4/11/2013: IMHO's latest initiative to help distressed borrowers

Today was a big day for Irish Mortgage Holders Organisation. Here's our announcement:
https://www.mortgageholders.ie/blog/posts/imho-launches-an-initiative-for-aib-ebs-haven-borrowers

It is a big step for many distressed borrowers and we hope that other banks will follow the AIB Group steps and start treat seriously the need to help homeowners secure independent and client-focused professional advice regardless of people's ability to pay.

The scope of the crisis we face is unprecedented. Here's a reminder:
http://trueeconomics.blogspot.ie/2013/09/592013-sunday-times-september-1.html
and the latest data on arrears:
http://trueeconomics.blogspot.ie/2013/08/2382013-irish-mortgages-arrears-q2-2013.html

26/10/2013: Local Authorities Loans Arrears

While we know about the crisis in mortgages extended by the banks, we have very little information on the housing loans extended by the local authorities. These are not reported, nor published. The figures are hidden out of view of the public. Last week, Irish Independent made public the latest aggregate data on these. read the article here: http://www.independent.ie/irish-news/twothirds-of-local-authority-homes-loans-are-in-arrears-29696111.html

Aggregate numbers are horrific: of total 20,277 local authority loans, 6,275 are in arrears of at least 90 days. No data was provided on arrears under 90 days. In ordinary owner-occupier mortgages, 'only' 12.7% of accounts were in arrears 90 days or longer in Q2 2013.

Keep in mind, local authorities loans were supplied on the basis of exceptional discounting of prices on underlying properties, implying that local authorities can simply convert loans into rent schemes back and cover the interest costs of property carry... hopefully... unless...

It is extraordinary that there is no reporting of and accounting for the potential losses carried by the local government in Ireland.

10/10/2013: Prof Honohan is correct on 'strategic defaults'... but...

It is good to see Prof Honohan making a substantive and strong statement on the issue of 'strategic' mortgages arrears, contrasting the current 'debate' with some reasoned commentary:
http://www.independent.ie/business/irish/patrick-honohan-some-mortgage-holders-not-paying-up-29649978.html

Prof. Honohan is correct - there are borrowers who are attempting to game the system. This is rational and expected. And often it is abusive. Prof. Honohan is also correct in pointing out that Ireland's environment for insolvency and bankruptcy resolution is different from the US, making comparisons to the US data and evidence incomplete at best.

However, Prof. Honohan is not correct in solely placing the blame for the insolvencies crisis on the shoulders of borrowers. Irish State and banks are to share in responsibility for this crisis as well by:

1. Banks - due to failing to properly price risks in issuing loans. Banks are paid to price these risks (this is what they collect the lending margins for) and they have not done their work in properly selling loans to some/many households.
2. State - due to failure to properly supervise loans risk pricing in (1) above and due to failure to protect borrowers from occasionally excessively aggressive loans origination practices of the banks.
3. Banks - due to failure to secure sustainable funding for loans origination, leading to excessive reliance on short-term borrowings and thus increased exposure to funding risks. These risks, once materialised, have been in part loaded onto the shoulders of borrowers with adjustable rate mortgages, in some cases potentially precipitating and in other exacerbating the extent of the crisis.
4. State - due to failure to properly regulate and supervise banks risk taking activities in funding markets.

None of the points 1-4 are liability of the borrowers. All of the points 1-4 are contributors to the crisis to some extent. 

There is co-shared responsibility by the State and the Banks and this responsibility must translate into liability to aid homeowners in distress. Such assistance can and should take form of cost-efficient and effective solutions. Unfortunately, current discussion does not even begin tackling this issue and Prof Honohan's comment today is not helping the process either

Note: my recent Sunday Times column on strategic defaults issue is here:

http://trueeconomics.blogspot.ie/2013/09/592013-sunday-times-september-1.html

My full position on strategic defaults and related matters of foreclosures is here:

http://trueeconomics.blogspot.ie/2013/08/182013-strategic-defaults.html

17/9/2013: CBI Sets New Targets for Mortgages Arrears Resolution

The Central Bank of Ireland has published new target for the mortgages resolution process: http://www.centralbank.ie/press-area/press-releases/Pages/CentralBankstatementonMortgageArrearsResolutionTargetsConcludedArrangements.aspx

The new target is that by the end of December 2013, 15% of mortgage holders in arrears above 90 days (as of the end of June 2013, ) should have "concluded agreements " completed. In March 2013, the Central Bank had requested offers of solutions to be made in respect of 20% of arrears cases, rising to 30% to Q3 and 50% by the end of December 2013. On foot of these targets, the Central Bank is now requiring that 15% of all arrears cases above 90 days should be concluded by the end of year.

March 2013 target of 20% offers of solutions by the end of Q2 2013 required the banks to submit formal offers on 19,575 principal residences mortgages accounts and 6,065 BTL accounts, while the new target of 15% concluded arrangement covers 14,681 principal residences mortgages accounts and 4,549 BTL accounts. In other words, the Central Bank’s combined targets are for the banks to issue formal offers of solutions to 25,640 accounts and achieve concluded arrangements on 19,230 accounts.

Detailed Central bank paper setting out original set of targets is available here: http://www.centralbank.ie/press-area/press-releases/Documents/Approach%20to%20Mortage%20Arrears%20Resolution%20-.pdf

IMHO will be issuing a more extensive press release on today's announcement later, stay tuned for the link.

5/9/2013: Sunday Times, September 1: Mortgages Defaults & Arrears

This is an unedited version of my Sunday Times column from September 1, 2013.


As the great 17th century German mathematician and philosopher Gottfried Wilhelm Leibniz said: "There are two kinds of truths: those of reasoning and those of fact. The truths of reasoning are necessary and their opposite is impossible; the truths of fact are contingent and their opposites are possible."  In other words, facts can be contradicted, properly structured reasoning cannot.

Recent debate in Ireland surrounding the issue of mortgages arrears and strategic defaults is the case in point. Based on simple extrapolations of evidence collected in the economies with regulatory and social environments largely alien to Ireland, it clashes with the very logic of the regulatory and policy changes we have put in place.

The conjecture is that between 20 and 40 percent of all mortgages arrears in Ireland are 'strategic' in nature. Most likely, this is an over-exaggeration, although we do not know with certainty. However, the incontrovertible truth that this conjecture helps to obscure is that the mortgages arrears crisis is structural and unyielding to the solutions proposed so far. The reason tells us that the mortgages arrears crisis can only be dealt with through the means of a systematic resolution approach.


To-date, no bank in Ireland has completed a full assessment of the extent of strategic defaults amongst the mortgages in arrears held on its books. In the end of Q2 2013, Irish banks held 100,920 restructured mortgages loans. We do not know how many of these relate to strategic defaults. The banks failure to report actual hard numbers suggests that they have not succeeded in identifying many such cases. Thus, factually, five years into the mortgages crisis, we have no evidence as to whether or not strategic arrears are a widespread problem. This lack of evidence is either down to the banks own choices not to analyse the data or their unwillingness to report the results of their analysis.

As the result, we lack not only the crucial evidence to tell how many borrowers are tempting to game the system, but also any knowledge as to what might be driving them to do so.

