Thoughts on the mortgage arrears crisis; the great contradiction

Last Friday the Central Bank of Ireland released the Residential Mortgage Arrears and Repossessions Statistics, updated to December 31^st 2014. The report is particularly timely given the huge increase in repossession orders being lodged with the courts and as more high profile cases garner media attention.

“Lies, damned lies, and statistics”

Statistics can be interpreted and presented in different ways, by different people, with different agendas. Those who have talked about the easing of the mortgage crisis point to the continued drop in the total number of mortgage accounts in arrears, the decline in early arrears and the increase in the number of mortgages restructured.

However, when you look behind the numbers objectively, the reality is that the mortgage arrears crisis, an economic and social crisis, remains unresolved. There are two key takeaways from the report:

1. The mortgage accounts in arrears over 720 days still constitute a significant portion of all accounts in arrears and the volume of arrears outstanding.
2. The restructuring techniques utilised to date do not adequately address the fundamental issue of over-indebtedness and the need for sustainable debt solutions.

The Central Bank report splits out the residential mortgage accounts by principal dwelling houses (PDH) and buy-to-let properties (BTL). As shown in Figure 1, of the 758,988 PDH mortgage accounts with an outstanding balance of €104.9 billion, 110,366 (14.5%) accounts were in arrears with a balance of €20.2 billion (19.3%). Of the 140,995 BTL mortgage accounts with an outstanding balance of €28 billion, 35,583 (25.2%) of these accounts were in arrears, with a balance of €9.6 billion (34.3%).

The outstanding balance of accounts in arrears is €29.8 billion, 22.4% of the overall mortgage book of €132.9 billion. If we break down arrears by days, as shown in Figure 2, the majority of this €29.2 billion is in arrears for a period of greater than 360 days, roughly €18.5 billion (62%).

Restructured, but may not be sustainable 

114,674 PDH mortgage accounts were classified as “restructured”, 78,418 of which were not in arrears. This represents a 36% increase, from a year earlier, in the number of restructured PDH accounts and a 72% increase in those categorised as restructured but not in arrears.

Judging by the restructuring arrangements it hard to be full of confidence on the longer-term sustainability. While they are referred to as “forbearance techniques” there doesn’t seem to be a huge amount of forbearance involved. As shown in Figure 3, the three main techniques – capitalise the arrears, split the mortgage or extend the term – account for 58% of restructured PDH mortgage accounts.

The mortgage crisis in Ireland is a microcosm of the wider global debt bubble that has been addressed in the same way: kick the can down the road. Record low interest rates from the world’s major central banks have brought reprieve, for now. What is required is a fresh approach to dealing with over-indebtedness and greater effort on pursuing sustainable solutions. Transparency on the restructuring policy is needed along with revisions to the personal bankruptcy law to help people get free of debt. We must remember that irresponsible borrowing was fed by irresponsible lending.

Most of all, a clear long term policy on residential real estate needs to be devised, addressing some of the bigger issues that got us to where we are today. In Ireland, there is an ingrained belief that the family home is sacrosanct, that this asset is relatively untouchable in situations of financial distress. This belief reflects a shared history with our English friends across the water, and one that has been borne out in the low level of repossessions since the crisis. Why then, if we apply such importance to the family home, is speculation in residential real estate permitted? How much property should one individual be allowed to accumulate? Is a house a home or an investment?

Recent developments in the Irish property market suggest that even before we have dealt with the mess of the last crisis, the seeds are being sown for another.

This article featured in the Journal.ie on March 19th 2015 as: Why is speculation on residential homes allowed?