20/12/2011: IMF IV Review of Ireland Programme

Fourth review of Ireland's programme under the Troika package is out and makes for some interesting reading. As usual, between-the-lines reading skills required. This is the first post on the report, focusing on housing markets and mortgages arrears.


The review is overall positive, complimentary and almost glowing. This warrants a number of caveats:

• The review is based on QNA data through H1 2011, so Q3 2011 fall-off in GDP and GNP are not factored in
• The review is based on the general data sources through mid-October, so November Exchequer results do not appear to have been factored in either

Aside from the strengths highlighted in the media, here are the critical points of the report. Mortgages arrears first, with subsequent posts dealing with other core issues covered.

"However, housing market and household debt indicators continue to deteriorate (Figure 2). With the fall in house prices accelerating in October to 15.1 percent on an annual basis, prices are down 45.4 percent from their peak in 2007. The rate of mortgage arrears by value continued to rise, reaching 10.8 percent in September 2011 (8.1 percent in terms of the number of mortgages), up from 6.6 percent in September 2010. With the share of longer-term arrears (greater than 180 days) continuing to rise, the authorities have deepened their analysis of the mortgage arrears problem (Box 1)."

Of interest here is the analysis the IMF refers to. Here is the summary (quoted from the IMF report, my comments in italics):

1. Aggregate mortgage arrears continue to rise sharply and in September 2011 reached 8.1 percent by the number of loans to owner-occupiers. 
2. To better understand the nature of mortgage distress, the CBI has utilized loan-by-loan data from end-2010 that were collected as part of the review of banks’ capital needs published at end-March 2011. [I am puzzled with this statement. CBI clearly stated at the time of PCARs that they did not analyse individual loans data for mortgages, but considered samples of mortgages. At a later date - in September 2011, CBI gave a presentation of a study based on the specific loans data, but this was also based on a sample of data, a large sample, but still a sample, not the entire population of the mortgages on the books of 4 banks.]
3. Of those households in arrears over 90 days, almost 40 percent have been in this position for a year or more. The average amount of arrears on these loans is €27,000, compared with an average outstanding balance of just over €200,000. [Please, keep in mind, per IMF, this is data through the end of 2010, so it is, by now - one year old!]
4. On top of arrears of 90 days or more, there are a significant number of borrowers who have restructured loans or delinquent payments of less than 90 days, bringing the total affected to about 20 percent of borrowers at end-2010. [These figures - 20% of borrowers either in arrears or restructured, or as I call these 'at risk' - is much greater than reported by the CBI in their quarterly report, showing for Q3 2011 that only 12.96% of all mortgages outstanding were either in arrears, restructured or repossessed]
5. Arrears tend to be highest in relation to buy-tolet properties and first-time buyers, as these purchasers took on large debts owing to high house prices during 2005–08. 
6. Negative equity is extensive. It is estimated that 36 percent of owner-occupier households with mortgages in these institutions are in negative equity (at September 2011 house prices). [This, of course, is now higher again, as October and November price declines totalled 3.71%] 
7. For owner-occupier loans taken between 2005 and 2008 (half of outstanding loans), 48 percent of properties are in negative equity, while 52 percent of buy-to-let loans are in negative equity. [The two numbers are remarkably close to each other.]
8. Negative equity does not imply arrears. Despite widespread negative equity amongst borrowers, the vast majority of negative equity borrowers, over 90 percent, were not in arrears at end-2010. 
9. About half of owner-occupier borrowers in arrears at end-2010 had positive equity, with around 38 percent having at least 20 percent equity in their homes. The average negative equity of owner-occupiers without arrears is €68,000, modestly smaller than the average of €84,000 for owner-occupiers in arrears. [Which, of course, means that these arrears can be dealt with at no loss to the banks via a combination of restructuring, equity stakes assumption by the banks and/or foreclosures. In the end, this also means that significantly less resources will be needed to help those who are in negative equity and at risk of arrears - i.e. those who are subject to punitive provisions of our personal bankruptcy code]
10. Buy-to-let properties. Of the total loan book analyzed, 22 percent (€20 billion out of €87 billion), relates to buy-to-let property debt. The average outstanding balance for the 52 percent of buy-to-let properties in negative equity is about €320,000 and the average negative equity is just over €100,000.
11. Within the four institutions covered by the Financial Measures Program, 33 percent of buy-to-let borrowers also have an owner-occupier mortgage with the same lender.  

Some very interesting observations from the IMF summary of the CBI evidence on drivers of arrears: 

• Studies, including from other countries, point to unemployment, debt service, and loan-to-value ratios as key determinants for arrears, although geography and loan vintage are also important, as are rental and payment rates for buy-to-let properties. 
• Data availability can be an issue, however, especially for current income. 
• An alternative approach developed a transition matrix for predicting mortgage arrears based on loan vintage, borrower type, interest rate type, and region.

There's no summary of the transition matrix provided.

Here are three more interesting charts relating to the Irish property market: