Tag: Mortgages

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.