Department of Finance Presentations: January 2012

Following on from the NTMA’s slidefest from a few days ago, here’s an interesting set of presentations that have just been released (apparently without a press release explaining who they were originally presented to but I think you can guess). There are presentations on Mortgage Arrears, SME Lending, Deleveraging, Funding, and a Banking Report Card. Enjoy.

European Commission Report on Ireland: December 2011

The latest European Commission report on Ireland is available here. Lots of interesting stuff in it. One bit that caught my eye is a discussion of an internal report prepared by the Central Bank

A second report covering the use of certain types of credit limits, from a prudential point of view, is at an early stage of development. This would take under consideration policy tools including Mortgage Insurance Guarantees and Loan-to-Value (LTV) limits, as well as potentially fixing all interest rates for certain products such as mortgages.

It’s not obvious to me that banning variable rate mortgages is a good idea, either from the point of view of consumers or from the point of view of international financial institions considering coming into Ireland to offer mortgages. While fixed-rate mortgages do offer increased stability, the premium required is quite large so that financing costs would be higher on average (and house prices probably that bit lower as a result).

There are various reasons why fixed-rate mortgages are not common in Ireland or the UK (this 2004 report on the UK mortgage market by David Miles discusses this issue in detail). But banning variable rate mortgages seems to be an extreme proposal.

Central Bank Paper on Mortgage Arrears and Negative Equity

The Central Bank have been publishing data on mortgage arrears for some time now.  On Friday, the Bank released some very useful additional analysis in the form of a paper by Anne McGuinness (press release here.) The paper provides new information on the extent of negative equity and also on buy-to-let mortgages, which are not covered in the Bank’s usual quarterly arrears figures.

Mortgage Arrears: June 2011

The latest quarterly report on mortgage arrears from the Central Bank is available here. The report shows the fastest increase yet in the fraction of mortgages that are more than 90 days in arrears. This fraction rose from 6.3 percent in March to 7.2 percent in June, compared with increases of about six tenths of a percentage point in the previous quarters.

55,763 mortgage accounts have been in arrears for more than 90 days, of which 40,040 are in arrears over 180 days. In addition, 69,837 mortgages have been restructured with 39,395 mortgages that have been restructured but which are classified as performing and not in arrears and 30,442 again in arrears. These figures raise questions about whether the type of light restructurings that the Irish banks have been applying to distressed mortgages are sufficient to deal with the problem.

Morgan Kelly on the Size Distribution of Irish Mortgages

Morgan has a new working paper titled “A Note on the Size Distribution of Irish Mortgages”.  From the conclusions

Our analysis here has shown that instead of 10,000 million plus mortgages, there were probably fewer than 2,000 and these were mostly for investment rather than own home mortgages. However, looking at the 11,000 largest mortgages from the bubble peak of 2006-08, we find that the total is €9 billion. We do not know how many people held more than one mortgage, but it does not seem implausible that the total indebtedness of the 10,000 people with the largest mortgage debt is in the region of €10 billion.

Morgan uses statistical methods to estimate the number of mortgages valued at over €1 million because the Department of the Environment do not make these data available.

While the question of how many mortgages there are over €1 million is not particularly important, it might be worthwhile for the Central Bank or CSO to make available more detailed figures on the size distribution of mortgages. As there are quite a few banks in the Irish mortgage market, the usual argument about confidentiality hardly applies as an issue when releasing aggregate figures.

Lack of Debt Forgiveness Not Realistic

From today’s Irish Times,

Debt-forgiveness scheme not a realistic option, says Hayes

THE GOVERNMENT is set to resist growing calls for a debt forgiveness scheme for homeowners in mortgage distress.

Minister of State for Finance Brian Hayes said yesterday a proposal to write off up to €6 billion in personal mortgage debt was not a realistic option.

A spokesman for Minister for Finance Michael Noonan also indicated such a scheme was highly unlikely …. Mr Hayes, however, said there were “two huge problems” with the proposal.

“With any debt forgiveness, it will raise questions of fairness for people paying 100 per cent of their mortgages who are not getting any help from the State. It’s a huge issue for that group, who are already straddled with huge mortgages and who have not sought debt forgiveness.

“Secondly, the Government has put huge store behind the two pillar banks. To introduce debt forgiveness totalling €6 billion at a time when the Government is bringing those banks out of the A&E wards would be very difficult to justify,” he said.

