responsibility to rehouse the tenant and can, in good times at least, sell the house to a mortgagee who will pay both capital and interest.”

    One of the problems is that there has not been much discussion or definition of what an “unustainable mortgage” is.

    If a bank has a mortgage of €200k on a house worth €300k, and the borrower is only able to service the interest, it could be argued that the bank is better repossessing and getting repayments of capital and interest on the €200k.

    However, if a bank has a mortgage of €300k on a house worth €200k and the borrower is able to repay the interest on the €300k, the bank is better off, assuming it’s a SVR mortgage. The interest alone, will probably exceed the repayments on a €200k loan.

    From the borrower’s point of view, if they have a loan of €300k on a house worth €200k, they are probably much better off servicing the interest than surrendering the house and having to pay off a shortfall of €200k. Of course, they would be much better off if the bank agrees to split the mortgage into a €200k annuity mortgage and an interest-free mortgage of €100k. But if the borrower is able to pay the interest on the €300k I don’t see why they should have their effective interest rate reduced so that they can repay capital and eventually own their home mortgage-free.

  20. DOCM Says:

    @ Joseph Ryan

    A chairman that is not impartial will not get very far! However, the individual in the chair is Van Rompuy, not the PM of the country holding the Presidency, the role of which has been much reduced as not alone does the European Council have an elected chair but also the Eurogroup (Juncker). The Irish ministers called upon to perform are those chairing the various technical councils (notably the Minister for Agricuture).

    As to the role of Merkel, most knew the die was cast when they saw this item in the FT.

    http://www.ft.com/intl/cms/s/0/1465bd64-34d3-11e2-99df-00144feabdc0.html#axzz2DERghZAt

  21. grumpy Says:

    @docm

    That FT coverage is excellent. I haven’t followed the negotiations closely as I assumed they woul lead nowhere, but it appers that that guy Paxman referred to as Mr Rumpy basically went for a last minute attempt to isolate the UK via a bribe to old vested interests, and one or two other countries weren’t willing to go along.

    “High quality global journalism requires investment. Please share this article with others using the link below, do not cut & paste the article. See our Ts&Cs and Copyright Policy for more detail. Email ftsales.support@ft.com to buy additional rights. http://www.ft.com/cms/s/0/1465bd64-34d3-11e2-99df-00144feabdc0.html#ixzz2DFTPEyqY

    Mr Van Rompuy’s proposal rebalanced the budget’s composition, siphoning money away from the one heading that had been billed as the most likely to generate economic growth and handing it back to traditional beneficiaries of EU funds.

    The common agricultural policy, the biggest share of the budget, received an additional €7.7bn while the development money known as “cohesion funds” was topped up with €11bn, according to diplomats.

    The biggest loser was the “connecting Europe facility”, a fund to build cross-border infrastructure projects, such as pipelines and broadband internet, that had been championed by the European Commission as the best way to spur growth. It lost €5bn, while another €8bn came from the larger pot of money that underwrites research and small and medium-sized businesses.

    Mr Van Rompuy’s proposal – released at about midnight – also trimmed €5.5bn from a fund that pays for foreign aid and other international items, and €1.6bn from the heading that covers judicial affairs.

    The administrative heading that covers salaries and benefits for the EU’s 55,000 civil servants survived intact – for now. But diplomats widely expected cuts there, if only for symbolic reasons to show that Brussels’ Eurocrats are facing the same austerity as other citizens.”

  22. DOCM Says:

    @ grumpy

    These negotitions are in themselves not that important. Eurointelligence, for example, does not follow them as they are of “no macoeconomic significance”. Very true! But they are a proxy for wider political disputes.

    The five larger member states (Germany, France, Italy, UK and Spain) account for 75% of the EU budget and the matter will be resolved between them or it will not be resolved at all.

    A eurosceptic Czech blog “Money-go-round” provides a wider insight.

    http://www.money-go-round.eu/

    N.B. Warning with regrad to methodology which differs from that of the Commission but which remains fairly accurate.

    Merkel simply did not wish to agree at this juncture. She leaves Cameron looking rather deflated. Bashing - admittedly overpaid - European public servants is but a sideshow.