Finance literature defines strategic defaults as a scenario where mortgagees can afford to pay their mortgage bill, but opt not to do so because walking away from the loan offers them a chance to reduce their financial losses over time. Under this definition, strategic defaults generally arise in the cases of severe negative equity.

Do we have strategic defaulters in Ireland? Reason suggests the answer to this question is yes we do. Is the problem as large as to cover 20 to 40 percent of all distressed borrowers? Logic implies that the answer to this question is no.

Suppose the claim of massive strategic defaults was true. Given property prices dynamics in Ireland over the last 6 years, this means that the bulk of such defaults should have occurred back around the 2010-2011, before the rate of property prices declines slowed down substantially. In terms of mortgages arrears data, the above suggests that arrears of over 360 days duration would be more likely candidates for representing strategic defaults. This is further supported by the fact that over the last 12-15 months, Irish authorities have stepped up the rhetoric against the alleged abusers of the system, and implemented well-publicised legislative and regulatory changes, such as the Personal Insolvency Bill, limiting the incentives for such behaviour.

Now, let's do some sums. Based on the Central Bank data, if strategic defaults were really covering between 20 and 40 percent of total mortgages arrears in Ireland, the number of such cases will be somewhere between 36,000 and 73,000 accounts. These would amount to between 48 and 96 percent of all accounts that are in arrears for over 360 days in the country. In other words, based on these claims, at least half of all longer-term arrears in the country could be suspected of being in a strategic default.

That's pretty extreme of a statement to be plausible. Crucially, such a claim is not consistent with what we can expect from the changes in policies and increased banks scrutiny. More likely, strategic defaults problem is more prevalent in the buy-to-let segment of the credit markets and here it might reach, say 20 percent of all loans in arrears. This would suggest that across all mortgages, including primary residences, there may be some 22,000-25,000 suspect mortgages or just 12 percent of all accounts in arrears. This would be a significant number, but a far cry from the claims put forward by the banks and some analysts.


However, the strategic arrears argument is just a red herring, designed to draw our attention away from ‘the truth of reasoning’, to use Leibniz’s terminology, that clearly shows that Irish mortgages arrears crisis is continuing unabated.

Quarter on quarter, defaults are up across all categories of mortgages, by numbers of accounts, outstanding volumes of loans and levels of built up arrears. Year on year the arrears are rising at double-digit rates. Total arrears now number 182,840 accounts, representing EUR36.6 billion in outstanding loans. The latter figure is growing at almost 10 percent annually. Given current property valuations and the costs of recovery on foreclosed mortgages, reported by the banks to-date, these represent a system-wide loss of ca EUR11-12 billion, hidden on the books. That is before we factor in the inevitable adverse impact of mass-repossessions on the market prices or high costs of personal insolvency resolution.

For Irish banks (as opposed to foreign banks) the above potential losses are closer to EUR6.5-7.5 billion. March 2011 stress tests were based on the Central Bank 2011-2013 projected losses of EUR5.8-9.5 billion for mortgages across Irish banks. In other words, the scenario that the 2011-2013 actual losses booked by the banks, plus the potential losses built up in the arrears will exceed the 2011 stress tests' capital allocations is now highly probable.


The only hope of avoiding another banking crisis, therefore, is that the system can somehow delay recognising the arrears-related losses. The argument that there are huge strategic default numbers hidden in arrears figures helps this, as it suggests that the banks can recover the losses associated with these abuses.

Alas, the strategic defaults are unlikely to be significant enough to help the banks. At the same time, it is hard to imagine that a significant delay to losses recognition can be brought to bear by the policy changes put in place to deal with the mortgages arrears.

Currently, banks hold 1,503 repossessed properties, a number that is still tiny compared to the overall default rates, signaled by mortgages over 720 days in arrears, which number 39,093 accounts and amount to EUR9,358 billion in lending. Thus, over a quarter of all mortgages in arrears are now in default for more than 2 years continually. Many of these are non-reparable. The rates of recovery on these mortgages are unlikely to be more than 40-50 cents on the euro.

Amortising such losses over six-to-seven years period - as envisaged under the reformed personal insolvency regime - may not be an option as to-date the regulators and the banks have been serially failing to deliver sustainable, long-term solutions to arrears.

Data on mortgages that have been restructured by the banks shows that restructuring of the loans is proceeding without any major change in either the mix of solutions offered or the rates of improvement on arrears achieved. At the end of June, only 55 percent of all restructured loans were not in arrears, which is virtually unchanged compared to Q3 2012, the earliest quarter for which we have comparable data.

The risk of default for restructured mortgages is even more significant when we consider the types of arrangements put in place in restructuring. Some 50 percent of all restructurings involve temporary switches to interest only payments or reduced payments of capital component. Eight out of ten restructured mortgages give only temporary reprieve to the borrowers. In effect, of the total of 21,563 principal residences accounts restructured through the end of June 2013, around 20,520 accounts have been restructured so as to potentially either increase or leave unaltered the overall volume of debt over the life-time of the mortgage. Instead of reducing debt burden, our 'solutions' to the mortgages crisis are increasing it.

The overall levels of mortgages that are at risk of default or defaulted continues to climb. Total number of mortgages at risk currently stands at 239,834 accounts, up 11.3 percent year on year in Q2 2013. These represent ca EUR47 billion worth of mortgages or more than one third of all residential lending in the country, up on 29.5 percent a year ago. The systemic risk to the system is rising despite some nascent stabilisation experienced in the property prices and overall macroeconomic conditions, and despite the historically low cost of credit.

The economy is hurling at a breakneck speed toward mass households insolvencies and large scale repossessions over the next 1-3 years. The logic of reality is constantly negating the factoids of the official analysis.

To break this vicious cycle we need to change our modus operandi.

Firstly, we must produce an independent and credible assessment of the problem of strategic defaults. The end-game here should be putting in place a system of evidence-based monitoring and evaluation of defaulting borrowers that is transparent, independent of the banks and accessible to all those involved in structuring long-term solutions. Anyone found genuinely guilty of gaming the system must be forced to bear the full burden of their actions.

Secondly, we need to set a mandatory, clearly priced and transparently administered menu of long-term solutions. All banks must be compelled to offer these to their borrowers.

Thirdly, we need to put in place a system of independent oversight and arbitration over the solutions offered by the banks.

Without swiftly dealing with the strategic defaults and with the problem of structuring, pricing and deploying long-term solutions, Ireland is risking a repeat of the acute banking crisis over 2014-2016. Navigating the world of contingent facts requires more than extrapolating foreign studies to domestic environment. It requires proper logic and reasoning as the backing to policies and systems we deploy.

