Tag Archives: mortgages

Why are Buy to Let Mortgages being allowed fester?

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?

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We know little about them so stop being meme to those in mortgage arrears

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.

Strategic Mortgage Default: What does the research tell us?

keysWhat do we know about strategic (could meet obligations but choose not to ) defaulters in relation to mortgages?

As I argued earlier, in the Irish case very little is known. There is a little more information for the USA, but we should be very careful about blindly or even carefully transposing US experience to Ireland. The legal, cultural, economic and social climates are very different. We seem to be more tolerant of default than the USA but beyond that…That said, here are what I see as the present state of play. Im sure I have missed some research but for what its worth…

  • As few as 15% of US defaults might be strategic (Gerardi et al. 2013) . Or it might be higher (but the methodology (Guiso, Sapienza, and Zingales 2011) used is to ask people, in effect, if they know someone who they think could have repaid but didn’t…) at around 25%. If its not 1/3 or more in the USA with more liberal bankruptcy and recourse laws then is it credible that it is 1/3 here?
  • People feel regret but not shame when they default (M J Seiler et al. 2012). There is a massive ‘fear factor’ on which lenders play, as well as asymmetrical fears of moral hazard (White 2010c).
  • Default is not just an individual but also a  social phenomena and there can be “herding” in defaults (M J Seiler, Lane, and Harrison 2012). This is perhaps an under researched area.
  • The bankruptcy code really matters with lower rates the easier it is to strategically default (Edmonds, Stevenson, and Swisher 2011)
  • The more you repossess the less a stigma it is and the more likely people are to strategically default (Wilkinson-Ryan 2011). The law of unintended consequences therefore suggests that if we move to  a significantly more aggressive repossession culture we will see cascades of defaults with the consequent knocking back of property prices and erosion of bank balance sheets…. be careful for what you wish.
  • Less information about the process is useful from the perspective of the lender in reducing the incidence of default (M J Seiler 2013). Theres no doubt that the Irish system is opaque, and perhaps deliberatly so.
  • Amongst lower income US households most defaults are not strategic. (Riley 2013)
  • There’s a contract between the lender and the borrower but even in law there can be a ranking of contracts and the social/familial contract supersedes this other contract allowing for default. (White 2010b).
  • Many defaults precipitate not from rational but from emotional decisions, thus reducing the emotional crises points can and does reduce default (White 2010a). Most people want a fair deal, which allows them to continue servicing debts at a reasonable rate but with certainty about where the future lies.
  • People don’t default, strategically or otherwise, until they are deeply underwater, typically negative equity of 67%  are required in the USA. (Bhutta, Dokko, and Shan 2011)
  • Oh, and some people might be neurologically more inclined to default than others…( Seiler, Walden, and Lane 2012). Might we see MRI scans as well as payslips being required in future before mortgages are approved?

Bhutta, Neil, Jane K. Dokko, and Hui Shan. 2011. “Consumer Ruthlessness and Mortgage Default During the 2007-2009 Housing Bust.” SSRN Electronic Journal (December 31). doi:10.2139/ssrn.1626969. http://papers.ssrn.com/abstract=1626969.

Edmonds, T N, L J Stevenson, and J Swisher. 2011. “Forgive Us Our Debts: The Great Recession of 2008-09.” Journal of Legal, Ethical and Regulatory Issues 14 (2): 1–16. http://www.scopus.com/inward/record.url?eid=2-s2.0-84863525338&partnerID=40&md5=cc9d8b72b8b94a96ca05b675fccb4560.

Gerardi, Kristopher, Kyle Herkenhoff, Lee E. Ohanian, and Paul Willen. 2013. “Unemployment, Negative Equity, and Strategic Default.” http://papers.ssrn.com/abstract=2293152.

Guiso, Luigi, Paola Sapienza, and Luigi Zingales. 2011. “The Determinants of Attitudes Towards Strategic Default on Mortgages.” SSRN Electronic Journal (March 1). doi:10.2139/ssrn.1573328. http://papers.ssrn.com/abstract=1573328.

Riley, Sarah F. 2013. “Strategic Default Behavior and Attitudes Among Low-Income Homeowners” (February 1). http://papers.ssrn.com/abstract=2282518.

Seiler, M J. 2013. “The Role of Informational Uncertainty in the Decision to Strategically Default.” SSRN Electronic Journal (January 29). doi:10.2139/ssrn.2211933. http://papers.ssrn.com/abstract=2211933.

Seiler, M J, M A Lane, and D M Harrison. 2012. “Mimetic Herding Behavior and the Decision to Strategically Default.” Journal of Real Estate Finance and Economics. Old Dominion University, College of Business Administration, Norfolk, 23529-0223, United States. http://www.scopus.com/inward/record.url?eid=2-s2.0-84866282494&partnerID=40&md5=bd88e45d25c19dc9afd2a035c384852b.

Seiler, M J, V L Seiler, M A Lane, and D M Harrison. 2012. “Fear, Shame and Guilt: Economic and Behavioral Motivations for Strategic Default.” Real Estate Economics 40 (SUPPL. 1): S199–S233. http://www.scopus.com/inward/record.url?eid=2-s2.0-84871824267&partnerID=40&md5=cc8149feb524d374946f70929bc874fa.

Seiler, Michael Joseph, Eric A. Walden, and Mark Lane. 2012. “Strategic Mortgage Default and the Decision to Follow the Herd: A Neurological Explanation.” SSRN Electronic Journal (December 27). doi:10.2139/ssrn.2194254. http://papers.ssrn.com/abstract=2194254.

White, Brent T. 2010a. “Take This House and Shove It: The Emotional Drivers of Strategic Default.” SSRN Electronic Journal (May 14). doi:10.2139/ssrn.1603605. http://papers.ssrn.com/abstract=1603605.