  23. DOCM Says:

    @ grumpy

    Quentin Peel has his usually incisive comment in tomorrow’s FT, apart from the bit that is missing! Why should Germany be relieved of 75% of its assessed share of the cost of the UK rebate?

    http://www.ft.com/intl/cms/s/0/f0d2f442-3703-11e2-893a-00144feabdc0.html#axzz2DERghZAt

  24. DOCM Says:

    @ grumpy

    Tony Blair has (or will have) his say.

    http://www.guardian.co.uk/politics/2012/nov/24/tony-blair-uk-eu-membership

  25. Yields or Bust Says:

    @BB

    “From the borrower’s point of view, if they have a loan of €300k on a house worth €200k, they are probably much better off servicing the interest than surrendering the house and having to pay off a shortfall of €200k. Of course, they would be much better off if the bank agrees to split the mortgage into a €200k annuity mortgage and an interest-free mortgage of €100k. But if the borrower is able to pay the interest on the €300k I don’t see why they should have their effective interest rate reduced so that they can repay capital and eventually own their home mortgage-free..”

    ( BTW Presumably you mean a shortfall of €100k in the opening line?)

    You see Brendan your last line is exactly why I have a serious problem with you in relation to this issue and have done for a long time.

    Your argument suggests that you have no difficulty in accepting the basis of the house price and accompanying mortgage when the deal was completed. I do. In fact, I, and many others have been making this fundamental point over a long long time.

    House prices since about late 2001 until now (well not in fact quite yet in many parts of the country) were simply wrong. Prices were wrong because they were not in fact determined, as you continually believe they are, by the interaction of house buying consumers in the marketplace, no far from it, house prices are simply a reflection of the availability of credit and banks willingness to lend into that asset class ahead of virtually any other for the period under review. In simple language, banks determine house prices not the house buying consumers.

    Property, particularly residential houses as an asset type is unique compared to virtually all other asset types insofar as its not in fact a cash driven asset market it is a credit asset market. This matters hugely and for my part this basic but hugely significantly difference between property and all other asset market seems to have passed you and your analysis by.

    You have assumed that the price of housing charged to consumers over the past decade was somehow fair and reasonable and effectively the ‘market price’ - based on all the available evidence this simplistic analysis of events is clearly wrong. It begs to question your basic understanding of the difference between value and price. They are not the same thing - price is what you pay but value is what you get over the longer term.

    We know from study after study that the ONLY sound long term metric for determining fair value in any housing transaction is to use a multiple of rent paid on similar proxy houses for the one being purchased (the capitalisation of rent method). The long run average in the RoI in housing from about the early seventies would suggest rental yields should generally fall in the region of 7% to 8% depending on location and the demand supply dynamic operating in the area. Banks know these ratios and have known them for generations; novice first time buyers who visit the property shop perhaps once or twice in the adult lifetime generally don’t and are always price takers in the property market. Consumers ability to bargain house prices down and yields up to their long run levels during the period under discussion was virtually nil. The reason being is that banks acting on the side of competing consumers simply disregarded these known yield metrics and lent to novice consumers, in the main, at yields as low as 2% gross (and in many cases lower). Not only did this happen on the odd occasion but it went on for years with billions lent and low and behold the banks are all bust as a result. This represents a massive bank lending error (fraud perhaps ?) plain and simple, there is no other alternate argument that could, reasonably be voiced in opposition to this basic conclusion. The banks simply mis-priced the residential property asset class and did so for about a decade.

    Your ongoing analysis of this mortgage disaster assumes a no lending error default position on the banks behalf - based on what we know this is a really silly position to adopt and you come across as simply a mouth piece for the banks, a Pat Farrell in disguise if you like. Sorry to say so, but its rather off putting when the overwhelming evidence suggests a massive error on the banks behalf who were regulated to know better.

    Take for instance the Irish Permanent RoI mortgage book – perhaps you are not aware but 66% of its entire book was lent in the years 2005 to 2007. Now the average duration of a mortgage in the period under review has increased beyond 25 years so on that basis a three-year lending period should have represented c12% of the outstanding book. The actual is over 5 times that rate. Not surprisingly, out of the mortgages lent in that period by Irish Permanent c80% are now in some sort of default. I’ll repeat that number, 80% of the mortgages lent by Irish Permanent in that period are now in some sort of default or restructuring process. Something has gone badly wrong.

    Your analysis and understanding of events would seem to suggest that the 100% of repayment duty still resides with the borrower – given the numbers above anyone with even the most basic understanding of banking couldn’t for a minute suggest that such a stance makes any sense. And it goes without saying that all the banks operating in Ireland in the mortgage space for the years in question are insolvent – and that includes the branches of the foreign banks operating here. Had such branches been stand-alone operations they too would be insolvent, given their ongoing and prior reported losses, and yet you continually suggest that the all the error and repayment obligation resides with the borrower.