These comments strike me as odd when one considers the underlying policy towards the Irish banks set out in the Financial Measures Programme (FMP) report, released last March and compiled with extensive (and expensive!) input from international consultants.

When Mr. Hayes talks about the “huge store behind the two pillar banks” I’m guessing he’s referring to the money being used to recapitalise them. Well, the recapitalisation requirements for these banks were dictated by the findings of the FMP report. 

The report estimates total lifetime losses on the €74.4 billion owner-occupied mortgage portfolio for AIB\BoI\EBS\ILP at €5.7 billion in their base case and €10.2 billion in the stress scenario. These loss estimates were then used to come up with the capital requirements for each bank, most of which has been met by putting public money into the banks.

For those who say that they don’t think that their money should be used to help write down other people’s mortgage debt, there’s bad news and good news. The bad news is that it’s already happened.  The taxpayer injections from the NPRF are covering mortgage debts that won’t be paid back. The good news is also that it’s already happened, i.e. implementing a debt relief programme won’t involve any additional costs to taxpayers over and above those already announced.

What this means is that the banks are sitting on mortgage losses that will be around €6 billion even if the economy recovers in line with the government’s projections.  This €6 billion represents debt that simply will not be paid back and taxpayer funds have already been injected to cover these losses.  At present, however, the banks are preferring to write these losses off as slowly as possible.  But whether the day of writing down is put off some more or whether the banks actively engage in a write-down programme, these losses are being incurred.

Brian Hayes may believe that the “extend and pretend” approach currently being adopted, while failing to resolve the debt nightmares of many citizens, is at least beneficial for the health of the Irish banks.  I don’t believe this to be correct.

A number of international financiers that I have spoken to recently have expressed serious disappointment at the slow speed with which Ireland is moving to write down mortgage debt. Their attitude is that they could deal with the Irish banks if they could see evidence that mortgage losses will indeed be limited to about €6 billion. However, at present, they do not see any “workout model” in place for dealing with Irish mortgage debt.  In the absence of seeing how such a model will operate, they will continue to be nervous about the size of the unexploded “mortgage bomb.”

What this means is that it will be beneficial for both the banks and their distressed customers to get on with implemented a well-designed debt relief programme. Indeed, prior to the comments from Brian Hayes and Mr. Noonan’s spokesman, I was under the impression that the government would implement such a policy. Certainly, the public statements of Jonathan McMahon, head of banking supervision at the Central Bank, indicate a preference for the banks to get on with writing down with bad loans.

What should a well-designed mortgage write-down programme look like? Brian Hayes raises the issue of fairness as if nobody has ever thought about this before. In truth, a lot of thought and effort has gone into dealing with personal debt problems around the world and there is a lot to learn from. We’ve also been discussing it on this site for a long time, e.g. this post I wrote eighteen months ago.

A well-designed programme needs to deal with mortgages on a case-by-case basis. In some cases, this can involve modifications of mortgages in bilateral deals between banks and their customers. In some cases, those who get modified mortgages will get to stay in their homes. In other cases, they will not.

In more serious cases, a process of negotiations between debtors and their creditors will be required, i.e. a personal bankruptcy procedure. The revised EU-IMF programme from April (page 15) contains a commitment to introduce a revised personal bankruptcy regime as well as a new non-judicial debt settlement and enforcement system. It claimed then that discussions were ongoing and would be completed shortly.

In light of the EU-IMF commitments on debt regimes, the stress test results and recapitalisation, and the stated approach of the Central Bank, I think the comments from Mr. Hayes about the inability to write down €6 billion in mortgage debt are unfortunate.

Let’s hope there is more progress being made on this issue than these narrow-minded comments suggest.

Mortgage Balances and Projected Losses

I’d written the comments below before seeing Stephen’s post on this, so I’m not trying to correct anything in it, just adding my own two cents.

I didn’t attend Morgan Kelly’s talk at ISNE yesterday so all I know about it is what I’ve read in today’s newspapers (e.g. this piece in the Irish Times) in which Morgan is quoted as saying “We are talking sums in the region of €5 billion to €6 billion which would be necessary to spend on mortgage forgiveness”. This evening, I heard a piece on RTE’s Drivetime in which Brendan Burgess of askaboutmoney.com was questioning various figures that were attributed to Morgan and arguing that Morgan was unnecessarily scaring people about the scale of mortgage defaults.

