29/12/18: Vultures, Prime Ministers and the Mud of 'Values' in Newtonian Finance

In a recent conversation with the Irish Times (https://www.irishtimes.com/news/politics/leo-varadkar-defends-vulture-funds-and-criticises-practices-of-irish-banks-1.3742477), Ireland’s Taoiseach (Prime Minister), Leo Varadkar, “has defended so-called vulture funds”, primarily U.S-originating buyers of distressed performing and non-performing mortgages, “stating that they are more effective at writing down debts than banks which “extend and pretend” rather than reaching settlements with homeowners.”

Mr Varadkar alleged that:

• “…homeowners whose mortgages were sold off to such funds would be “no worse off” than those whose loans were owned by the banks.”
• And, “he disagreed with the use of the term “vulture fund” and criticised the practices of our own banks.”

A direct quote: “I’m always reluctant to use the term vulture funds because it is a political term. What we’re talking about here is investment banks, investment funds, finance houses, there are lots of different things and lots of different financial entities there and the term is used, vulture funds. But you’ll know from the numbers that they’re often better at write-downs of loans than our own banks. Our own banks tend to ‘extend and pretend’ rather than coming to settlements with people.”

Let’s deal with Mr. Varadkar’s claims and statements:


1) Is ‘vulture fund’ or VF a political term? 

The answer is no.

As a professor of finance, I use this term without any political context or value judgement. As do Investopedia, and the Corporate Finance Institute (CFI), along with a myriad of text books in finance and investment, as do the Wall Street, Bloomberg, Reuters, Wall Street Journal… In fact, all of the financial sector. For example, CFI defines VFs as “a subset of hedge funds that invest in distressed securities that have a high chance of default”. So, Mr. Toaiseach, the term ‘vulture fund’ is a precisely defined concept in traditional, mainstream finance. It is not a political term and it is not a term of ethical value assigned to a specific undertaking. In fact, as a finance practitioner and academic, I see both positive and negative functions of the VFs in the markets and society at large. Just as a biologist would identify positive aspects of the vulture species in natural environment.

Vulture Funds are invested in and often operated by ‘different financial entities’, including ‘investment banks’. They are a form of ‘investment funds’ when they are stand-alone undertakings. Which covers the entirety of the Taoiseach’s argument on this.

As an aside, a term ‘financial house’ used by the Taoiseach is not a definable concept in finance in relation to mortgages or other assets lending. Instead, FT defines a financial house as “A financial institution that lends to people or businesses, so that they can buy things such as cars or machinery. Finance companies are often part of commercial banks, but operate independently.” 

In other words, financial organisations and entities purchasing distressed and insolvent Irish mortgages cannot be classified as ‘financial houses’, and any other classification of them allows for the use of the term Vulture Fund.


2) Can VFs be regulated into compliance with the practices other lenders are forced to adhere to?

The answer is no. 

They simply cannot, because VFs always, by their own definition, pursue a strategy of recovery of asset value, not the recovery of debtor solvency. Regulating them as any other undertaking, e.g. banks, will remove their ability to exercise their specific strategies. It will de facto make them non-VFs.

Here is CFI on the subject: ““Vulture” is a metaphor that compares vulture funds to the behavior of vulture birds that prey on carcasses to extract whatever they can find in their defenseless victims.” Note the qualifier: defenceless victims: CFI is not a softy-lefty entity that promotes ‘victims rights’, but even corporate finance professionals recognise the functional aspects of the vulture funds. VFs cannot trade/exist on the same terms of traditional lenders, because: (1) they are not lenders (they do not pursue transformation of short term funding into long term assets, as banks do), (2) they have zero (repeat zero) social responsibility (no legislation can induce them to have any such a mandate in terms of social responsibility in funding assets as banks have, because such a mandate would invalidate the VFs investment model), and (3) unlike lenders, VFs deal with specific types of assets and specific areas of risk-pricing that cannot be covered by the lending markets precisely because of the implied conflict between the lenders’ longer-term market strategies, and the need to recover and capture asset values. In other words, you can’t make vultures be vegans. And I place zero political or social value in these arguments. It’s pure finance, Taoiseach.

“Vulture funds deal with distressed securities, which have a high level of default and are in or near bankruptcy. The funds purchase securities from struggling debtors with the aim of making substantial monetary gains by bringing recovery actions against the owners. In the past, vulture funds have had success in bringing recovery actions against sovereign governments and making profits from an already struggling economy.”

What this tells us is (a) VFs pursue legal seizures of assets from debtors as a norm (in the case of mortgage holders - this amounts to evictions of renters and forced sales of owner occupied properties); and (b) VFs are good enough at that job to force sovereign nations into repayments (which puts into question even the theory of efficacy of any consumer protections the Government can put forward to restrict their practices).