BOX-OUT:

This week, the OECD published an assessment of the effects of immigration on the member states economies. On average, across the OECD, immigrants contribute positively to the host countries' exchequers, with a net contribution of 0.4-0.57 percent of GDP. In today's Ireland immigrants' contribution to the state purse, net of benefits received, is negative at -0.23 to -0.39 percent of GDP. There is no discernible difference between native and foreign born employment rates in Ireland in 2012. There is a relatively large difference in unemployment rates between the native- and foreign-born sub-populations, that is especially pronounced for women. OECD data puts Ireland in the 8th worst position in the OECD in terms of labour markets effects of immigration and the second worst position in terms of the immigration effects on public finances. Given the fact that Ireland is continuously attracting large numbers of highly-skilled, fully employed, young and tax-compliant professionals, the above findings suggest that Irish aggregate figures are more reflective of the economic impact of the two other major cohorts of immigrants. These are: immigrants who arrived in 2001-2008 from the EU Accession states and those who arrive for family reunification reasons. However, per OECD data, the latter cohort, actually makes a larger positive contributors to the state finances any other type of the household, including the native households. This leaves immigrants from the EU Accession states, most severely hit by the collapse of building and construction and domestic services sectors in Irish economy during the crisis, as the cohort behind the overall negative findings. The point is that, traditionally, stock of immigrants in a host economy acts as one of the automatic stabilisers - a factor that adjusts on its own to reflect the prevailing economic conditions, shrinking in the recession and expanding in recoveries. In modern Ireland, one of the legacies of the 2001-2007 bubble, is that instead of stabilising economic activity, immigration might have acted to amplify the crisis.

23/8/2013: IMHO statement on Mortgages Arrears for Q2 2013

Irish Mortgage Holders Organisation (IMHO) issued opinion on today's mortgages arrears figures: https://www.mortgageholders.ie/another-false-start-in-resolving-mortgage-crisis/

My detailed analysis of the figures is here: http://trueeconomics.blogspot.ie/2013/08/2382013-irish-mortgages-arrears-q2-2013.html

23/8/2013: Irish Mortgages Arrears: Q2 2013

Mortgages rears figures are out for Q2 2013 and guess what, things are (predictably) getting worse. I am sure the Government will say that 'getting worse today'='getting better in the future'. As such, we do live in the world where stabilisation = decline in the rate of decline, while a slight uplift on any time series is greeted as an indisputable 'gathering growth momentum'.

What do the numbers of mortgages arrears tell us, spin aside? I highlight main conclusions in bold.

In Q2 2013 there were 919,139 mortgages accounts outstanding (EUR139,883 million in total), of which 770,610 accounts were for primary residences (EUR109,147 million). Primary residences are referenced as PDH accounts in CBofI. The balance of 148,529 accounts  (EUR30,626 million) relate to Buy-to-lets, BTLs.

This means that over the year through the end of H1 2013, the number of mortgages accounts rose 0.4% and their outstanding volumes fell 2.41%. Deleveraging is very slow in the economy, given the crisis scope: number of primary mortgages accounts rose 0.7% and their volume shrunk 2.52%, while the number of BTLs fell 1.1% and their volume shrunk 2.01%. In fact, as the chart shows, deleveraging process so far is not helping the workout of arrears:

Total number of primary accounts in arrears of any duration is up 11.46% y/y, underlying volume of mortgages represented by these is up 9.1% to EUR25.69 billion from EUR23.55 billion a year ago, while amounts in arrears are up 36.46%, breaching EUR2 billion for the first time. This means that, penalties inclusive, the arrears are now attracting ca EUR202 million in roll up charges annually or about 40% of the annual savings that we need to deliver in Budget 2014 from the social welfare funds.

Total number of BTLs in arrears was up 15.06% y/y and the amounts of mortgages outstanding for the BTLs in arrears rose to EUR10.94 billion - up 11.45% y/y, while the actual cumulated levels of arrears hit EUR1.207 billion, up 43.63% y/y.

All in, there were 182,840 accounts in arrears, representing cumulative amount outstanding of EUR36,634 million and cumulated arrears of EUR3,231 million. These were up: +11.39% y/y for account numbers (+19,924 accounts), +EUR3.267 billion or 9.79% y/y for mortgages outstanding, and +EUR 907 million or +39.05% y/y for actual arrears.

Repossessions accelerated, but remained subdued overall, rising to 1,503 accounts (1,001 accounts for primary residences). This represents a y/y increase of 13.69% for all accounts, 6.04% rise for primary residences and 32.8% jump for BTLs.

Restructured mortgages numbers declined in Q2 2013, from 106,612 accounts to 100,920 accounts over the period of 12 months through June 2013. This breaks down as per decline of 6.57% for primary residences from 84,941 to 79,357 accounts, and a decline of just 0.5% for BTLs from 21,671 to 21,563 accounts.

Performance of restructured mortgages somewhat improved, although we do not know as to why this was the case. Restructured mortgages that were not in arrears as percentage of the total number of restructured mortgages has improved from 47.35% to 53.31% for primary mortgages, and from 51.17% to 61.13% for BTLs.






And some scarier figures for the end:

• Total number of mortgages at risk of default or defaulted (mortgages in arrears, mortgages restructured and not in arrears, and repossessions) rose to 239,834 in H1 2013 (up 11.27% y/y)

• Total number of primary mortgages at risk or defaulted rose to to 186,202 in H1 2013 (up 9.94% y/y)
• Total number of BTL mortgages at risk or defaulted rose to to 53,632 in H1 2013 (up 16.12% y/y)

• 20.26% of all primary residential mortgages were in arrears or at risk of default in Q1 2013, against 18.50% in Q2 2012.
• 36.11%of all BTL mortgages were in arrears or at risk of default in Q1 2013, against 30.75% in Q2 2012.
• 26.09% of all residential mortgages were in arrears or at risk of default in Q1 2013, against 23.55% in Q2 2012.
• By volume of mortgages outstanding, 33.35% of the total mortgages pool or EUR46,618 million were mortgages either in arrears, or restructured at the end of Q2 2013, up on 29.51% (or EUR42,258 million) at the end of Q2 2012.

1/8/2013: Strategic defaults...

This is "I am not drowning puppies for fun" note concerning my view on the problem of 'strategic defaults':

1. I do not allege there are no 'strategic defaults' in Ireland.
2. I do state that at this moment, there is no evidence of these defaults being a systemic problem of specific dimension.
3. Absence of evidence is not, in my view, an evidence of absence. 
4. I am aware that some people prioritise payments of unsecured debt over secured debt.
5. However, (4) does not automatically imply that a person doing so is out to 'game the system' to their advantage. They might be prioritising payment of unsecured debt for a number of reasons, other than personal gain, e.g.: (a) their credit cards or small credit union loans fund their day-to-day living expenses and as such they need their credit flowing to survive, or (b) their unsecured creditors exerted more pressure on them and they simply caved in, etc.
6. I do not allege that doing (4) above (including for the reasons outlined in (5))  is a correct or a good or an acceptable course of action. In fact, in my opinion, it is not. However, presently, the Irish authorities have failed to secure a clear, accessible and definitive pathway for resolving the conflict between secured and unsecured debt obligations for distressed borrowers. As the result of such a failure, we cannot fault people opting for acting according to (5) above, regardless of what we might think.
7. I am aware of at least one instance where an organisation I am working came across a case of a wilful and strategic default. As the case was brought to us for an independent external assessment and was not represented by us on a client basis, we advised to pursue all legally available courses of action to stop the person from continuing to engage in such activity and we advised the borrower to immediately cease such activities.
8. I am aware of the study that used US research (not US data) to extrapolate to the Irish situation. I find such an approach a good starting point for a debate, but I do not accept it as a robust evidence to base any policy design or analysis on. It is not an evidence and thus (2) and (3) above continue to apply.
9. I am aware of the statements by media and analysts that the problem of 'strategic defaults' in Ireland is growing and is already significant. 
10. My view is that (9) represent unsubstantiated claims, not backed by any real evidence and as such these claims have to be treated as speculative conjectures. Anyone is free to make a conjecture. Some might even opt to be so kind as to seek evidence to back one up. None have a right to impose their conjecture onto actual solution or policy mechanism.