I’d like to make two (hopefully) clarifying points on this issue. First, the sizes of the owner-occupied and buy-to-let mortgage books for Irish properties of the four guaranteed Irish banks are not something that there needs to be any disagreement about, as the balances as of December 31 last year were published in the Financial Measures Programme (FMP) report of March 31 (page 19).

Second, rather than being a scary figure, Morgan’s estimate of between €5 billion and €6 billion for a substantial mortgage relief programme is, if anything, a bit low relative to what the Central Bank’s figures in the FMP report indicate is necessary.

On the size of mortgage books, here are the facts. As of December 31 last year, BoI, AIB, EBS and INBS had a combined €97.7 billion in Irish residential mortgages with €74.4 billion being owner-occupied and €23.3 being buy-to-let (Table 7, page 19 of FMP report).

On estimates of losses on the owner-occupied portion of Irish residential mortgages, the FMP estimates total lifetime losses on the €74.4 billion portfolio at €5.7 billion in their base case and €10.2 billion in the stress scenario. The amount of these losses to be realised over the next three years is estimated to be €3.5 billion in the base scenario and €5.7 billion in the stress scenario (see Table 9 on page 23).

This shows that Morgan’s estimate of between €5 billion and €6 billion corresponds to either the lifetime losses assumed by the Central Bank in the base case or the three-year losses associated with the stress case.

As I said above, I don’t know how Morgan came about his figures but the five to six billion figure for mortgage writedowns seems to me to be in line with the Central Bank’s official policy.

Furthermore, my reading of statements by Jonathan McMahon, head of banking supervision at the Central Bank (e.g. here and here) is that he is keen to see the banks get on with implementing debt writedowns that are in line with the Bank’s assumptions about mortgage losses. The banks have been recapitalised under the assumption that the losses in the FMP base case are going to occur, so it is surely time to start dealing with this problem.

Perhaps rather than have an unnecessary debate about figures that are actually published and can’t really be disputed, Morgan’s talk can serve as a useful starting point for a debate about exactly how mortgage debt write-downs should be implemented.

Frank Daly on NAMA Providing Finance

NAMA Chairman Frank Daly gave an interesting speech today. NAMAWinelake analyses the speech in detail here.

Daly discusses how NAMA may get sales going in both the commercial and residential property markets. In terms of commercial property, Daly describes how NAMA can provide finance in a simple and clear manner which hopefully will dispell some of the confusion about this issue when it first came up (the point of this post was that it was a very simple issue but that didn’t stop us getting various comments about where would they get the money from, the whole thing being circular and Ponzi schemes and the like …):

To illustrate how stapled financing might work in practice, let us take the case of an investor who wishes to buy a property asset from a NAMA debtor or receiver but who cannot source any funding or sufficient funding from banks even though he is willing to contribute 30% equity. Assuming a purchase price of €100m, the investor would pay €30m upfront to NAMA and then enter into a loan agreement for the residual €70m which would see him repaying the principal on an amortising basis to NAMA over a five/seven year horizon. The original debtor’s outstanding obligations to NAMA would fall by €100m. The net impact for NAMA would be positive in a number of respects. It would have generated a transaction in the market which would not otherwise have taken place. It would have replaced a loan of €100m with what is likely to have been a weaker debtor with a performing loan of €70m with a stronger debtor, thereby reducing and diversifying its credit risk. It would also have a cash receipt of €30m which it could then use to reduce its own debt. In reality, it does not require any new money from NAMA; it is a recycling of existing debt but achieving a significant cash payment upfront.

The comments about selling residential properties are more interesting. Because the maturity of most residential mortgages extends well beyond NAMA’s projected lifespan, they are keen to get involved with the two pillar banks to provide mortgage finance. Interestingly, NAMA appear to be willing to provide funds to insure purchasers against future price declines:

Our aim would be to unveil a product with the two banks in the early autumn which meets a number of key criteria: one which generates sales of property controlled either by NAMA debtors or by receivers yet provides an incentive to purchasers to invest at current prices in the knowledge that there will be a mechanism in place which will offer them protection against the risk of negative equity in the event that prices should continue to fall. Given that NAMA is effectively providing state funds for this purpose and the pillar banks will be largely state owned, it raises a question about whether such mortgages should be offered beyond the limited set of residential properties owned by NAMA.