3) Are debtors better off or as well off under the vulture fund management of their debts as under other banks’ management?

The answer is: it depends. 

If a debtor genuinely cannot recover from insolvency, then forcing earlier insolvency onto them actually provides a benefit of offering an earlier restart to a ‘normal’ financial functioning of the debtor. This is the ‘clean slate’ argument for insolvency, not for VFs. In order to achieve this benefit, the insolvency must be done with a pass-through of losses write-downs to the debtor (avoiding perpetual debt jail for the defaulting debtor). The VFs simply do not do this on any appreciable scale, and are even less likely to do so in the tail end of the insolvency markets (later into insolvency cycle).

Why? Because they have no financial capacity to do so. Do a simple math: suppose a VF purchases an asset for EUR60 on EUR100 of debt face value (40% discount on par). Costs of managing the asset can be as high as 5%. Cost of capital (and/or expected market returns) for VFs is ca 15%-18% due to high risk involved. The asset is assumed to return nothing - it is severely impaired, like a mortgage that is not being re-paid. To foreclose the asset, the VF has to pay another cost of, say, 10% (legal costs, eviction-related and enforcement costs, etc including costs involved in disposing of underlying property against which the mortgage is written). And the process can take 1-2 years. Suppose we take the mid-point of this at 1.5 years. There is uncertainty about the legal costs and timings involved. Suppose it involves 10% of the total mortgages pool purchased by the fund. The cost or recovering funds for the VF, accounting for compounded interest on VF’s own funding, is now EUR22.99-25.91. Take the lower number of this range, at EUR22.99 per EUR60 asset purchased. Suppose the VF forecloses on the house and sells it. Suppose the house is an ‘average’ one, aka, consistent with the current residential property price index metrics, and the mortgage was written around 2005-2007 period. This means the house is roughly 20 percent under the valuation of the mortgage at the mortgage origination. So the VF will get EUR80 selling price on EUR100 loan. If the mortgage was 90% LTV, roughly EUR90. Take the latter, more favourable number to the VF. and allow for 1.5 years cumulative asset growth of 20% (property values inflation). VF’s cumulative returns over 1.5 years are 25.06% or 16.04% annualised. The VF has barely performed to its market returns expectations. There is zero room for the fund to commit any write downs to homeowners in this case. None in theory, none in practice.

In contrast, the banks do not face market expectation of returns in excess of 15% pa on their assets, nor do they face the cost of funding at 15-18%, which means they can afford passing discounts to the homeowners.

The situation is entirely different, when a debtor can recover from insolvency, e.g. via pass-through to the debtor of market value discounts on their debt (30-40% that VFs would get in the sale by the bank), or via restructuring of the loans, a VF will never - repeat, never - allow for such a restructuring, because it results in extending the holding period of the asset required for recovery. VFs are not in business of extending, and, yes, Taoiseach is correct on this, they are also not in business of pretending.

Now, the logic of selling non-recoverable (via normal routes of working out) assets to VFs can accelerate the speed of insolvency. But the logic of selling recoverable assets to VFs only forces insolvency onto borrowers where they do not require such for the recovery. Any restructured, but performing mortgages sold to VFs will be inevitably foreclosed (insolvency created), even though they are recoverable (insolvency is not optimal). And there is nothing the Government can do, short of forcing VFs to become non-VFs, to avoid this.

I append zero, repeat zero, social impact costs to this analysis. These are, however, material in the case of mortgages and foreclosures, especially due to the adverse impact of such actions on demand for social housing, and in light of ongoing housing crisis in Ireland.


4) Are VFs subject to “the the same regulations and the same consumer protections as the banks,” as the Taoiseach claimed?

Answer is no. 

VFs do not adhere to the same regulations and the same oversight as the banks. The proof of this is the fact that Government is currently supporting legislative attempts to bring VFs into the regulatory net, aka the Michael McGrath’s bill that FG support. If the Government is supporting a new legislation, the Government is admitting that current regime of regulation for the VFs is not sufficiently close to that of the banks. If the current regime is sufficient to cover consumer protection to the extent that the banks regulations are, then why would there be a need for a new legislation?


In a summary: the Taoiseach is simply out of his depth when it comes to dealing with the simple, well-established in mainstream finance, concept, such as the VFs. This is doubly-worrying, because the Taoiseach is leading the charge to provide a new regulatory regime, to cover the areas that he appears to have little understanding of.

