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There was a time in the last decade when the Central Bank’s mortgage arrears figures were as early as the property price figures from the Central Bureau of Statistics.
They have been gradually moving away from the public and media focus as the years have passed, but the problem has not gone away.
There remain a significant number of residential mortgage holders whose accounts are in some form of delinquency, primarily long-term.
On Thursday, the latest batch of Central Bank figures were released, relating to the last three months of last year.
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 a bit.
Which begs the question, have mortgage holders been spared the worst excesses of the pandemic or are we calm before another storm of arrears?
Gradual decline
At the end of last year, there were just under 732,000 primary residential property mortgages here (which excludes purchase mortgages to rent property) worth € 98 billion.
Of these, just under 55,000, or 7.5%, were classified as in default.
The number dropped marginally, by 462, from the total at the end of September.
From an industry point of view, the important figure is arrears of “more than 90 days”.
This category has been declining very gradually since mid-2013 and accounted for 5.3% of all residential mortgages at the end of 2020.
Almost half of those in arrears have been in that position for more than two years. One in ten has been in default for more than a decade.
Anticipated arrears increase
There has by no means been an increase in arrears since the pandemic broke out last year.
However, there was a slight increase in the ‘under 90 days’ numbers in the last three months of last year, an increase from 670 to 16,201.
That can be explained by the mortgage holders who came out of the pandemic pauses and entered new agreements with their banks.
The payment breaks, which took effect in the early stages of the pandemic, were offered for a period of up to 6 months.
On the basis that banks formally stopped offering them since the end of last September, the last of those breakouts should come to an end in the next few weeks.
Importantly, late payments during the pandemic blackout period were not classified as arrears.
Therefore, if longer-term payment problems arise in the wake of the pandemic, they would only start to manifest themselves in the last quarter of 2020.
Increase in arrears is expected
The banks, in their full annual results for 2020 released in recent weeks, indicated that the vast majority of recipients of interrupted payments had reverted to their prepaid payment arrangements.
That finding was largely reflected by rating agency Fitch in a review of banks here this week.
He estimated that by the end of February, in 85% of the cases of payment interruptions, the borrowers had returned to their payment terms before the pandemic.
If the lenders here had extended more than 150,000 payment breaks to Irish households and businesses, that leaves a sizable minority of loans (22,500) that have not reverted to pre-paid terms.
The rating agency said it expected non-performing loans from Irish banks to rise in the coming months as measures to support the pandemic gradually come to an end.
“However, we expect the deterioration in asset quality to be much less severe than after the 2008 financial crisis,” the agency added.
That warning was repeated by the governor of the Central Bank in a speech to the European Financial Forum in recent weeks.
“The euro zone banking sector has been resilient so far, but the economic consequences of the pandemic will lead to a deterioration in asset quality, particularly as government support for businesses and households begins to withdraw,” said Gabriel Makhlouf .
Banks reserved significant provisions for expected bad loans during fiscal 2020.
Between them, the top five banks set aside more than € 3 billion, of which AIB and Bank of Ireland accounted for the largest share.
AIB said its provision of € 1.5 billion was “forward-looking” and at the upper end of the European average.
Do banks expect the financial consequences to be worse here than in the whole of Europe? Or are they just being conservative and hope they can get a lot of those provisions back when this period has passed?
“They are building the wall,” said David Hall, CEO and co-founder of debt resolution service, the Irish Mortgage Holders Organization.
“They haven’t provided it for nothing.”
Hall said his organization has been listening every day to people who are having difficulty repaying their loans as a result of the economic impact of the pandemic.
The payment disruptions, while welcome, have been hiding the extent of the growing problem, he said.
“We have had 1,368 homes in default, in hospitality alone, in the last six months in which one or both parties are involved to some extent in a business that is directly affected by the pandemic where there has been a closure at level 5” .
He says banks already have a “clear view” of how many households will not recover from the financial impact of the pandemic.
The number was 25,000, David Hall said.
Legacy problem
Many of them may be borrowers who were already in default before the pandemic, but even if a fraction of them are new arrears, it could significantly compound the problem that has persisted since the last financial crisis.
And the question remains what to do with them.
So far, banks have dealt with inherited arrears through a combination of loan restructurings within their own operations and sales of loan books to other lenders, which may be passing the problem on.
Then there is the question of how successful the restructuring policy has been.
“Even within mortgages classified as restructured, a very high proportion (27.6%) involves capitalization of arrears so the outstanding arrears are added to the remaining balance,” explained Rachel McGovern, director of financial services at Brokers Ireland, the representative group of runners.
“It is likely that a large part of these will not be resolved successfully and, in fact, more than one in five are no longer complying with the terms of the restructuring,” he added.
McGovern said that mortgage holders in Ireland were “paying dearly” for not being able to cope successfully with mortgage arrears “which have been prolonged.”
The numbers seem to back up that argument. According to the latest figures from the Central Bank, mortgage interest rates here are now the highest in the euro zone, having surpassed Greece in recent months.
The average rate that mortgage holders pay on new mortgages here is more than double that of their euro area counterparts.
That’s partly because banks have to hold larger reserves than their euro zone counterparts, a hangover from the latest financial crisis, but according to Brendan Burgess of consumer website askaboutmoney.com, it’s also because the extreme difficulty that banks have. in recovering properties here.
That difficulty was also mentioned by the governor of the Central Bank in a blog published just before Christmas.
“Relatively low levels of home recovery in Ireland lead, at the system level, to higher interest rates as banks lose greater amounts for each borrower that defaults than they would have,” noted Gabriel Makhlouf.
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, about a third by court order and the rest by voluntary surrender.
While it is a tragedy for each of the households involved, in the broader European context, it is a fairly low number, but why are banks not more active in this regard?
David Hall, who in the past has been criticized for predicting a ‘tsunami of recoveries’ that never materialized, says it is because banks have been delaying and are simply not dealing with the problem.
“Banks are not looking for recovery,” he said. “That is why there has been no tsunami.”
“How can you have 55,000 people in arrears and there are only 7,000 legal proceedings? The scale has been so great, it is a self-protection mechanism,” he suggested.
The reality is that more than a decade after the financial collapse, we are dealing with a housing crisis and a major problem of mortgage arrears, both of which could deteriorate significantly in the months and years to come.
Help is available
For anyone struggling with debt and loan repayment, there are several resources available.
First, 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.
Groups like the Irish Mortgage Holders Organization and New Beginning provide debt resolution and counseling services to affected individuals.
The Irish Insolvency Service helps insolvent people cope with their debt problems through a number of mechanisms.
Freel Legal Advice Centers (FLAC) provide advice and information to people struggling with debt, as does MABS, the Budgeting and Financial Advice Service.
The Citizens Information website has some helpful tips available on its website on how to deal with debt problems.
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