    You may also not be aware that Ireland is unique in that never before in a so called westernised economy, has all its banks, or for that matter any industry in its entirety, ever gone into insolvency at the rate the Irish owned and foreign owned banks did. The scale of the meltdown is unique, and yet we seem hell bent on accusing the banks customers for the blame of the downfall. You’ll have to concede that something doesn’t smell right. There is an issue here, and its too simplistic an argument to talk about people vacating houses because they can no longer afford their mortgages etc this is a structural issue and personal insolvency legislation or whatever its equivalent as a solution is missing the point. Personal insolvency legislation was devised to solve, as the name suggests, sad individual cases. We don’t have sad individual cases we have c30% of all mortgages in the country in trouble. This is a structural problem – individualised based solutions will not work in this instance. Can you imagine a similar situation in the UK where on a like for like basis the scale of their mortgage problem would be running in the region of 3.3 million unsustainable mortgage cases and for the authorities to start out on the PIB route – crazy beyond belief and no doubt somebody somewhere would rightly call a halt to such madness. Not in Ireland, it seems. There has to be another way.

    My way is to recognise that there has been a fundamental error in the pricing methodology used by the banks in pricing houses for the years in question. For all years, banks have utilised an ability to repay a loan of a given size as a methodology in pricing a house. Nothing could be more stupid and yet it has worked for years primarily because credit was scare and priced accordingly. As credit became widely available and priced cheaply, the previously ‘robust’ methodology fell apart exposing the error in all its glory. The ability to repay a loan is in no way linked to the price a stand alone asset should command in a properly/ cash priced asset market, its completely unrelated. We now know this to be the case. So when one hears of stories of “I have mortgage approval of €x “– feel afraid – the chances are the banks have leaned nothing.

    A review of the mortgages in the period as discussed and a comparison to a known rental proxy based valuation of the house in question could be easily completed which will reveal the extent of the over valuation and the extent of the, if you like, reckless lending element. A simple decision has to be made that this was a lending error and it needs to be written off, regardless of it being serviced or not. All mortgages on theses properties need to be recalibrated to take into account what has been paid to date on the original loan and then fix a lending rate, which makes sense for the remaining duration of the mortgage. If the current owner cannot service the revised loan then they need to relocate and the house can then come on the market. The chances are the house will sell because as for once the banks will realise the house is valued in line with a long run valuation methodology that makes sense and at a level they are unlikely to lose out upon regardless of who purchases the property. In addition, those in receipt of the write down should lose the PPR tax relief on the eventual sale of the house.

    Talk of bankrupting hundreds and thousands of individuals who were unfortunate enough to be born at a time when the ability of lending officers and directors of banks to contain themselves sounds like as disastrously stupid idea. Please do not go there and strive to better understand the nuances of a much more complicated problem than you’ve done heretofore.

  26. Brendan Burgess Says:

    Hi YoB

    Seamus reproduced the DoE definition of an unsustainable mortgage.

    I agreed with it and noted it was a pity that it was not applied by the banks as well.

    Joe said that while it might be appropriate for the local authority, it was not appropriate for the banks.

    I explained why I thought it was appropriate.

    You don’t seem to have commented on any of this, which is the key point I am trying to make.

    You seem to take issue with only one line of mine, “I don’t see why they should have their effective interest rate reduced so that they can repay the capital and eventually own their home mortgage-free”. This is in the context of the situation that a person finds themselves in today. If they can pay the interest on their mortgage, they should do so. Just because they can’t pay the capital, doesn’t mean that they should get debt forgiveness or that they should have their interest rate reduced.

    You are making a separate argument which, if I understand it correctly is: Everyone who took out a mortgage since 2002 should get a refund, because they were mis-sold. This is irrespective of whether they are today struggling with their mortgage or not. I think your essay on the topic deserves a separate thread as 1) it is as good an argument I have seen for irresponsible lending and 2) it is distracting from Séamus Coffey’s original post.

    Brendan

    By the way, I haven’t checked your numbers about the PTSB, but they don’t look right to me. You might want to check them.

  27. Yields or Bust Says:

    @BB

    Thanks for the reply.

    I suggested above, if you read it carefully, that the DoF may endorse this definition because it follows along the lines of how a Govt generally repays it bonds i.e. it doesn’t. A Govt ordinarily repays the bond interest and at maturity date simply raises the principal with another bond issuance and away we go again i.e. in the main no principal is ever repaid, its simply rolled over.