Per Taoiseach: “We support that and we are going to make sure that anyone who has a mortgage, who is repaying their mortgage, making a reasonable effort to pay it, continues to have the exact same protections, the exact same consumer protections as they would if the loan was still owned by the banks.”

This is a wonderfully touchy statement of the objective. Alas, Mr. Taoiseach, you can’t have asset ownership by the VFs combined with the regulatory protection measures that invalidate VFs’ actual business model. And you can’t scold the banks for ‘extending and pretending’ on borrowers, while at the same time codifying these ‘extensions’ for all investment funds, including the VFs. The cake vanishes once you eat it. Finance is Newtonian, in the end.

8/12/15: Irish Rents: A Longer Term View

Much has been written about the plight of renters in Ireland. Much of it is correct - there have been some atrocious rises in rents, primarily private rents, in recent years. Year on year, in the last 3 months (though October 2015), private rents rose 10.35% against local authority rents falling 1.11% and mortgage interest declining 8.88%. A year ago - over 3mo through October 2014, private rents inflation was running at 8.95% against local authorities rents rising 1.06% and mortgage interest falling 10.26%.

Which makes for a depressing reading for the renters. Actual rents paid by tenants were up 8.83% in 3mo period through October 2015 and they rose 7.93% y/y in the 3mo period through October 2014. So inflation rate in rents is going up.

However, rents inflation has to be taken over the longer period of time. And here, things are not as clear cut as in the short run. Comparable CSO data goes only back to January 2003. So we have no reliable benchmark for earlier periods, albeit some bootstrapped comparatives are possible. As the result, let’s consider 1Q 2003 as the starting point for inflation - with a host of caveats attached.

Setting 1Q 2003 average level of price indices at 100, inflation in overall Housing, water, electricity, gas and other fuels category that includes rents, mortgages and other housing costs stood at 55.94% in October 2015. Actual rentals paid by tenants over the same period of time were up 26.93%. Private rents rose over 1Q 2003 to October 2015 by 18.62% while local authority rents rose 73.36% and mortgages rose 24.33%.

In other words, cumulated inflation since 1Q 2003 was higher in Local authority rents and mortgage interest than in private rents. Chart below illustrates:

Pretty much the same picture emerges if we take the entire 2003 average (not just 1Q 2003) as a benchmark. In fact, compared to 2003 levels, mortgage interest inflation is just above actual rents paid and is still higher than private rents inflation.

Setting levels aside, let’s take a look at inflation rates (y/y changes in indices). Historical average y/y inflation in Housing, Water, Electricity, Gas & Other fuels category is 4.50% against historical mortgages interest costs inflation of 5.29%, historical private rents inflation of 1.56%, historical local authorities rents inflation of 4.56% and historical inflation in actual rentals paid by tenants of 2.00%.

Once again, timing is everything: given low level of transactions in the purchasing markets for property over the current crisis, majority of mortgage payees today have lived through the period of pre-crisis spike in mortgage costs. Their current savings (reduced cost of mortgages interest) are simply lagged off-sets to this high cost reality of the past. On the other hand, renters faced far lower volatility in rents than mortgagees in mortgage interest. Their current pain is a delayed cost uplift on past moderation in inflation.

Which is, of course, not to say there is less pain because of this or that Irish rental markets are somehow functioning well in terms of pricing. Just to point out that timing of comparatives is important and that one should be careful pitching the (real) pain of Irish renters against the allegedly easy-times for other participants in the markets.

12/6/15: Did Ireland Abandon Homeowners in Need?

An short, but informative article on the issue of mortgages arrears in Ireland:
http://www.herald.ie/news/state-has-abandoned-mortgage-holders-31296163.html

The article correctly points to the lack of state engagement with the issue of long term arrears and the banks' strategy of extend-and-pretend in hope that rising house prices will maximise their returns on future foreclosures.

But the real, the main, point here is whether the Irish state has abandoned the homeowners in need. In my view - the Irish State was never concerned with the interests of homeowners. To think otherwise is to delude oneself once again into a fallacy of seeing the State as an agent concerned with the interests of the people.

Here are the excerpts from the recent study commissioned by the EU Parliament on changes in core rights accruing to individuals across a number of European nations in the wake of the post-crisis austerity programmes. The selection addresses the view of the reporters on Ireland in the context of the right to housing.

"Right to housing was affected in Belgium, Cyprus, Ireland and Spain in two
principal ways: with the increase of foreclosures and evictions and by the
interventions into the allocation of social housing and rental allowances." (page 15)

Note: this is not 'new' as in being indicative of an 'abandonment' of homeowners - rather, this is an assessment of systemic, long-term changes enacted by the State. And it covers both: private structure of homeownership and rental markets, and public provision of social housing.

