Central Bank Mortgage Conference

A reminder that this well-timed Central Bank conference on the Irish mortgage market takes place today.

Karl Deeter on Mortgage Relief

Karl Deeter of Irish Mortgage Brokers has written a paper on mortgage relief Designing a Debt Relief programme with minimal moral hazard to address the Irish household debt overhang. You can access the paper here.

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.