The mortgage crisis is the rancid gift that keeps on oozing.
The publication this week by the Department of Finance of mortgage arrears figures highlights the festering lethargy that has characterised much of the Irish response to the financial crisis. That it publishes slightly different figures on the same issue as the central bank highlights the embedded inability of the Irish state to engage in any sort of joined up thinking. The central bank data is of end March, the Department of Finance end April. They use slightly different presentations and slightly different emphases on the same dataset. To get a full picture of what is going on one needs to read two publications and interpolate two different time series. Why is this effective duplication allowed? Why is it needed? Why do we not have ONE official source, weekly or monthly or quarterly or whatever, from ONE state agency providing ONE comprehensive dataset? Do the central bank and department of finance not talk to or coordinate with each other? Does one hand know what the other is doing?
As to what they show, it is frankly horrific. I do not intend here to talk overly much about the principle private residence mortgage market. Suffice it to say that at end april/may we had 17% of all residential mortgages in arrears, the vast bulk being in deep arrears, that is over 90 days. These account for about 2.4b euro or some 10% of the outstanding loans. These need to be dealt with carefully, and humanely. We seem to have moved on from the days when we were told that “1/3 of mortgages in default are in strategic default” . That debate was a classic example of how an ill defined concept estimated on fuzzy data and published in a scientifically hedged manner can take legs and run off to the circus. Data on what exactly is going on in the Irish mortgage market is surprisingly weak still. But enough about the residential market.Where the problem lies is in the buy to lets. These have festered, and have been let fester. A giant can of worms has, again, been booted down the road. Lets take it back – these are investments. They are assets, purchased in good faith and hope by people, in the expectation that they will provide a return. The returns lie in both the income that gain from letting these out, and a capital gain from sale on the culmination of the mortgage. They are assets
As of the end of the quarter we have an arrears rate in this asset loan pool of 27%. Almost one in three loans in this sector are non performing. This represents just under 11b of mortgages, and a total of 1.6b in arrears. 37,000 mortgages are in this pot. 13,000 are in arrears for over two years. 30% of all mortgages in arrears in this sector are in arrears for more than 90 days, a figure which has risen from 23% in mid 2012, and this against a slow increase in rents and thus one must assume rental yield. Over 10,000 investment mortgages have been restructured and are still in arrears. As a sector it is a horror. And yet, of these assets, less than 600 are in repossession. This is frankly crackers. If 14,000 people had car loans they had not repaid for more than 2 years, 13999 would be on the bus. Again, I draw a distinction between principal private residences and investment properties. While residential mortgage investors may have also expected that the asset for which they borrowed would yield both capital gains and a wealth effect as well as providing housing services, there is no such mix of expected outcomes in investment properties. They are, on the face of it, clean investment assets on whom 1/3 of the loans are now in default. The question has to be asked – why are we not seeing vast repossessions of these investment assets which have not performed and which the borrowers are not able to repay? We are not talking about a family being evicted from their cabin by the RIC with a battering ram here.
It cannot be down to the hit the banks will take if they enforce. A central bank paper presented earlier this year gives some granularity on the losses. In general we can see buy to let mortgages as of end 2013 as having a loan to value ratio of 120-130%. Lets say it is 125% for illustrative purposes. Thus on the face of it the 11b in mortgages are worth only some 8.8b. Across the sector therefore a first cut of the losses from enforcement might be some 2.2b. This is a pittance. An argument can be made that a more rigorous enforcement approach would lead to greater losses through firesales. This depends on there being a firesale. There is no reason why we cannot create some form of a NAMA to take these and drip them out, manage them and so forth. In Slovenia, NAMA is a large department store – we have the shell so lets put more into it. The great thing is that the banks have already been paid for these losses through rounds of state led recapitalization. We need not repeat the issues around the monies NAMA paid for the large developers. There is another benefit to this. A very large percentage, 70- 75% plus by balance, of buy to lets in arrears are on tracker mortgages. These are enormous loss makers at present and even with an upswing in the interest rate cycle we will still see the banks losing money on an ongoing basis. Removing them from the banks, even in part, can only assist them to do that which we need them to do, act as credit intermediaries in a mild recovery. Although not as large as the loans from developers which were shifted off the books, the banks are now still unable to do their jobs with these necrotizing loans zombifying them.
The only other rational reason why we might not be seeing proper commercial control being enforced is that of intramarket contagion. We do not know the amount of cross collateralization. What % of the buy to let mortgage market, and of the part of it in arrears, are collateralized on private residential dwellings, or worse, on each other. To what extent is there a pyramid scheme element? This is crucial for understanding what is to be done. The central bank or the department of finance should have this information. It is not commercially sensitive, but it may be commercially embarrassing. That is not enough of a reason for not making it public. Anyhow, one imagines that Irish bankers are immune to embarrassment.
Two things therefore are required – enforcement and transparency. To ensure both of these will require political will and political strength. And that is the problem….We have now become addicted to extending and pretending, to kicking the can, to putting it off, to procrastinating tomorrow, to expecting little from our political class and getting less. We need to start, as a nation, demanding capitalism to work. And that means failure gets its fruits as much as rewards. Of course, in an environment where the political class have placed the private debt of large investors into the pockets of taxpayers already, it is perhaps no surprise that we see this. Failure in investing in Ireland is costless if you are large enough individually or in aggregate. There truly is strength in negative numbers.
This is a version of my column in the Irish Examiner Saturday 14 June 2013