Mortgage arrears – is this the calm before another storm?
There was a time in the last decade when the Central Bank’s mortgage arrears figures were as keenly anticipated as the property price figures from the Central Statistics Office.
They’ve gradually slipped from public and media focus as the years have passed, but the problem hasn’t gone away.
There remains a significant number of residential mortgage holders whose accounts are in some form of arrears – mainly long term.
The latest batch of figures from the Central Bank, relating to the final three months of last year, were published on Thursday.
Understandably, there was quite a bit of interest in them in the context of the pandemic, but perhaps surprisingly there was no marked deterioration in the numbers.
In fact, they had improved somewhat.
Which begs the question, have mortgage holders been spared the worst excesses of the pandemic, or are we in a calm before another arrears storm?
At the end of last year, there were just under 732,000 mortgages on primary residential properties here (that excludes mortgages on buy to let properties) to the value of €98 billion.
Of these, just less than 55,000 – or 7.5% – were classed as being in arrears.
The number was down marginally – by 462 – on the total at the end of September.
From an industry point of view, the important figure is the ‘over 90 days’ arrears.
This category has been declining very gradually since the middle of 2013 and accounted for 5.3% of all residential mortgages at the end of 2020.
Nearly half of those in arrears have been in that position for over two years. One in ten has been in arrears for over a decade now.
Early arrears creeping up
There has by no means been a surge in arrears since the pandemic struck last year.
However, there was a slight increase in the ‘under 90 days’ numbers in the final three months of last year – a rise of 670 to 16,201.
That may be accounted for mortgage holders coming off pandemic payment breaks and entering new arrangements with their banks.
The payment breaks – which came into effect in the early stages of the pandemic – were offered for a period of up to 6 months.
On the basis that the banks stopped formally offering them from the end of last September, the last of those breaks should be coming to an end in the weeks ahead.
Importantly, payments missed during the period of the pandemic payment breaks were not classed as arrears.
So, if there are longer term payment problems emerging from the pandemic, they would only be beginning to show through in the final quarter of 2020.
Arrears increase expected
The banks – in their full year results for 2020 published in recent weeks – indicated that the vast majority of payment break recipients had returned to their pre-pandemic payment arrangements.
That finding was largely reflected by the ratings agency Fitch in a review of the banks here this week.
It estimated that by the end of February, in 85% of cases of payment breaks, borrowers had returned to their pre-pandemic payment terms.
If more than 150,000 payment breaks were on extended to Irish households and businesses by lenders here, that leaves a sizeable minority of loans (22,500) that are not back on pre-pandemic payment terms.
The ratings agency said it expected that Irish banks’ non-performing loans would increase in the months ahead as the pandemic support measures gradually come to an end.
“However, we expect asset quality deterioration to be much less severe than in the aftermath of the 2008 financial crisis,” the agency added.
That warning was echoed by the Governor of the Central Bank in a speech to the European Financial Forum in recent weeks.
“The euro area banking sector has been resilient so far, but the economic fallout of the pandemic will lead to a deterioration in asset quality, particularly when the Government supports to firms and households start to be withdrawn,” Gabriel Makhlouf said.
The banks set aside significant provisions for expected bad loans during the 2020 financial year.
Between them, the five main banks put aside more than €3 billion with AIB and Bank of Ireland accounting for the bulk of that.
AIB said its provision of €1.5 billion was ‘forward-looking’ and at the upper end of the European average.
Are the banks expecting the financial fallout to be worse here than across Europe? Or are they simply being conservative, and expect to be able to claw back a lot of those provisions when this period has passed?
“They’re building the wall,” David Hall, CEO and co-founder of the debt resolutions service, the Irish Mortgage Holders Organisation, said.
“They haven’t provisioned that for nothing.”
Mr Hall said his organisation has been hearing every day from people who are getting into difficulty with their loan repayments as a result of the economic hit from the pandemic.
Payment breaks – while welcome – have been disguising the extent of the mounting problem, he said.
“We’ve had 1,368 households in arrears – in hospitality alone – in the last six months in which one or both parties are involved to some extent in a business that is affected directly by the pandemic where there’s been a shutdown in level 5.”
He says the banks already have a ‘clear view’ of how many householders will not recover from the financial impact of the pandemic.
The number was as high as 25,000, David Hall said.
Many of those may be borrowers who were already in arrears before the pandemic, but even if a fraction of those are new arrears, it could add significantly to the problem that has persisted from the last financial crisis.
And the question remains as to what to do with them.
So far, the banks have dealt with legacy arrears through a combination of loan restructurings within their own operations and loan book sales to other lending institutions, which is arguably passing on the problem.
Then there’s the question as to how successful the policy of restructuring has been.
“Even within mortgages classified as restructured, a very high proportion – 27.6% – involve arrears capitalisation whereby outstanding arrears are added to the remaining balance,” Rachel McGovern, Director of Financial Services at Brokers Ireland – the representative group for brokers – explained.
“It’s likely that quite a proportion of these will not resolve successfully and indeed over one in five is already not meeting the terms of the restructure,” she added.
Ms McGovern said mortgage holders in Ireland were ‘paying dearly’ for a failure to successfully deal with mortgage arrears ‘that have been allowed to drag on’.
The numbers appear to back that argument up. According to the latest figures from the Central Bank, mortgage interest rates here are now the highest in the euro zone having overtaken Greece in recent months.
The average rate that mortgage holders are paying on new mortgages here is over twice that of their euro area counterparts.
That’s partly accounted for by banks having to hold larger reserves than their euro zone counterparts – a hangover from the last financial crash – but, according to Brendan Burgess of the consumer website, askaboutmoney.com, it’s also down to the extreme difficulty that banks have in repossessing properties here.
That difficulty was also referred to by the Governor of the Central Bank in a blog published just before Christmas.
“The relatively low levels of housing repossession in Ireland lead, at a system level, to higher interest rates as banks lose greater amounts for each borrower that enters default than they would otherwise have done,” Gabriel Makhlouf noted.
A Central Bank review of mortgage arrears published last year showed that fewer than 10,000 homes had been repossessed here between 2009 and last year – around a third by court order with the remainder by voluntary surrender.
While a tragedy for every one of the households involved, in the wider European context, it’s quite a low number, but why are the banks not more active in this regard?
David Hall, who in the past has been criticised for predicting a ‘tsunami of repossessions’ that never materialised, says it’s because the banks have been dragging their heels and simply not dealing with the problem.
“Banks don’t seek repossession,” he stated. “That’s why there’s been no tsunami.”
“How can you have 55,000 people in arrears, and you have only 7,000 legal proceedings? The scale has been so big, it’s a self-protecting mechanism,” he suggested.
The reality is that over a decade on from the financial crash, we’re dealing with a housing crisis and a significant mortgage arrears problem – both of which could deteriorate significantly in the months and years ahead.
Help is available
For anyone experiencing problems with debt and loan repayments, there are several resources available.
First and foremost, borrowers are encouraged to establish an early line of contact with their lenders.
They have protections under the Central Bank’s code of conduct on mortgage arrears.
The Insolvency Service of Ireland helps insolvent individuals to deal with their debt problems through a range of mechanisms.
The Citizens Information website has some useful advice available on its website on how to deal with debt problems.