I hope this explains my position on the issue and ends the nonsensical accusations that I am denying the problem. 

My personal conjecture on the topic (backed by anecdotal evidence, so not different from any conjectures on the topic presented in the media to-date) is that there are, most likely, some borrowers attempting to game the system. We do not know how many there are. We do not know who they are. We do not have a means for rigorously identifying them. The correct way for dealing with them is to penalise them at the point of discovery, make such penalty known in advance of any actions to give them a  chance to alter their behaviour.

If the resolution of onerous arrears requires repossession of the property, repossession is justified. It is not my position to argue that all repossessions are unjustified. It is my view that repossessions of family homes should be minimised and, crucially, all repossessions should be preceded by the full, binding and voluntary agreement between the borrower and the lender on how the residual debts, remaining post-repossession action, are to be settled.

Before a point of discovery of their guilt, however, everyone is innocent. 

17/7/2013: IMHO statement on Land & Conveyancing Bill

Irish Mortgage Holders Organisation response to the passing of the Land anf Conveyancing Reform Bill, 2013:
https://www.mortgageholders.ie/land-and-conveyancing-reform-bill-2013/

do keep in mind, while reading, that our view recognises fully that in many cases, in dealing with mortgages debt there will be no option other than foreclosure sale (voluntary or enforced).

The key to any economically and socially sustainable system for resolving this crisis is to create a symmetric balance of power and incentives between the banks and the borrowers to achieve a long-term sustainable solution to the debt overhang. This the current system does not allow for. 

21/6/2013: Irish Mortgages Arrears Q1 2013

At last, with a delay of some 4 weeks we have the Mortgages Arrears data for Ireland for Q1 2013. The delay was caused by (my sources tell me) a reporting glitch from one of the institutions. 

At any rate, the CBofI release of the data does not seem to fit any of the conspiracies theories bandied about, so let's assume that it was a glitch. That raises a question - what sort of a glitch can disrupt reporting of something as simple as arrears without having any effect whatsoever on any lender's other operations? I shall leave this question for you to ponder.

What do the figures tell us? As usual, my suggestion is - ignore the spin in the media, read CBofI own release, read https://www.mortgageholders.ie/ position (due tomorrow am) and let's focus on raw numbers here.

In Q1 2013, number of outstanding mortgages accounts relating to principal dwelling houses/residences (PDH) stood at 774,109, down on 792,096 in Q4 2012 - a decline of 2.27% q/q, but an increase of 1.3% y/y. With BTLs added, total number of residential mortgages in the country stood at 923,504 or 2.01% below Q4 2012 and 20.9% above Q2 2012 when reporting began. Much of changes in the total numbers of mortgages in recent quarters is accounted for by classification changes.

While the number of mortgages outstanding dropped by 2.27% for PDH, volumes of loans relating to mortgages decline by far smaller 0.79%.

So observation 1: exits remain based predominantly on pay downs of older vintage, smaller mortgages, leaving the remaining pool of mortgages more toxic.

Total number of accounts in arrears in relation to PDH stood at 142,118 in Q1 2013, down 1.2% from 143,851 accounts in Q4 2012, but up 15.6% y/y. Total outstanding amounts relating to PDH accounts in arrears was up 2.85% q/q at EUR25.485 billion (up 11.21% y/y) and underlying volumes of accumulated arrears rose to EUR1.932 billion (up 7.81% q/q and 39.87% y/y).

Observation 2: Marginal decrease in arrears-impacted mortgages accounts was associated with deeper deterioration in terms of the volumes of PDH mortgages impacted by arrears. The problem got slightly more concentrated and much more toxic.

Number of accounts in arrears in relation to BTL rose to 39,371 in Q1 2013, up 3.73% q/q and up 13.4% y/y. Total outstanding amounts relating to BTL accounts in arrears was up 2.84% q/q at EUR10.891 billion (up 10.94% y/y) and underlying volumes of accumulated arrears were at EUR1.178 billion (down 1.29% q/q and up 40.13% y/y). Note: y/y comparatives for BTLs are only referencing 9 months period since the end of Q2 2012 - the first period for which we have data available.

Observation 3: BTLs continued to tank across the board, although cumulated arrears amounts did decline q/q. Assuming there were no reclassifications, this suggests some write-offs by the banks of defaulted loans.

Total (PDH+BTL) number of accounts in arrears stood at 181.489 in Q1 2013, down 0.17% from 181,806 accounts in Q4 2012, but up 11.4% on Q2 2012 - the earliest for which we have data available for BTL. Total outstanding amounts relating to all mortgages accounts in arrears was up 2.85% q/q at EUR36.376 billion a rise of 9.02% on Q2 2012. However, the core number, relating to cumulated arrears has jumped significantly more than any other arrears-related parameter. This rose to EUR3.11 billion in Q1 2013 up 4.17% q/q and +33.83% on Q2 2012.

Observation 4: across all residential mortgages, the problem of arrears became slightly marginally more concentrated and significantly more toxic.

In Q1 2013, 185,263 PDH mortgages accounts were either at risk of default or defaulting (the category that includes, per my methodology, all mortgages in arrears, all repossessions and all mortgages that are restructured and currently are not in arrears), which is 0.81% down on Q4 2012 and +13.97% up on Q1 2012. At the same time, there were 52,991 BTL accounts at risk or defaulting, up 2.15% q/q and up 14.74% y/y. Which means that across all mortgages, the number of accounts at risk of default or defaulting declined marginally from 238,663 to 238, 254 between Q4 2012 and Q1 2013. The number was up 10.53% y/y.

At the end of Q1 2013, 20.1% of all PDH mortgages accounts were at risk of default or defaulting, up on 19.8% in Q4 2012. The percentage of BTL mortgages that were at risk of default or defaulting in Q1 2013 was 35.5%, up on 34.5% in Q4 2012. 

Among all residential mortgages in Ireland, in Q1 2013 25.8% were at risk of default or defaulting, up on 25.3% in Q4 2012. 9 months ago that percentage stood at 23.6%, implying a swing up of 2.2 percentage points in 9 months or an annualised rate of increase in the incidence of risk of default or defaulting of 2.94 percentage points.

Update:  Here is a link to IMHO statement on today's data: https://www.mortgageholders.ie/irelands-mortgage-crisis-is-blowing-out-of-control/

12/6/2013: Statement, Questions, Facts

Statement: "She pointed out that one in five of credit union loans was in arrears for more than nine weeks. This 20pc figure compares with 11pc of mortgage holders being in arrears for three months or more."

Source: http://www.independent.ie/business/personal-finance/property-mortgages/credit-unions-warned-many-loans-will-not-be-paid-back-29337885.html

Question 1: Given that both Credit Unions and banks are regulated from the same Central Bank, why are we using different time bases for comparatives on NPLs?

Fact: 11.9% is the actual percentage of mortgages in arrears (by account numbers) over 90 days, per latest official data available (Q4 2012), which rounds to 12% not 11%.
Fact: Including BTLs, 13.04% of all mortgages were 90 days and more in arrears (by accounts) and 18.2% by outstanding amounts.

