The mortgage debt crisis in this country is much worse than the banks' official figures would have us believe...
A report published two weeks ago by prestigious think tank Organisation for Cooperation and Development (OECD) on the mortgage crisis here was unambiguous. For a dozen years, Irish house prices raced ahead at the fastest rate and for a longer time than anywhere else in the world.
When the bubble burst in 2007, it left Irish households facing – along with the Dutch and the Danes – the highest family debts in the world.
A bird's eye view of OECD housing markets by Christophe Andre reveals that Irish house prices since the 1970s were many times above the prices in Britain, Netherlands, Spain and France. Some years, several countries experienced house price booms simultaneously, said Andre, who defines a boom as prices having increased by 25% or more over five years.
Doubling of household debt
But since 1995, 13 countries of his sample of 17 countries simultaneously shot higher and, of course, Irish house prices shot higher than anywhere else. The mortgage debt taken on in Ireland to pay for the highest house prices on the planet shot up too: Andre's figures suggest that as a percentage of income, household debt doubled since 1995.
The picture is fairly clear. Ireland went into one of the biggest housing busts ever seen in the world, after house prices and mortgage debts soared faster than anywhere else. House prices will fall here the most because they reached higher peaks than anywhere else.
The Irish economy has seen the biggest collapse of any advanced economy and the upward trajectory in the jobless rate has been among the largest in Europe. The legacy of household debts – as detailed by the OECD in the 54-page report – ought to show a huge rise in the number of borrowers facing difficulty meeting their monthly mortgage payments.
Yet, the banks' official figures tell a remarkably benign story.
Every few months, the financial regulator publishes the figures it collects from the lenders for the number of people who are in arrears with their mortgages, having failed to meet payments over at least three months.
Before Christmas, the regulator said all the banks here, including RBS's Ulster Bank and Danske's National Irish Bank, reported that at the end of the third quarter fewer than 26,500 mortgage accounts had failed to meet three or more monthly mortgage payments. The arrears accounted for 3.3% of all 791,634 mortgage accounts and were worth €4.8bn, or 4%, of the €118bn outstanding in all private residential loans.
Surprisingly, the default rate in Ireland – where the jobless rate is likely to peak this year at short of 14% – is not significantly higher than in Britain, with an unemployment rate of 8%.
Michael Greaney at Fitch Ratings in London estimates that the default rate on €9.3bn pools of Irish mortgages which he assesses was running at 2.8% last September, compared with a default rate in Britain of about 2.2% for its buy-to-let scrutinised mortgage loans.
Many mortgage brokers, who used to account for up to half of all the mortgages sold here, say the figures issued by Irish banks underestimate the numbers of people facing big distress in paying their mortgages.
"I just don't believe the figures. They underestimate the problem," said Michael Dowling of the Independent Mortgage Advisers Federation (IMAF). He estimates that more than double – over 50,000 people – are likely to be experiencing distress in meeting their mortgage payments, suggesting that 150,000 children and adults in indebted households could be affected by huge mortgage debt problems.
Switch to interest-only payments
Most of Dowling's working day is spent renegotiating on behalf of existing clients with their lenders to switch onto interest-only payments because they can no longer pay the monthly capital and interest payments.
He believes the figures do not capture the huge numbers of people who have had to switch to interest-only or part-interest-only repayments and therefore fail to reflect accurately the number of households facing mortgage-debt distress.
"I have never heard any bank describe to me a customer as being in arrears when that customer has switched to interest-only. That customer is left alone for six or 12 months. If they were in arrears then they would appear in the Credit Bureau. The figures the regulator gets from the banks, I believe, are underestimating the problem," he said, adding that the banks so-called policy of forbearance serves their interest of not having to write off bad mortgage loans and preserve capital on their balance sheets.
Possibility of debt forgiveness
Other experts, including the Rathfarnham and Dundrum office of the Money Advice and Budgeting Service (Mabs) in south Dublin, report a large increase in the numbers seeking advice on their mortgage problems since Christmas.
Capturing the scale of the debt issue will be a key issue for the expert group that government minister Eamon Ryan said in recent weeks will examine the possibility of debt forgiveness – writing off some of the mortgage debt of people facing serious arrears.
The mortgage brokers say that debt forgiveness will be required here if the economy is to recover. But first, they say, any expert group will need to assess the size of the debt problem if it is to devise an affordable scheme. Dowling says that the regulator should get the banks to publish monthly and provide more detailed arrears figures.
2.9% default rate on mortgages
Fitch Rating closely monitors the underlying arrears' rate on seven big Irish mortgage pools or so-called residential mortgage backed securities, which were worth €13.5bn when the Irish banks offered the securities in recent years to investors.
In the summer of 2008, Fitch made two predictions: that house prices here would fall by 45% and that the arrears rate on the underlying mortgages would hit 9%. The first of its "severe test stresses" came true – house prices have fallen, but Fitch reports that the rate of default on the RMBS mortgages last September was running at only 2.8%, below Spain's 3% and a default rate of 2.2% on Britain's scrutinised buy-to-let mortgage loans. With repayments, the pool of mortgages Fitch follows is now worth €9.3bn.
The issues are: Ulster Bank's Celtic Residential Irish Mortgage worth €3.85bn when issued several years ago but which has since shrunk to €2.8bn as the underlying mortgages have been paid off; Bank of Ireland's ICS Kildare Securities issue of €3.97bn which now has €2bn in the pot; Bank of Ireland's ICS Pirus Securities issue of €1.79bn which now has €1.68bn; EBS' Emerald No 4's €1.5bn which now has €1bn; Start Mortgage's Lansdowne No 2 issue of €525m, now worth €237m; Start's Lansdowne No 1's €373m, now worth €118m; and Irish Nationwide's Armoin Residential pool which had €1.5bn in mortgage debt when issued several months ago.
Report by Eamon Quinn - Sunday Tribune.