"At the same time, in Belgium, Cyprus and Ireland, rental allowances or the
availability of social housing are inadequate and insufficient to respond to the needs of people in the wake of the crisis" (page 123)

"The Irish social housing budget was cut by 36% in 2011 and by another 26% in 2012. At the same time, with the loss of jobs and turbulence in the labour market, it is not surprising that the number of households on waiting lists for social housing increased by 75% between 2008 and 2011, i.e. from 56,000 to 98,000. Moreover, it is estimated that in 2011, approximately 5,000 people were homeless in Ireland compared to 3,157 people in 2008. The continued rise in rents, particularly in the last 12 months, is seen as contributing to the problem498, while rent supplements, having been reduced by 20% to 25%, are becoming increasingly inadequate with the severe budget cuts. Certain vulnerable groups have been adversely affected in Ireland. Travellers have
experienced 85% spending cuts on housing since 2008. Moreover, resource allocations for asylum seeker accommodation were reduced by 13% in 20115. In 2008, 36% of all single-parent households were on the waiting list for social housing and one fifth of all people who relied on a rent supplement to meet their rental costs were single parents. The capital assistance scheme, which used to house people with disabilities, was also reduced from EUR 145 million in 2010, to EUR 50 million in 2012" (page 125)

So here you have it - the EU report does not document an act of abandonment as a departure from past policy. It suggests systemic, long term trend toward such abandonment. In other words, the report findings imply a lack of concern or interest on behalf of the State to secure rights to housing from the start of the crisis, not a sudden change of heart.

Full EU report is available here: EUP (2015: PE 510.021) "The impact of the crisis on fundamental rights across Member States of the EU Comparative analysis". Study for the Libe Committee, Policy Department C: Citizens’ Rights and Constitutional Affairs, European Parliament. February 2015: http://www.europarl.europa.eu/RegData/etudes/STUD/2015/510021/IPOL_STU(2015)510021_EN.pdf 

9/4/15: IMHO Proposals Concerning Home Repossessions

IMHO proposals to the Department of Finance on the Risk of Significant Home Repossessions is now available here: https://www.evernote.com/shard/s442/sh/e8e02a47-30c0-49c5-9846-d09f1ab9c18f/20f2d8894a0ab47c9fde09b245120436. 

13/5/2014: Q1 2014 Mortgages Approvals Data: There Is a Rise, But...

Undoubtedly, you heard much about the latest IBF data on mortgages approvals showing huge increases in lending in March 2014 compared to March 2013. But are these increases as dramatic as the IBF claims?

Well, let's take a look at the data:

• In Q1 2014, total number of mortgages approved for house purchase as opposed to remortgaging was 4,357 which represents a large increase of 55% y/y. Remortgages approved rose to 334, up 18% y/y. And total number of mortgages approved is up 51% to 4,691. Sounds impressive, until your remember that November 2012-April 2013 was the period of huge volatility due to changes in tax breaks on house purchases. But more on this point below.
• By value, total mortgages approved in Q1 2014 rose to EUR782 million, or 56% up on Q1 2013. House purchases mortgages value was at EUR750 million, up 58% y/y and remortgaging was up at EUR32 million or +19% y/y.
• Average mortgage issued for house purchase purpose stood at EUR172,027 which is up 3% y/y, average re-mortgaging loan was EUR93,954 or down 1% y/y. So average mortgage issued for both purposes was EUR136,854 which is up 3% y/y.

Two charts to illustrate above numbers:

Note two things from above chart:

1. With such a large jump in March, number of mortgages approved is still barely above the trend line. Which might be a sign of solid technical support for further upside.
2. Average mortgage value, having risen slightly above the trend line is still consistent with downward pressure on mortgages issued. Things are still solidly trending downside here.

Note to the above chart: we are bang-on the trend line in March, so nothing surprising in the rise - it is in line with longer term trend. The series continue to show support to the upside, which is a good news.

But here is the kicker. Coming back to that problem period of November 2012 - April 2013, we have a pesky little problem: how do we compensate for the one-off change in mortgages issuance that took place due to changes in taxation. One way (pretty much the only way) is to compute trend and use it to replace the actual outruns in these 'troublesome' months. I've done this before, so you will be familiar with the chart below:

Here's the thing: in IBF data we have a 53% rise in house purchase mortgages approved in March 2014 y/y. Adjusting for the one-off tax changes yields a much shallower rise - of 8.2%. Ditto for value data: IBF data shows 50.3% rise, but adjusting for volatility induced by tax changes, we have a 5.4% rise.

Still, nice bit - there is a rise...