Question 2: Given the above, why is the Registar of Credit Unions referencing 11%?

Fact: Balance of mortgages in arrears over 90 days in Q4 2012 was 15.8%.

Question 3: Should we reference balances for comparatives?

Fact: in Q4 2012 all mortgages in arrears (>30 days or over 4 weeks and given reporting and registration lags, closer to probably 6-7 weeks) amounted to 19.3% of all mortgages by account numbers and 24.9% of all mortgages by outstanding amounts. All of the sudden, that vast difference implied in the quote above is... err... rather much smaller.

Aside: why are we now ca 2 weeks behind the normal release schedule for mortgages arrears data?

30/4/2013: 2012 Was Not a Year of Brilliance for the Central Bank

From the Opening Statement by Governor Patrick Honohan at the publication of the Central Bank of Ireland Annual Report 2012, 30 April 2013


"Two major elements of the Bank’s work during 2012 came to decisive junctures early this year – the liquidation of IBRC and related replacement of the promissory notes with marketable government bonds; and the introduction of an enhanced mortgage arrears resolution framework, which was announced in recent weeks. All of these measures are ultimately concerned with creating the environment for sustainable economic growth and reduction in unemployment."

It is my opinion that 2012 marked the year when the Central Bank has done the least to deliver on any meaningful reforms and change that can create or sustain "the environment for sustainable economic growth and reduction in unemployment". The bases for my opinion are:

1. In 2013, the Central Bank attempted (key word here) to introduce an enhanced mortgage arrears resolution framework. The new framework is 'enhanced' only to the extent that the previous framework was proven to be a complete failure. However, looking forward and setting aside the failures of the very recent past, the new framework is not consistent with the goals for either reducing unemployment or enhancing prospects for economic growth. Some of my criticism of the new framework in the context of these two objectives can be found here: http://trueeconomics.blogspot.ie/2013/04/1842013-legalising-modern-version-of.html
2. In 2013, the Irish Government has undertaken a swap of one financial liability (promissory notes) with another (government bonds). This transaction has been deemed by myself, many others, including the IMF, to have near-zero impact on debt sustainability when it comes to the Irish Government debt. The transaction was net positive for cash flow, albeit moderately, and hugely positive for PR. while th CB of Ireland did benefit significantly from improved security underlying the ELA, this benefit came at a cost to the rest of the Irish economy in the form of the conversion of the quasi-sovereign debt (promo note) into long-dated sovereign bonds.
3. Beyond the above two points, there has been very little progress on any tangible reforms in the banking sector in Ireland. We are still pursuing a duopoly model of the domestic banking market,  and there is no effective discussion, let alone effective resolution of the problem of lack of new entrants and lack of restructuring of the existent lenders. We have no new models of banking and lending in the country emerging after six years of this crisis and, if anything, we are now consolidating the strategic space in our banking services to a singular model of low-quality, low-access services supplied at an excessive cost. Both AIB and Bank of Ireland are pursuing this model, leaving customers to pick up the tab for reduced access to services and increased charges on the remaining services. This hardly supports Governor Honohan's claim that the Central Bank is working on creating and sustaining environment for growth.
4. All banking sector performance parameters have been either not improving or deteriorating over 2012 within the directly state-influenced covered group of financial institutions.

Slapping ad hoc targets on the banks to reduce mortgages arrears and then introducing masers to give them power well in excess of that awarded to the borrowers is about as productive of a measure for dealing with mortgages crisis as giving hospitals management targets for reducing the number of trolleys in corridors while removing patients protection from malpractice.

The Central Bank-supplied 'framework' is thus simply not fit for purpose, neither by the criteria of dealing effectively and humanely with the debt crisis (by first removing the unsustainable debt in systemic, transparent and fairly-priced fashion, then by addressing future moral hazard), nor in terms of placing the burden of crisis resolution where the causes of the crisis rest (proportionally with both the banks and the borrowers), nor in respect of the Central Bank claimed objectives of delivering supports for economic recovery.


Updated: Central Bank of Ireland has made a claim of 2012 'profit' of EUR 1.4 billion. But wait, a business makes profit by taking investors' / equity holders' / lenders' or own funds, purchasing inputs into production, producing something and then selling that something to willing customers who pay for these goods from their own funds. Central Bank of Ireland took claims imposed by the Government of Ireland on consumers and taxpayers, gambled these claims on the banks, who were basically compelled to take 'as offered' these Central Bank-supplied 'goods' and then collected from these captive banks pay (which the banks promptly ripped-off their customers - aka consumers and taxpayers). The Central Bank subsequently relabelled these rip-off charges 'profits' and remitted them back (EUR 1.1 billion) to the Exchequer. So can anyone explain to me what Central Bank produced that someone voluntarily was willing to buy with their own cash?

10/4/2013: IMHO Submission on the Review of Code of Conduct on Mortgages Arrears

The Irish Mortgage Holders Organisation Ltd.,
www.mortgageholders.ie
Not for profit organisation.

Submission on the review of code of conduct on mortgage arrears consultation paper CP 63

Irish Mortgage Holders Organisation, April 9th 2013.

Attention: Mr. Bernard Sherridan, Central Bank of Ireland.



Dear Mr Sheridan,

We would like to thank you and your team for meeting us recently about issues and concerns we have at the treatment by banks of Mortgage Holders.


We are very concerned by the statements made by Mr. Elderfield at the launch of the “targets” (set by government and the Central Bank) for banks, with respect to dealing with those in arrears as well as comments surrounding the changing of the Code Of Conduct on mortgage arrears to allow banks to take swifter action against mortgage holders.

It is our view that the process of mortgages arrears resolution is being facilitated in an unsupervised and unstructured way, without due regard to the need for transparency and openness which would be consistent with the best practices for arrears resolution and consumer protection. The process – as outlined to-date – leaves the mortgagees fully exposed to banks putting their own objectives and strategies ahead of the needs of the Irish economy, society and borrowers, and provides a large deficit in consumer protection.

We would like to make the following specific points regarding the review of the code of conduct on mortgage arrears notwithstanding the fact that it may already be predetermined as demonstrated by Mr. Elderfield’s comments as referenced above.


Legal standing:

In the first instance and reluctantly we have to raise the issue of the legality of the Code Of Conduct. This issue has been discussed behind closed doors for some time now and it is an issue of the utmost importance as the legal status of the code of conduct on mortgage arrears is by no means certain. We wish to reaffirm our concerns about the legality of the code which we expressed originally in our email to Governor Honohan last month.

A number of recent high court cases refer to this issue including Irish Life and Permanent v Duff where Justice Hogan raised “the somewhat troublesome issue of the precise legal status of the code of conduct”. Justice Hogan followed recent high court precedent in the Fitzell case and warned The question, for example, of what constitutes a “reasonable effort” on the part of the lender does not easily lend itself to judicial analysis by readily recognisable legal criteria. How, for example, are “reasonable efforts” to be measured and ascertained? If, moreover, non-compliance with the Code resulted in the courts declining to make orders for possession to which (as here) the lenders were otherwise apparently justified in seeking and obtaining, there would be a risk that by promulgating the Code and giving it a status that it did not otherwise legally merit, the courts would, in effect, be permitting the Central Bank unconstitutionally to change the law in this fashion’.