———. 2010b. “The Morality of Strategic Default.” SSRN Electronic Journal (May 22). doi:10.2139/ssrn.1597835. http://papers.ssrn.com/abstract=1597835.

———. 2010c. “Underwater and Not Walking Away: Shame, Fear and the Social Management of the Housing Crisis.” SSRN Electronic Journal (October 27). doi:10.2139/ssrn.1494467. http://papers.ssrn.com/abstract=1494467.

Wilkinson-Ryan, T. 2011. “Breaching the Mortgage Contract: The Behavioral Economics of Strategic Default.” Vanderbilt Law Review 64 (5): 1547–1583. http://www.scopus.com/inward/record.url?eid=2-s2.0-81855184667&partnerID=40&md5=4546d2ad8953dfd098aacad6d2fadffc.

Strategic Defaults in Irish Mortgages – What do and dont we know?

Irish residential and Buy to let mortgages are in a mess. The latest Central Bank data indicate that by value 16.5% of all residential mortgages are in arrears accounting for 12.3% of all mortgages. The charts below show the evolution of this situation. Note that these are only for residential mortgages. Buy to Let are a separate problem, and are commercial loans that if in default should be foreclosed on. There may well be an issue with cross collaterisation of these to residential but again thats a separate issue.

marrears2 MArrears

One of the issues that arises is “strategic default”, that is to say how many of these 142,000 mortgages in arrears are “wont pay” rather than “cant pay”. The simple answer is we do not know. That doesn’t stop the assumption that “its a lot”. Today we see in an otherwise excellent discussion by Davy stockbrokers on the banks the statement ” A growing culture of strategic non-payment of debt “.  How do they know its growing? From what base? To what level?

The meme is that its 1/3 of arrears in default are “Strategic” , Wont Pay defaulters. This arises from a post by Professor Gregory Connor where he took US studies and tried to map the findings to Ireland. This is a difficult and thankless task but absent anything else its all we have.

In a parliamentary reply to a question on this issue the Minister for Finance stated his view (aka the Department of Finance view) on the 1/3 figure as ” The suggestion that the rising number of mortgage arrears is in part being driven by increased levels of strategic default, that is individuals deliberately withholding payments when they are in a position to service their debt in hope of gaining concessions from lenders, is wholly anecdotal and not based on any robust, structured, or in-depth analysis of the situation” 

This then begs the question : where is this analysis? So far as I am aware there is none. A proper analysis of the issue of strategic or wont pay default would require the following, I contend.

  • a survey of all defaulters, or a representative sample thereof.
  • While this  survey would  have to originate from the issuing lenders it would have to be 100% clear and bulletproofed that no information whatsoever would return back from the analysis to the lender such that individual borrowers could be identified. Thus in all probability no official body should carry out the analysis or interpretation
  • defaulters would need to be queried as to their present expenditure habits , with a view to ascertaining whether they were strategic and if so how and why
  • to what extent are borrowers strategic in placing other loan repayments before mortgages or are they defaulting on many loans and using funds for ongoing living expenses
  • to what extent are they not repaying due to pressure, either lack of same from the mortgage lenders or relatively greater from other
  • the extent to which social and other pressures impact ; there is a good recent paper on this in SSRN

Now, it may be that this is already underway. But if its not then it should be. I am perfectly happy to undertake this research pro-bono, and I am sure that other academics would help. This information, the bare knowledge of who is defaulting and why, needs to be surfaced.  We cannot devise strategies if we dont know the problem. We cant simply map the situation in the USA, with wildly different legal and economic systems, to Ireland.

Where and when will Irish mortgage arrears peak?

The Central Bank has brought out the latest figures on mortgage arrears and they are not pretty. Lets look at the private home mortgages –  As of september 17% of all mortgages are in arrears, that is 135k out of 760k. By value it is 15%. Those over 90 days in arrears, those who are rapidly slipping into total default mode is 86k.  As  a % of total numbers in arrears the over 90 days is now 63% of the total , compared to 40% in september 2009.

This is horrific. When will it end?  If there is any comfort to be taken it is that the rate of increase in arrears has moderated, with a blip in the last quarter. See the chart below













If we look at the last 4 quarters the quarter-quarter change in the % of mortgages in arrears (either in total or over 90 days) has moderated by about 8% per quarter. If we take the dynamics of the last 4-5 quarters and project them forward we will see the total number of mortgages in arrears peaking only in December 2014 – two full years ahead – at 23% of all mortgage holders.  How long it would take to start to fall is anyones guess….

So – with two more austerity budgets to go, with the number of mortgage holders whose credit history is shot heading for north of 20%, it will be quite some time yet before any corners are turned. While we must sort out the national government finances the mortgage crisis cannot be let fester. What odds the government taking bold radical steps to solve this?

Danish Mortgages in Ireland? No thanks

Senator Sean Barrett introduced a bill into the Senate this week to in effect restructure the Irish mortgage market along Danish (aka rational) lines. Stephen Kinsella on IrishEconomy has a post on it where he notes that the Minister nixd the bill on essentially four grounds

1. We are not, nor were we ever, Denmark.

2. Changing wholesale to this system has risks, most of which I won’t go into here, but the Danes give defaulting households 6 months and we’d really like that to be longer, say a year.

3. Changing to this system would imply loans at 80% LTV, most banks are at 92% LTV, this would make it more difficult for first time buyers.

4. We’re in the middle of negotiations on the various capital requirements directives, this could throw a spanner in the works with the EU.

The debate, which was quite good, is reported here. Note that Constantin G and myself in February mused at the Croke Park Conference that something along these lines was desirable. Its interesting that the system can take in good ideas but not it seems accept them.

Here is