    It is therefore no coincidence as a result that the DoF would define a sustainable mortgage using a similar methodology as they use themselves. This is not new news nor in any way a break through in the definition of a sustainable or unsustainable mortgage if you wish - it’s a DoF definition, which doesn’t really add to the real argument regarding the mortgage disaster that the country faces.

    Perhaps you are correct this topic does deserve a wider discussion but we know that the overwhelming problem is not surrounding the definition of what is or is not sustainable mortgages its the fact that far too many of the crazy loans were given out in the first instance and vast numbers can no longer afford to service them. This is not about definitions its about cash, valuations and mis pricing.

    The PTSB details are quoted from a Davy research report back in August of this year. The numbers stuck with me as I was shocked when I read them, just to note I referred to the years 05-07 whereas it should in fact read 06-08 when I now re read what I wrote, anyway it amounts to the same conclusion, the banks went on a serious bender. The numbers are based on the value of PTSB mortgages for the years in question from memory.

    You suggest above that because someone is in a position to pay a mortgage that they should continue to do so. This follows along what you’ve been suggesting for a long while and confirms my suspicion that you believe the mortgages and therefore the price of houses associated with them were fair. for the years in question. As noted above for the reasons outlined, I don’t.

    As I’ve indicated above this is a silly position for you to adopt because the ILCU surveys are telling us that despite these loans being repaid the knock on consequences to long run investment in pensions, education, savings etc is being hammered as a result. I have argued with Seamus Coffey on this point many times before - just because a mortgage is being serviced in no way means that household budgets are on sustainable paths. The real problem is the enormous numbers just holding on and managing, a one off sickness, injury or financial shock would have huge numbers of households in serious problems. So despite the fact that official numbers may suggest 22% odd of OO mortgages are either in default or restructured it really tells us very little about the next 50% or so of mortgages which could not be serviced were interest rates to revert back to a normalised level, as they likely will in time. On that definition vast swathes of these mortgage loans are not sustainable primarily because they were stressed at origination on the basis of a what if scenario if rates were to rise to x% but not under conditions where rates rise to x% and net income falls by 20% to 30% as it has in many households. Therein lies the real problem.

    Houses priced (not valued) on the basis of an ability at a point in time to repay of loan don’t stand up to scrutiny when loans can’t be repaid.

  28. Gavin Kostick Says:

    @ Yields, Brendan, etc

    Very interesting discussion above:

    ‘just because a mortgage is being serviced in no way means that household budgets are on sustainable paths.’

    Good point. With the papers reporting today that people are skipping meals to make ends meet, one wonders what other items have been cut out also.

  29. Brendan Burgess Says:

    Hi YoB

    Let’s consider someone who has made the decision to rent a home long term instead of buying one.

    They are paying their rent. They are feeding their children. Let’s assume that they don’t have enough to put much aside for their pensions.

    This person is in the same position as someone who can pay the interest on their mortgage, but who is not able to repay capital.

    An illness or term of unemployment will put them in a serious situation.

    Most of the banks seem to think that a mortgage is only sustainable if the borrower can repay the principal by the time of retirement. So they will be introducing split mortgages where they will repay capital on the active part and accumulate interest on the deferred part. This makes no sense to me.

    Some banks are going further and seeking to repossess houses with such “unsustainable” mortgages. In some cases, this won’t be in the interest of either the borrower or the lender.

    If the house is in heavy negative equity, and the lender is prepared to write off the shortfall, then it should be in the borrower’s interest.

    But they will then be a renter facing the same problems, whereby an ilness or period of employment will knock their financial security.

    I would love if we had an economy where everyone was able to live well, have insurance against illness and unemployment, pay off their mortgage and fully fund their pension. But we don’t have such an economy.

    We need to target our limited resources at those who need them most. People who can pay the interest on their mortgages at present, don’t need any intervention yet. They may indeed need an intervention of some sort when interest rates increase or if their income decreases further, but for the moment they are ok.

    Brendan

  30. Occam Says:

    There may be a different way to restructure unsustainable mortgages - check out ;
    http://www.hussmanfunds.com/wmc/wmc090223.htm and
    http://www.hussmanfunds.com/wmc/wmc110606.htm

  31. eamonn moran Says:

    @ yields
    “so of mortgages which could not be serviced were interest rates to revert back to a normalised level,”

    What if there is a new much lower normal level?

    I was reading before that if if there was to be an increase in interest rates the derivative market would go into chaos.
    I think there are significant new but long term downward pressures.

