What's really happening with mortgage arrears

What's really happening with mortgage arrears

The Central Bank held a conference this week entitled: “How to Fix Distressed Property Markets?” and part of its purpose was to compare the treatment of mortgage arrears in Ireland with the treatment of mortgage arrears in the United States.

Despite the terrific title with the peculiar question mark? – it was probably a stuffy enough affair with Irish and American central bankers trading presentations – and the whole thing would most likely have slipped quietly into oblivion (like the last one in 2011) if it hadn’t been for some spectacular personal comments made by visiting speakers as they headed back home after the conference.

Here’s a few…

Michael Moore from the IMF said that: “Figures supported the view that faster foreclosures contributed to the quicker resolution of a housing and mortgage crisis.”

Then Anthony Murphy, an economist with the Federal Reserve Bank of Dallas and former academic said that: “The lack of repossessions in Ireland was crazy and really strange.”

In a conversation with Newstalk he elaborated by saying that: “In the US, everyone accepts that the foreclosure rate is too high. In Ireland, the foreclosure rate of zero is far too low. It makes no sense.”

He also said that there was no measure or rule to determine what people could afford to pay in Ireland, so there was likely to be a large element of strategic default.

Can pay but won't

Strategic default is the technical term for folks that can pay, but won’t. In the US, it is around 12% of all arrears. In one of the presentations made at the conference, it was reckoned that strategic defaulters make up a much higher proportion in Ireland – because there are practically no repossessions, and therefore no consequences to not paying up.

Michael Noonan and Patrick Honohan have both expressed frustration at the banks’ inability to address the mortgage arrears problem, but neither have been particularly clear about what should be done to fix it.

There are a number of major issues that the banks and the government are facing that make it extremely difficult to repossess distressed properties.

The Code of Conduct on Mortgage arrears which came into effect two years ago says that once a homeowner is considered to be in arrears, the banks must follow an extraordinary list of procedures over at least twelve months before considering repossession. However, there are a whole lot of things that a borrower can do to extend that period almost indefinitely.

Then there’s the Dunne ruling. In July 2011, Ms Justice Elizabeth Dunne ruled that Start Mortgages couldn’t repossess a home because the mortgage had been taken out before 1st December 2009 and demand for possession was made after 1st December 2009.

Why would she make a ruling like that? Well, there was a new Land and Conveyancing Law Reform Act introduced in December 2009 which replaced bits of an old Act from 1964. But it left out bits that would give lenders the power to repossess properties where the mortgage was taken out before 2009 which – if we're honest – is pretty much all of them.

And of course, there’s forbearance. The government, and by association, the Central Bank and the banks themselves have been following a policy of forbearance for years now. Forbearance basically means not enforcing an agreement. Or, in the Irish context, it means just letting mortgage arrears slide, and slide, and slide some more. It’s the equivalent of closing our eyes, sticking our fingers in our ears and singing la-la-la-la-la. Unsurprisingly, this hasn’t fixed the mortgage arrears problem.

So how big is the mortgage arrears problem?

Well, since it was Irish and American bankers that got together this week, we’ll use Irish and American arrears as a benchmark. During the sub-prime crisis, American mortgage arrears of three months or more peaked at 3.6% at the end of 2010. That number has improved to 3.0% since then. At the end of 2010, Irish mortgage arrears of three months or more was at 5.7%... That number has not improved since then.

At last count in September 2012, there were 761,954 private residential mortgages in Ireland. 86,146 of those are behind by three months or more. That’s 11.3% - double what it was in 2010. Or one in eight.

But 11.3% doesn’t really tell the whole story. There are another 49,482 mortgages in arrears of up to 90 days. That brings us up to 17.8%. One in six.

Then there’s another 43,742 that have been restructured. Sure, there’s lots of reasons for restructuring a loan, but I think it’s fair to assume that most of these are due to an inability to pay. If you add these into the mix, you’ve got an absolutely staggering 23.5% of Irish mortgages that are in some sort of trouble. Almost one in four.

Looks like Michael Moore could be right. Figures actually do seem to support the view that faster forclosures do contribute to the quicker resolution of a housing and mortgage crisis. The Irish approach of almost zero reposessions has made our crisis worse.

So what is being done?

Well, back in 2011, the Central Bank held a similar conference on the state of the Irish mortgage market. In his opening remarks, Central Bank Governor Patrick Honohan made a number of very pointed statements. I’ll paraphrase some of his remarks here:

  • Mortgage arrears had made it to the top of the policy agenda in Ireland
  • Society will not tolerate those who could pay but won't, and the banks must figure out who they are
  • The old policy of forbearance was being replaced by more comprehensive measures
  • We needed to know what affordable payments should be, so arrears customers could come to agreements on their debts

Mortgage arrears may still be at the top of the agenda, but very little has changed. Forbearance still seems to be the only policy in dealing with mortgage arrears, and we continue to tolerate those who can pay but won’t.

Forbearance is dramatically demonstrated by how few repossessions there are. In the quarter up to September 2012, there were only 79 cases where the courts granted orders for repossession – that’s not even one a day. Even before the Dunne ruling, repossessions were neglibible.

When talking to Newstalk about what was affordable as a mortgage payment in the United States, Anthony Murphy of the Federal Bank of Dallas said: “Normally with programs that are common in the US at the moment, most people can afford to pay roughly 31% of their income on housing.”

And there’s that number Patrick Honohan was looking for – about a third.

So what did Patrick Honohan say this week?

Well, he certainly suggested that things were about to change. He said that “there must be consequences for an uncooperative borrower refusing to make a reasonable effort.” But then he said that in 2011 and there have been no consequences since then.

He was a little more specific this year though. He said that the repossession of investment properties may be inevitable – which suggests that they will be the first on the list.

What he did say that may come as a relief to many genuinely distressed householders is that (again I paraphrase) "permanent debt relief is a necessary ingredient in the resolution of arrears… but has to be limited to those who are truly over-indebted and close to insolvency.”

We have not really seen any kind of debt relief during this crisis, so this is remarkable. It seems to recognise that there are thousands of people with unsustainable levels of debt - and no matter how much you stretch out the terms, fiddle with the payments or muck about with the rates, unsustainable debt will remain unsustainable, and therefore there must be permanent debt relief.

Patrick Honohan is very concerned about the consequences of repossession though. He wondered: “If more investment properties are repossessed, or surrendered voluntarily to lenders, will this improve or hinder the functioning of the property market? Will a release of repossessed or surrendered property into the market depress prices further, or will instead the increased number of transactions relieve uncertainty and help the market to finally find a price floor?”

Well, there’s only one way to find out, right? We need decisive action on delinquent loans, we need permanent debt relief and as international experts have clearly advised, we need to release property into the market.

We’ve already found out what happens when we do nothing. In Ireland right now, we can’t borrow, we can’t buy homes, we can’t sell homes and we can’t move home. Anthony Murphy tells us:

“We're ending up with a situation of zombie banks, so banks are not… going to lend at the moment, because if they lend, they are worried that they can't repossess at a future stage. So you have a situation where one of the major functions of the banks is not being carried out by the banks themselves.”

It’s crazy and really strange, and it needs to change.

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