Resolving credit distress after COVID-19 – new articles and data from the Central Bank

Over the last fortnight, the Central Bank has published several articles and new data on trends and policy challenges relating to credit.

This includes articles on payment breaks for mortgages by Ed Gaffney and Darren Greaney and for firms by David Duignan and Niall McGeever, as well as enhanced statistics on mortgage arrears by David Duignan, Andrew Hopkins, Ciaran Meehan and Martina Sherman. The new data shows a “persistently high number of PDH [owner-occupier] mortgages that remain in long-term arrears some ten years on from the financial crisis”.

To coincide with a Central Bank Webinar on Distressed Debt on Monday 28 September, Fergal McCann and Terry O’Malley published an article on “Resolving mortgage distress after COVID-19: some lessons from the last crisis”. The article is presented as a “stock-taking exercise as COVID-related [payment breaks] begin to expire”. It draws on the lessons of the last decade, emphasising the need for early engagement and a focus on long-term sustainable solutions. The paper also provides rich new information on the financial position of borrowers as they engaged with the restructuring process over the last decade, highlighting the sharp falls in living standards that had been experienced by many. It also provides clear evidence of the role of deeper up-front payment relief in explaining lower re-default after modification Finally, it highlights the need for lenders and credit servicing-firms to put in place plans and capacity to help customers in financial distress.

Well it’s raining, again

With flooding back in the news today, I thought I’d take the opportunity to mention that my colleague and co-author Swenja Surminski from LSE will be giving evidence tomorrow morning (Thursday) at the Oireachtas Finance Committee hearings on the Flood Insurance Bill. Details of the session are here. You should be able to watch proceedings online here. The Flood Insurance Bill can be viewed here.

65th Economic Policy Panel

For more than 30 years, Economic Policy has been publishing papers on pressing European policy issues. Preliminary versions of the papers are first discussed at Panel meetings. The 65th Panel meeting, which starts today in Valletta, features papers on the causes of Brexit, on the consequences of Brexit, on the impact of the 2015 reforms on the Italian labour market, on innovation, on entrepreneurship, on retirement, on monetary policy, and on mobile communications. The papers are available here.

Reformed central bank regulators criticised for being, uh, ‘awake at the wheel’

Three people bid for a house, each using a mix of savings and borrowings; the highest bidder wins. Now suppose each had been prepared to spend more, and each bidder’s bank had extended an additional €100,000 of credit. Nothing changes in the aggregate – one house is bought and sold – except that the buyer has an additional €100,000 of debt (and the seller an additional €100,000 of cash.)

How is that a better overall outcome?

When supply is constrained, credit limits are needed (from a central bank, or internally to the banks themselves) to prevent lending driving up house prices and household debt as borrowers compete against one another for a fixed supply of accommodation. Under boom-time conditions, prices rise to levels Ireland saw ten years ago. Any sensible regulator would seek to put a stop to such a spiral, and should expect to receive the support of politicians, the media and a responsible industry.

But the Irish Central Bank’s mortgage lending controls seem to leave it standing almost alone, criticised by the building industry, the banks, politicians and journalists for being – what? – ‘awake at the wheel’? These controls protect buyers from over-paying. Yet the Central Bank is pictured as punishing the consumers it is protecting. (‘Only the rich can now afford housing’ says the newspaper headlines, but without credit limits only the over-indebted could.)

This is remarkable on many counts.

The Crash is not over, but already many seem to have tired of financial regulation. Denounced for failing to act in the boom, the Bank is now denounced for limiting wasteful bidding wars. Meanwhile, largely uncriticised and indeed not much commented on, local authorities construct elaborate and costly planning rules that increase housing costs. That’s without considering what Colm McCarthy calls (in today’s Sunday Indo) the ‘elephant in the room’: the planning and zoning restrictions that create an artificial housing shortage in the first place. Curiously, we criticise regulations that protect us and not the regulations that harm us.

The media present the lending rules as adjustable but house prices as fixed. The opposite should be the goal of policy. If today’s prices and lending limits require a level of savings impossible for most intending house-buyers to achieve, this means house prices are too high not that regulatory rules are too tough. Do we want everything else to be cheap but the most substantial purchase – housing – to be dear? Perhaps we do; Aidan Regan has recently argued on this blog broadly along these lines. When the number of house owners dwarfs the number of marginal buyers, the intergenerational political economy gets very ugly.

To tackle the housing shortage we should leave bank regulators to do their job, and deal with the policy obstacles that cause so few houses to be built. Don’t tackle one problem by creating a second. And don’t fuss over bank regulation to avoid looking at underlying planning, zoning, intergenerational and NIMBY problems.

A scarcity of accommodation is not solved by lending limits. But house prices are lower, mortgages smaller, banks safer, and taxpayers sleep more peacefully; admittedly miscellaneous middlemen may earn lower fees and journalists have to search elsewhere for a story.

Credit limits protect house buyers when there are more buyers than the kinds of houses they want to buy.

Aviation conferences and meetings in November

The 2015 meeting of the European Aviation Conference (EAC) will take place this year in Cranfield University on November 19th and 20th. Academics, business and industry figures will debate whether the momentum behind airline liberalisation over past decades is now spent, as some evidence suggests.

The conference programme may be inspected and a booking made on the conference website.

Preceding the EAC will be the 2nd COST Workshop on Air Transport, Regional Development, Airport Hubs & Connectivity, which will take place at the University of West London (17 November) and Cranfield University (18 November). The program for the Workshop is available on the German Aviation Research Society (GARS) website where, as always, aviation-research-related information is updated continuously; see www.garsonline.de