The Code itself has no specific legislative status. It is neither a piece of primary legislation in the form of an act of the Oireachtas nor a secondary piece of legislation in the form of a ministerial regulation issued by the Minister for Finance. The Code is not even stated to be admissible in legal proceedings. It is a Code issued under the terms of Section 117 of the Central Bank Act 1989 and therefore lenders who infringe its terms may be subject to the Central Bank’s Administrative Sanctions Procedure. This is an internal process that allows the Bank to control the conduct of and helps to define its regulatory relationship with financial service providers, but it is not one that a consumer as a borrower has any involvement in. This we believe is a matter of extreme urgency that needs addressing.


Right of Appeal:

Section 49 & 52 as proposed allows for a lender to have 3 senior staff act as an appeals board. This is completely unacceptable and allows for no independent oversight. The appeal process must be fully detached from the banks or banking sector representative institutions and vested with an independent authority acting to protect the interests of all parties involved in a dispute. The process must be made explicitly transparent and any asymmetries in representation during the dispute that may arise due to (a) nature of the processes that lead to the appeal, and (b) resources available to the parties prior to and during the appeal should be removed. In practical terms, this requires provisioning for the independent and fully funded counsel for borrowers who cannot afford such professional help, and an appeals board that is fully operationally and membership-wise independent from both borrowers and lenders.


Moratorium:

The proposed and current code is flawed in not being prescriptive in defining the periods of time over which the moratorium clock is ticking. No time is given for gathering of financial information or indeed an exchange of offers between the lender and the borrower. This will become a significant issue when the legislation is introduced to reverse the Dunne Judgement, which will lead to a significant rise in repossession applications. Lenders can initiate delays in corresponding with borrowers, as they have done on many occasions to-date, and such periods of delays will account for time eaten into a moratorium period. Borrowers, however, are not accorded similar powers. Again in the absence of prescriptive process and recording of times borrowers can be seriously and unfairly disadvantaged by losing time that is taken off them ahead of potential repossession proceedings.

Provision 37 proposes ‘Prior to completing the full assessment of the borrower’s standard financial statement, a lender may put a temporary arrangement in place where a delay in putting an arrangement in place will exacerbate a borrower’s arrears or pre-arrears situation. Such a temporary arrangement should not last for more than three months. Any subsequent arrangement should be based on a full assessment of the standard financial statement’.

This provision should state that the duration of this temporary arrangement does not count for the purposes of the 12 month moratorium on repossession proceedings. Similarly, Provision 57 should state in relation to the twelve month moratorium that ‘the twelve month period does not include any time period where a proposal for an alternative repayment arrangement is being negotiated’.


Unsolicited Contact by Lenders with Borrowers:

The Central Bank “themed inspections” as to the banks adherence to the previous rule of no more that 3 unsolicited contacts in one month was typical of light touch supervision. The lenders seem to have
had significant influence in this proposal and the Central Bank seem to have accepted the industry’s lobby position on this. In addition the Central Bank gave advance notice to banks before their “inspection”.

‘Feedback from industry would indicate that the current requirements, particularly the limit of three successful contacts, are preventing lenders from making contact and engaging with borrowers and are therefore impeding the consideration and resolution of borrower’s cases. The Central Bank does not believe that this is in the best interests of borrowers’.

There are no provisions for the engagement with mortgage holders in this feedback system. Similarly, there are no explicit, transparent and enforceable provisions to ensure that lenders engagements with the borrowers will be “proportionate and not excessive”. There are no data disclosure provisions relating to inspections and any remediation measures applied to institutions violating code of conduct.

The new unlimited contacts must not be “aggressive or intimidating”. Once again, how is it proposed to ensure this will be the case? How will it be proven that all attempts to contact the borrower have been made and that these attempts have been made within the confines of the Code-permitted procedures? The removal of this limited protection of mortgage holders is a significant regressive step in consumer protection and has left the borrowers unprotected against potential abuses by the banks.

Debt collectors acting on behalf of lenders are still unregulated within the existent structure and under the proposed code. How does this code cover their activities or can they adopt any means they deem appropriate to recover monies?

The Central Bank will have failed to provide symmetric protection of the interests of the borrowers and the lenders unless it allows for explicit, enforceable and transparent safeguards to protect many vulnerable people who are in arrears and will be set upon by lenders who have been given a free rein.


Unsustainability: 

Many actions taken by the bank to repossess property are predicated on a decision by a lender that a loan underlying the property is unsustainable. The Code should include prescriptive rules defining what is sustainable and what is not sustainable. This may involve some sort of expenditure guidelines. These rules and guidelines should be transparent, public, enforceable and compulsory for all banks, and applicable to all borrowers.


Trackers:

It is vital that provision 12 (d) is not changed unless there is a clear system for borrowers to seek advice to ensure that any removal off a tracker is of benefit to the borrower. Such advice should be delivered on a professional basis and borrowers in need of funding for procuring such advice should have access to such funding. Page 4 of the consultation paper suggests that the removal off a tracker might have merit if in the interest of the borrower. This determination cannot be solely in the remit of the lender nor can it be left subject to the appeal system that incorporates explicit conflict of interest between the appeals process and the bank interests per note above.


Engagement:

Our experience, confirmed by the experience of other organisations working on behalf of the borrowers in distress, is that lenders do not respond in a timely manner to borrowers proposals or engagements, which is unacceptable. What happens to a lender who does not engage, who does the borrower appeal or complain to, other than the bank, which is alleged to engage in the abuse of the system?

Engagement by lenders with borrowers can be painfully slow, tedious and difficult leaving the borrower exhausted, their financial resources significantly reduced and without a resolution. There needs to be a clear code of conduct enforcement by the central bank on lenders for their behaviour and engagement and such enforcement should be transparent, effective, verifiable and not based on an ad hoc system of inspections, criteria and judgements.


Borrower representation and advice:

Even in normally functioning bankruptcy regimes around the world, those in debt are at a significant disadvantage compared to the might of creditors. They face corporate strength and power that can crush any debtor financially, emotionally, socially and psychologically. Observed by passive regulators, as in Ireland, compounded by the insolvency regime that is both under the current statutes and in its ‘reformed’ reincarnation nothing short of draconian, leaves the debtor in great peril.

When this financial crisis happened it was the citizen who suffered where the regulated entities and regulators enjoyed protected pay, conditions and functionality. Now, the very same citizen is facing the immense power of the state backing the already significant powers of the banks when it comes to the personal debts.

Bankers have a Banking Federation that represents them. Bankers are also availing of the weaknesses in the Irish competition laws to sustain and even consolidate their market powers at the expense of the taxpayers. They discuss issues and present their views publicly and to the government rather effectively and are assisted by a receptive media. They tend to be in sync with government announcements and findings and have direct access to the Social Partnership process and all other avenues of policy formation.

Debtors lack any statutory or institutional power. They need assistance and protection, care and support. This is best achieved by a coming together of advocates and organisations that provide services and assistance to debtors. Organisations and bodies such as MABS, The Irish Mortgage Holders Organisation, Flac, Phoenix Project and others are providing exceptionally effective and professional services to debtors usually on the basis of voluntary engagement of experts and ordinary citizens, and in the majority of cases, with no cost to the state. These and other organisations have a combined knowledge, experience and passion of their volunteers to help those is debt.

