Irish mortgage arrears, particularly in the buy-to-let sector, are very high by international standards, at 8.8% for principal private residence mortgages and 17.9% for buy-to-let mortgages as of the third quarter of 2012. It is not all bad news, Ireland also has an extremely low rate of repossessions; there were a total of 79 judicial repossessions in the third quarter of 2012, consistent with the general trend over recent years. The Irish repossession/arrears rate is perhaps the lowest in the developed world. Notwithstanding that good news, the mystery of why arrears are so unusually high needs to be tackled.
The United States of America provides a natural laboratory for understanding mortgage lending and repayment behaviour since each US state has its own separate legal framework, with limited federal intervention. Gerardi, Hansen and Willen perform a careful statistical comparison between easy-repossession US states and difficult-repossession US states; this comparison might be relevant since Ireland currently has a “very difficult” repossession system due to the Dunne judgement of 2010. Define the arrears rate as arrears/loans and the repossession rate as repossessions/arrears. Summarizing the Gerardi, Hansen and Willen evidence together with the current situation in Ireland:
- Easy repossession US states have high repossession rates and low arrears rates
- Difficult repossession US states have low repossession rates and high arears rates
- Very difficult repossession Ireland has a very low repossession rate and a very high arrears rate
No obvious pattern explaining the Irish experience comes to mind, but more research is called for.
Often in economic analysis it is useful to “drill down” and consider individual cases in order to understand incentives and behaviour. Compare the hypothetical cases of two equivalent small business owners, one in the USA and one in Ireland. Each has invested in a half-dozen buy-to-let properties paid for via mortgages at a local bank. In each case, the small business is currently under strain and the business owner must make difficult decisions about whether to go into arrears on his buy-to-let mortgages. The Irish business owner knows that if his loan arrears build up there is a 1/20,000 chance that the buy-to-let properties will be repossessed. Also, in keeping within Financial Regulator guidelines, the Irish business owner will receive letters and up to three phone calls a month from his loan manager cajoling him to clear the outstanding balance and offering him a range of loan restructuring solutions. The otherwise-equivalent US business owner knows that if arrears build up there is a 99/100 chance that the properties will be repossessed. He receives only one phone call from his bank manager, telling him that if the arrears balance is not cleared in the next ten days the buy-to-let properties will be immediately repossessed and sold at auction. Why is the US bank manager so much more successful in preventing the build-up of buy-to-let arrears than the Irish bank manager? Are Irish bank managers not being sufficiently creative in the loan restructuring solutions that they offer to customers? Perhaps the Irish Financial Regulator should mandate that all loan managers pass a certified Communication Skills course. Something needs to be done to encourage Irish banks to confront the growing arrears problem more effectively, like their US counterparts.
Even taking account of Ireland’s very difficult economic environment, the level of mortgage arrears is very high by international standards, particularly in the buy-to-let sector. It is not all bad news, since Ireland also has one of the lowest repossession rates worldwide. The mystery of why mortgage arrears are so unusually high requires more economic analysis but the riddle will eventually be solved, given time.