  32. Yields or Bust Says:

    @Eamonn

    Indeed you may well be correct. The action in the gold market to me is a reflection of ongoing and likely continous very low interest rates for a considerable period of time. But as you know conditions can and do change and in many cases change can be dramatic so I’d keep a very close eye on the gold market as to me it now represents the best indicator of where short term interest rates are going particularly in the US. If the gold price starts to fall sharply and sets a downward trend in so doing you can rest assured interest rate rises are around the corner as gold has been a play on a continued low 2 year treasury yield for the past 5 years.

    @Occam

    I have actually posted the Hussman scheme here before and I believe it does indeed have merit but I think the better scheme is not the PARs device but what he mentions earlier i.e. the deleveraging losses incurred by banks in selling their MBS (as they are doing currently)

    “…First, if it were possible to collect all of the pieces of various securitized mortgage issuances at large discounts to face value (say 60 cents on the dollar), then the government could write down the mortgage principal by the same amount of that discount, with absolutely no cost to taxpayers. Essentially, the losses already taken by lenders and the owners of those mortgage securities would be “passed on” to the underlying homeowners in the form of mortgage principal reductions…”

    The prices achieved on these trades should represent the revised mortgage balances in that if the bank is selling a book of MBS for 50% in the Euro then the buyer of that security should in my view be limited in their ability to collect only 50% of the outstanding mortgage in simple terms the losses are passed back to the mortgage holders.

    The reason why the banks are selling these securities is obviously twofold 1. to reduce the overall asset size of the balance sheet for regulatory capital requirments but 2. if also draws a line under its losses. The pain however for the mortgage holder continues - I’d love to be able to sell my negative equity house for a price repay the bank the proceeds and walk away - that’s what the banks are doing, with no repercusions, as the losses on these trades have been shored up via the recap money supplied by the citizens.

  33. Yields or Bust Says:

    @BB

    You say:

    “..Let’s consider someone who has made the decision to rent a home long term instead of buying one.

    They are paying their rent. They are feeding their children. Let’s assume that they don’t have enough to put much aside for their pensions.

    This person is in the same position as someone who can pay the interest on their mortgage, but who is not able to repay capital..”

    But this is my precise point. In theory these people should, with an equivalent house type in the same general vicinity, be in the same general economic position but the purchaser who bought in the period under review is significantly worse off as their interest payment is significantly ahead of the rental payment because of the massive mispricing of the asset at the time of sale.

    Real life scenario: House number 1 was rented earning €750 a month rent in 2006 - house number 2 was sold in 2006, exactly the same size same make and shape house for €300k. The mortgage on #2 was charged at 4% meaning the interest alone was €11,870 for year 1 on a capital mortgage i.e. c€990 interest per month.

    Based on a known rental yield the bank should not have valued the house anything more than €117.8k (€750*11 (months rent per year to account for upkeep and vacancies ) at a long run capitalisation of 7% yield i.e. 14.3x net rent). In this instance (repeated up and down the country by the thousand) the owner if they are paying interest only is worse off by €240 (€990 - €750) a month at 2006 rentals and we know the average fall in nominal rents has been c25% since the peak so the €750 is now in fact €563 so the buyer is now down €427 (€990-€563) a month versus the average renter on the assumption the loan was fixed at 4%.

    The obvious but clearly never questioned issue by your goodself is how can a bank price the exact same house, next door to each other at such an alarming difference when it is clearly known what an equivalent rented house is generating in the market at the time of sale? This is the issue.

    The above scenario is absolutley typical of what went on. You may question the housebuyer but as I have repeatedly suggested the overwhelming majority of house buyers transact in the market perhaps once or twice in their lifetime - they consult and take advice from those who do this as their day job. It is completely unrealistic to think that the novice buyer would have the ability to bargain the price down to what it fundamentally was worth at the time of sale. Housebuyers are price takers because the housing market is driven by credit and competing credit flush housebuyers on the other side of any deal will likely be in the same boat with the same level of credit/loan approval ensuring prices are kept at artificial rates when credit is widely available and priced competitively.

    The bottom line is that in my scenario the housebuyer is paying significantly more than the renter for exactly the same house type and is nursing a loss of c60% relative to todays prices.

    All of this could have been easily avoided had the banks done the very simple and basic sum I completed above and stick to the known long run metrics this market has witnessed for decades. The banks didn’t do this, they lent the money at valautions which were completely daft (in this instance at 2.75% net rental yield) levels. Requesting any individual to make good on this deal when the evidence was there for the banks to see on a day by day basis that such loans were virtually guaranteed to turn sour is a step too far. Make no mistake the error here resides with the banks as they always have in a credit driven market the ability to say no to any deal.

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