Mabs has been effectively assisting debtors for the last few decades and they have experience and a national foot print from where services and supports could be head quartered.

Yet, even with these organisations behind them, Irish debtors do not have the resources needed to deal with aggressive and disruptive creditors. With many commentators and practitioners expressing concerns and uncertainty as to how the new personal insolvency act will work there is a need to address the imbalance that exists today between debtors and lenders, as well as prevent the exacerbation of this imbalance threatened by the new legislation.

The new Insolvency regime will add additional hurdles for debtors, allowing vultures prey on the hundreds of thousands of households saddled with excessive debts, while providing little certainty to the debtor or any chances for a renewal to the economy.

Successive governments have chosen to ignore the one constant support debtors have had which is Mabs, in favour of diluting their effectiveness and giving banks and creditors a strengthened hand. Successive governments have also opted to ignore all other organisations currently working on the frontlines of the debt crisis. Despite the governments’ best efforts these organisations continued to offer a better balance and chance for debtors to be represented and protected effectively. These organisations deserve to be recognised as the de facto debtors’ representatives and be allowed to fund professional provision of services to debtors by linking arrears and insolvency resolution savings delivered to the economy at large via their efforts to the resources available to them to achieve such savings.

The insolvency bill raises a serious question of how those deeply in debt will be able to afford professional representation to assist them deal with their debt in favour of those with cash flow who can avail of professional services. This will promote a two tiered system leaving the most vulnerable to fend for themselves in unchartered waters full of predatory creditors and commercial service providers.

What would be helpful to debtors in the years ahead would be a number of organisations that compete to provide a full suite of services to debtors including legal, financial, negotiation, mental health, conveyancing and creditor payment services. These organisations should be modelled around Mabs, with Mabs established on a stand alone basis with an independent Board filled with experienced directors. A Board with a strategic plan that addresses the needs of debtors in the years to come.

Mabs is currently funded from the department of social protection to the tune of EUR18,5 million per annum. This funding could be directed towards the new organisation and additional funding could be raised by charging creditors as is done in many other jurisdictions. Many consumer credit counselling services agree voluntary payment arrangements with creditors on behalf of debtors and facilitate the cash transactions for a fee. A truly independent and well-resourced Mabs can act as a coordinator and supervisor over other organisations that compete with each other for representation of debtors in the
process of developing systemic resolution to the debtor arrears or insolvency.

Given the disproportionate powers granted to the banks by the new legislation, existent debtors’- representing organisations will undoubtedly try their best to help but they are not adequately funded to achieve significant scale and scope of their operations to fully function as representatives of families and people in difficulty. Indeed, majority of them are not funded at all. There is an urgent need to consolidate these organisations’ efforts, provide them with proper supervision and supports, and allow them to raise resources to deliver meaningful and effective change.


Yours sincerely,
David Hall
Dr. Constantin Gurdgiev
Directors
Irish Mortgage Holders Organisation.
Dublin, Ireland
April 9, 2013

THE IRISH MORTGAGE HOLDERS ORGANISATION LIMITED is Registered in Ireland No: 517549 Directors: Arthur Mullan, David Hall, Lucy Cronin, Tracy Mullan, Constantin Gurdgiev

22/3/2013: Sunday Times, 17/03/2013

This is an unedited version of my Sunday Times article from March 17.


Economics is an art of contention. In so far as economics body of knowledge is concerned, the world is largely composed of an infinite number of things that are either uncertain, or open to interpretation. One of the very few near-certainties that economists do hold across the ideological and philosophical divisions is that an economy undergoing deleveraging of household debt is likely to experience a lengthy period of below-trend growth. The greater the debt pile to be deleveraged, the faster was the period of debt accumulation, the longer such a recession or stagnation will last.

Another near-certainty is that in a debt crisis, economy is unlikely to recover on foot of either monetary or fiscal stimuli. Monetary easing can help the deleveraging process if and only if low policy rates translate into cheaper mortgages on the ground. This requires a functioning banking system, in addition to monetary policy independence. Fiscal stimulus can only help to the extent to which it can temporarily stimulate growth, and even then the impact on more indebted households is unlikely to be any stronger than on less-indebted ones. Longer-term effects of a significant debt-financed fiscal stimulus in an economy already struggling with government and household debt, are more likely to be detrimental to the overall process of deleveraging. Higher debt today necessary to fund economic stimulus translates into higher burden of that debt in the future.

Meanwhile, deleveraging of the households in and by itself, even absent banking and other crises, is a process associated with dramatically reduced economic activity and growth.

Households struggling with a debt overhang are effectively removed from being active participants in the economy. Indebted households do not save, thus depleting their future pensions provisions and reducing overall levels of investment in the economy. Indebted households tend to cut back their consumption, both in terms of large-ticket durable goods and in terms of everyday items. They also reduce consumption of higher-quality higher-cost goods, adversely impacting domestic producers in higher-cost economies, like Ireland, favoring more competitively priced imports.

With banks beating on their doors, indebted households abstain from entrepreneurship and engage less actively in seeking improved employment opportunities. The latter means that indebted households, fearing even a short-term spell in unemployment, do not seek to better align their skills and talents, as well as future prospects for promotion with jobs offers. This, in turn, implies loss of productivity for the economy at large. The former means slower rate and more risk-averse entrepreneurship resulting in further reduction in future growth potential for the economy.

Last, but not least, household debt overhang results in increased rates of psychological and even psychiatric disorders, incidences of self-harm, suicide, stress and social dislocations. These effects have a direct and adverse impact on public services, the economy and the society at large.

In Irish context, the effects of household debt overhang (most acutely expressed in mortgages arrears) are likely to be significantly larger than in normal debt crises episodes and last longer.

Consider the sheer magnitude of the problem. In an average debt crisis, household debt arrears peak at around 7-10% of the total debt outstanding. Per latest data from the Central of Bank of Ireland, at the end of 2012, 143,851 private residential mortgages accounts and 37,995 buy-to-let accounts were in arrears. Total number of mortgages in arrears represented 19% of all mortgages outstanding.  Total balance of mortgages in arrears amounted to EUR35.4 billion, or 25% of the entire mortgages-related debt. Mortgages at risk of default or defaulted (defined as all currently in arrears, relating to properties with repossession orders and mortgages restructured during the crisis, but currently not in arrears) amounted to 238,663 accounts and EUR45.3 billion of the outstanding debt, or 25.3% and 31.9% of the respective totals.

Given expected losses from the above mortgages in the case of repossessions and/or insolvency, and inclusive of the interest costs due on this unproductive debt, over the next 3 years Irish economy is likely to face direct losses from this mortgages crisis to the tune of EUR20 billion. This will reduce our current level of gross fixed capital formation in the economy by 40 percent in every year through 2015.

In indirect costs, the crisis currently is impacting some 650,000-700,000 individuals living in the households with mortgages at risk, as well as countless others either in the negative equity or arrears on unsecured debt (credit cards, credit unions’ loans, utility bills etc).  Using basic cost of health insurance coverage, the relationship between health insurance spend in Ireland and cost of public healthcare, and assuming that annual cost of higher stress associated with debt overhang amount to just 10% of the total annual insurance costs, direct health costs alone from the debt crisis can add up to EUR400-500 million per annum. Factoring productivity losses due to stress, the total social, psychological and psychiatric costs of the mortgages arrears can run over a billion.