Finally, this passage will prove popular with many:

A number of debtors appear to be trapped in the old mindset whereby it is they and not the lender who sets the terms on which business is done. It is akin to falling overboard and then complaining to your rescuer about the colour of the lifebuoy that he is about to throw in your direction. Some of them have difficulty surrendering the grandiose lifestyles that they seem to regard as their continued entitlement, even if the rest of us are expected to pay for it through higher taxes and cuts to services in our schools and hospitals. We have and will enforce against such debtors. If the taxpayer is being asked to keep you in business, it would seem to be a matter of basic common sense that you do not seek to maintain a lifestyle that is beyond your means. The taxpayer does not owe you a living and certainly does not owe you an unrealistic lifestyle if you are not in a position to repay your debts.

Tough words. Let’s see if they’re accompanied by corresponding actions.

Mortgage Arrears: March 2011

The latest quarterly report on mortgage arrears from the Central Bank is available here. The report shows a continuation of the steady increase in the fraction of mortgages that are more than 90 days in arrears. This fraction rose from 5.7 percent in December to 6.3 percent in March, in line with the previous increases over the past year.

49,609 mortgage accounts have been in arrears for more than 90 days. In addition, 62,936 mortgages have been restructured with 36,662 mortgages that have been restructured but which are classified as performing and not in arrears and 26,274 again in arrears.

Mortgage Activity “Remains Subdued”

For good or ill, the future financial prospects of the Irish sovereign depend in various ways on the future of the Irish property market, both via its purchases of NAMA property and its investment in banks with considerable mortgage books.

The Irish Bankers Federation report on the mortgage market (data here and press release here) paints a picture of a market that has almost completely collapsed. NAMAWineLake provides his customary high quality analysis here. I’d note that the series seem to have a seasonal pattern so comparisons of 2011:Q1 with peak may be a little misleading but even year-over-year comparisons paint a picture of a market in freefall. These figures also tie in pretty well with the figures from the new house price index from the CSO which showed a faster pace of price decline in the three months to March 2011 than had been seen since mid-2009.

Mortgage Arrears: December 2010

The latest quarterly report on mortgage arrears from the Central Bank is available here. The report shows a continuation of the steady increase in the fraction of mortgages that are more than 90 days in arrears. This fraction rose from 5.1% in September to 5.7% in December, in line with the previous increases over the past year.

For the first time, the Bank are also publishing statistics on how many mortgages have been restructured and the nature of these restructurings. In addition to the 44,508 mortgage accounts that were in arrears for more than 90 days, there are 35,205 mortgages that have been restructured but which are classified as performing and not in arrears.

Mortgage Arrears: June 2010

The apparently newly branded Central Bank of Ireland has released the latest summary data on mortgage arrears here.  

A total of 36,438 mortgage accounts were in arrears over 90 days in June 2010, up from 32,321 in March. This meant that 4.6 percent of mortgages were in arrears, up from 4.1 percent in March and 3.3 percent in September 2009.  However, mortgages in arrears have a higher average balance (€190,000 compared to an average of €149,000 for the full sample) so the 4.6 percent of mortgages in arrears accounted for 5.9 percent of the total outstanding mortgage balance.

The arrears on the overdue loans totalled €559 million in June. Those in arrears over 180 days are, on average, behind on 10 percent of their total balance.

Mortgage Arrears: March 2010

The financial regulator has released the latest summary data on mortgage arrears here. The data show a 13% increase in accounts more than 90 days in arrears. In total, 4.1 percent of mortgages are in arrears over 90 days, with 2.8 percent of these being over 180 days.

Balances on past due mortgages are higher on average than those not past due: The average balance for mortgages not past due is about 147,600 while the average balance for mortgages in arrears is 188,800. This means that past due mortgages account for 5.2 percent of the total balance of mortgages outstanding. Those mortgages past due over 180 days already have approximately 10 percent of the balance in arrears.

These calculations do not include people who are not in arrears because they have come to an agreement with their bank on a different repayment schedule.

These figures suggest to me that the Central Bank Prudential Capital Assessment Review’s “stress scenario” assumption of 5 percent looks more and more like a reasonable baseline. This is also the number the Morgan Kelly mentioned in his recent article as a conservative estimate.

How could this number come about? For instance, if the mortgages that need to be foreclosed on or restructured end up accounting for 10 percent of the total balance and the loss given default is 50 percent, then this would imply a five percent loss on the mortgage book. One could imagine more stressful scenarios than this.