This is a version of my Irish Examiner column of 10 august 2013
The Irish mortgage situation continues to bedevil both political and economic commentators. It does this in an almost complete vacuum, and as we know nature abhors a vacuum, and so this is filled with chatter and verbiage. Out of this chatter has come a series of memes. Memes are social genes – they propagate and mutate, sometimes becoming full blown urban legends other times lurking in the collective subconscious like recessives only emerging to render their carrier sterile blind and damaged.
One such meme is that over 1/3 of Irish mortgage arrears are “strategic defaulters”. That is a delicious meme. The words sound precise and weighty, and convey an image of hordes of well heeled investors sipping pimms while debating their financial future with advisors. It conveys a deliberate decision to engage in an activity which then creates both cost for the prudent and lays the ground for moral hazard to ensnare the weak. It makes default a deliberate decision made in cold calculation.
It is of course a meme that is almost wholly grounded in air. Are there people who make cold, calculated decisions to walk away from their loans and leave the state to pick up the mess while they continue in the style to which they have become accustomed? Assuredly there are and the vast majority are in NAMA, multimillion bankrupts and defaulters the downfall of whose empires of sand lit the fuse that blew up the state.
We know very little about mortgage default in Ireland. But this doesn’t do much to stop the rot about strategic default.
We know how many mortgages are in arrears. As of march 2013 this stood at 142k residential and 39k buy to let. Note that this is not the same as the number of persons, who are less, but by an amount we do not know. Some residential mortgages are really buy to let. Other persons have multiple mortgages. Others are joint mortgages. Others have both buy to let and residential mortgages in their name. In any case the first thing we do not know is : how many persons are affected directly by mortgage arrears, either as principles (mortgagees) or as direct family members. Bear in mind that there are approx. 1.7m households in the state, even if every case was a single discrete person and nobody had both a residential and buy to let mortgage we would be talking about approx. 1/10 of all households. In reality the number is probably lower. But we do not know.
These mortgage numbers account for 18.3% of all residential mortgage numbers and 23.1% of total value, and 26.3% volume and 35.2% for buy to let. These are pretty horrific but when we look at the actual amount in arrears we realize that there is a much smaller amount at risk. In buy to let we have total arrears of 1.1b or some 3.8% of outstanding and for residential we have 1.9b or less than 2%. Thus the problem is relatively small. Even if 1/3 of all were strategic we are looking at one middle sized NAMA borrower.But unlike the mortgage holder who defaults won’t get s €200k salary from the state to manage his debt.
We do not know what percentage of this small percentage of mortgage default is “strategic”. In fact, worse, we have no clue what that means. It is the loosest of terminology. At one level we have people who make a decision to priorities essential family expenditure on health and food over mortgage; these are what we might call shouldn’t pay; then we have people who have extreme difficulty in juggling mortgage and other payment; these are what we might call can’t pay. Then we have the defaulters who simply refuse to reduce their lifestyle expenditure, the won’t pays. We do not have a working definition. Some research suggests defining it as not being current on mortgage while being current on other loans. Given that there has been a remarkably small decline in the amount of money outstanding on credit cards it is reasonable to imagine that some at least are keeping this in play (being current) while not being current with the mortgage. Others define it as being 90 days plus in default for more than 2 months while having financial means to not be in default. Others define it as defaulting to gain a short or long term financial advantage, which is almost tautological and which ignores the fact that the longterm disadvantages almost certainally outweigh any shortterm liquidity advantages. So a second thing we need to find out is what the various stakeholders consider to be strategic, as opposed to accidential, or liquidity, or any other form of default.
We also know little about the circumstances of the people in default. The central bank published some excellent reports in 2011, but we are ignorant now of the interrelationship between levels of under and unemployment, negative equity, after tax income changes over the last half decade and arrears levels. Research from the USA shows that unemployment and reduced savings balances are the main things which tip people into default.
Nor do we know what the final tipping point is. It is, from US research, rarely a cold economic decision, giving the lie to the strategic nature of default. It is much more an emotional decision, where people find themselves unable to cope and begin withdrawal. The consequence of this is that more aggressive bank processes are likely to shock people into more arrears not less. Combined with the fact that US research also suggests that social herding is important, the more people you know who have defaulted being an important determinant of whether you default and banks and government run a risk. Absent knowledge of who and why are in default action which is predicated on their being a large body of strategic defaulters who can be prevailed upon to start paying a risk emerges of reducing social stigma from default which combined with the emotional triggers will increase default
Given all this ignorance it is imperative that we lift the veil. A proper analysis is long overdue.