Costs of foregone entrepreneurship are even harder to quantify, but can be gauged from the overall decline in investment. In 2012 the shortfall in aggregate domestic investment activity compared to 1999-2003 annual average (taking the period before the rapid acceleration in property bubble) was running at ca EUR6.9-7.0 billion. This shortfall is roughly comparable to the above estimated annualized cost of servicing defaulting and at risk mortgages. Gross investment in Ireland is now running at a rate not seen since 1997.  Meanwhile, net expenditure by the local and central Government on current goods and services is running above 2005 levels, same as personal consumption of goods and services. This suggests that our current rates of domestic investment and associated entrepreneurship are down more significantly than personal and Government spending.

In some sectors, things are even worse.  Construction sector is clearly seeing no turnaround with new residential construction permits down 88% in 2012 on the peak, heading for historical low of estimated full-year 14,022 permits based on data through Q3 2012. Extending mortgage arrears crisis or deepening the households’ already significant debt overhang through the means of forcing them into repaying the unsustainable loans will only exacerbate the crisis in Irish construction sector and in all sectors of domestic economy.

In years to come, the mortgages crisis today is likely to cost Irish economy around 10% of our GNP.

And it is unlikely to ease significantly any time soon, since the above costs exclude the effects of likely acceleration in mortgages defaults in months and years to come due to the adverse policy and economic headwinds.

Firstly, ongoing fiscal consolidation is shifting more burden of paying for our State onto the shoulders of Irish households, including those subsumed by the debt crisis. This process is not going to end with Budget 2014.

Secondly, reform of the personal insolvency regime will add fuel to the fire by giving banks disproportional powers over the households in structuring long-term solutions to the mortgages distress. Changes to the Central Bank code of conduct for the banks in dealing with borrowers, along with the accelerated targets for restructuring non-performing mortgages announced this week are likely to push the banks to more aggressively deal with the borrowers. These factors will amplify the rate of mortgages arrears build up, driving more households into temporary relief measures. These measures will structured by the banks in absence of transparent and efficient consumer protection to suit banks’ objectives of extracting all resources out of households for as long as possible before forcing the households into bankruptcy in the end.

Finally, mortgages arrears will continue to rise on foot of weak economic growth and continued re-orientation of the Irish economy away from domestic activity toward MNCs. This headwind closes the loop from the household debt overhang to depressed domestic investment to higher unemployment and lower domestic growth to an even greater debt overhang.

In order to deal with the mortgages crisis, we need a prescriptive approach to long-term solutions based on principles of borrower protection, standardization and transparency.

All lenders operating in Ireland should be required to publish a full list of solutions offered to the distressed borrowers which complies with the minimum standards set out by the Central Bank and a borrowers’ protection watchdog, such as reformed and independent Mabs. The financial criteria and conditions that qualify borrowers for such solutions should be disclosed. The process of finalizing the details of solutions should involve borrowers supported by an adviser, fully resourced to deal with the lender and independent from the lender and the state.

Only by matching borrower and lender powers and resources in a transparent and strictly supervised manner can we achieve a resolution to this crisis. Until then, this economy will continue operating well below its potential rate of growth, condemning generations of Irish people to debt slavery. The status quo of the state granting ever increasing powers to the banks in dealing with mortgages arrears is not sustainable and is likely to lead to both economic misery, continued emigration, and in the long run to political and social discontent. Sixth year into the mortgages crisis of extremely acute nature, we can not afford another round of half-measures and fake solutions.

Box-out:

This week auction of Irish bonds put to some test the theory of yields divergence with the euro area periphery. Compared to Italian Government bonds auction carried out on the same day, Irish 10 year bonds were greeted by the markets with a cheer.  While supportive of the analysts’ consensus view that Ireland is decoupling from the peripheral states, such as Italy, Portugal and Spain, the results of the auction were at least in part driven by factors outside the Irish Government control. This was the first 10 year bond issuance for Ireland in 3 years and the issue came without much of the adverse newsflow surrounding the economy. Complete absence of 10 year bonds in the secondary market prior to the auction assured some of the demand. For Italy, this was the first auction following Fitch downgrade of the sovereign to Baa1 rating – fresh in the memory of the markets. Italian newsflow has also been disappointing recently with elections outcome unnerving the markets and with GDP figures (Italy has reported its 2012 full year growth almost a month ahead of Ireland, which is still to post results for Q4 2012).

Just how much of this week’s result for Ireland can be accounted for by the factors unrelated to the Government policies or real economic performance is impossible to determine. Nonetheless, Minister Noonan’s cheerful references to the auction as ‘extraordinary’ in nature sounds more like a political PR opportunism than of financial realism.

13/3/2013: IMHO press release on CBofI Mortgages Plan

Here is the IMHO press release on today's Central Bank announcement relating to mortgages arrears resolution. This sums up my views and views I agree with.

Press release

March 13th, 2013

Government and Central Bank mortgage plan throws borrowers to the wolves, says Irish Mortgage Holders Organisation

Today’s announcement that the Central Bank of Ireland will set targets for six major banks in relation to restructuring of mortgages in arrears is a sad extension of the failed policies of the past that have allowed Irish mortgages crisis to spin out of control and have resulted in total mortgages arrears of unprecedented proportions.

The latest plan lacks any prescriptive solutions and allows banks to determine the nature, the extent and the application of all solutions while setting the terms and conditions with out any supervision. The plan delivers no improvement in transparency of solutions to be offered to borrowers by the lenders and provides no protection for borrowers against potential abuses by the lenders of their powers.

While the review of the code of conduct is to be welcomed the review fails to deliver a meaningful improvement to the previous practices and does not allow for an effective protections for borrowers.

Mr Elderfield's statement claiming that the regulator intends to remove the current cap on number of times a bank is allowed to contact or call or visit a borrower ahead of the review of the code of conduct is very concerning. In our view, the central bank is underestimating the extent to which the banks are willing to go to pressure borrowers. It also pre-empts the actual review of the code of conduct for mortgage arrears..

The borrower is exposed and has been afforded no protection in this plan. The lenders are incentivized to maximize the rate of extraction of savings and income from the already distressed borrowers prior to completion of any long-term forbearance or restructuring agreements, thus reducing the effective relief that can be accorded the borrower in the end.

The net effect of this plan will be additional stress on mortgage holders and more power to banks without an appropriate safety net or independent arbitration for mortgage holders.

The Irish mortgages crisis, now into its sixth year, is still raging beyond any control of the authorities. Per latest figures from the Central Bank of Ireland, 186,785 mortgages (including BTL) in Ireland are at risk (in arrears, restructured or in repossession), accounting for an unprecedented 25.3% of all mortgage accounts still outstanding. The balance of mortgages at risk,  relative to the total balance of all mortgages outstanding has reached a catastrophic figure of 31.9%. With some 650,000-750,000 estimated people residing in the households with the principal residence in mortgages difficulties, we are witnessing a wholesale destruction of savings, pensions and wealth of several generations of Irish people.

State response to this crisis to-date has been woefully inadequate and erring on the side of the financial institutions. Today’s announcement offers no hope for any meaningful change in the ways Irish authorities treat ordinary borrowers in distress.

For further information contact:

David Hall

or

Constantin Gurdgiev

IMHO