28/3/2014: 'Recovery' in Mortgages Lending... Back to 1995...

In previous post I have shown that IBF mortgages approvals data is primarily driven by the excessive volatility recorded at the end of 2012 - beginning of 2013, thus skewing the entire result for February 2014. The details here: http://trueeconomics.blogspot.ie/2014/03/2832014-irish-mortgages-approvals.html

However, we can also look at quarterly data and extend the series to cover periods before IBF data became available. Based on CSO's heavily lagging (the latest we have is Q3 2013) series for House Loans Approved and Paid and extending it with IBF data for Q4 2013, we have data on the issue of number of loans approved and their value from Q1 1975 through Q4 2013. We can also use January-February 2014 data from IBF to estimate Q1 2014 with relative accuracy.

Here are the results:

The argument is that January-February data and indeed data for the later part of 2013 shows improvement in the markets, and even recovery in the markets.

In the last 2 quarters, based on IBF data, there were around 4,510-4,530 house loans approved. This represents 8th lowest quarterly result for the entire history. This also represents lower levels of lending than in Q2 and Q3 2013. Prior to the onset of the crisis, there is not a single quarter on record when there were fewer new loans issued by numbers.

In terms of volumes of lending, without adjusting for inflation, things are only marginally better. Volume of lending over Q4 2013-Q1 2014 averaged at EUR809 million per quarter. This is comparable (but slightly lower) than levels of lending attained in Q4 1995-Q1 1996.

As you can see from the chart, you need to have pretty vivid imagination to spot any recovery in the above series.

28/3/2014: Irish Mortgages Approvals: February 2014

There were some boisterous reports in the media today about the latest IBF data on mortgages approvals in Ireland, covering February 2014.

Here are the facts, some of uncomfortable nature for the 'property markets are back' crowd.

1. Year on year, mortgages approved for house purchases rose 49.5% which, on the surface, is a massive nearly 50% jump, suggesting huge improvement in the markets (see below on this).
2. However, 3mo average approvals through February 2014 are down 16.2% on 3mo average approvals through November 2013. Which suggests that things are still running slower in recent months than they did before.
3. Top-up mortgages approvals have declined: down 6.6% y/y and down 27.3% on 3mo average basis compared to previous 3mo period.
4. Average value of mortgage approved for house purchase is up 6.5% y/y, but it is down 5.4% for 3mo average through February, compared to 3mo average through November 2013. So mortgages being approved do not support price increases in recent months. Or put differently, mortgages being approved afford lesser LTVs on homes.

Chart to illustrate:

Key takeaways from the chart above:

• Number of new mortgages approved is running well below the trend, so improvement in February is driven by something other than market growth. Instead, it is driven (as argued below) by extraordinary volatility in approvals around the end of 2012 - beginning of 2013, which was down to expiration of tax breaks at the end of 2012. 
• Average mortgage approved is on-trend and the trend is down not up. So things are getting worse, not better.

Next, volume of lending:

1. Total volume of loans issued for house purchase went up 59.1% y/y in February 2014, but
2. 3mo average through February 2014 was down 20.9% on 3mo average through November 2013. In fact, February 2014 lending was the second lowest level over 10 months, with the worst recorded in January 2014. The start of this year is worse than any 2 months period since January-February 2013, which were distorted by end of tax break in 2012 and stripping these out, this years first two months are the worst since May 2012.

Key takeaways from the chart above:

• February 'improvement' puts us below trend and within the general trend direction, so the reading is weak, but consistent with upward trend.

Now on to the main bit: What happened to drive February figures so dramatically up in y/y terms? The next chart explains in full (click on the chart to enlarge):

Key takeaways from the chart above:

• Statistically-speaking, all of the massive increase y/y in lending for house purchases in Ireland recorded this February is down to huge distortion generated in the data by the end of tax breaks in December 2012. There is no other story to tell.

12/3/2014: (If You Missed Them) Here're Mortgages Approvals Numbers

Since we are due data on these soon-ish, only a quick update on IBF data for mortgages approvals and drawdowns. Mostly charts with quick comments.

Here are monthly results through January 2014 for approvals:

We are solidly on-trend on average mortgage approved, below trend on number of new accounts approved. Year on year, however, things are better: 3mo through January 2014 are up on same period in 2013 by some 11.36% for house purchases, 3.47% for re-mortgages and top-ups and up 10.77% for all mortgages (by number of accounts). Average mortgages (on 3mo y/y basis as above) are up 4.72% for house purchases, down 1.3% for re-mortgages and top-ups and up 5.09% for all mortgages.

Overall volume of mortgages approvals by total value are trending also nicely, though the latest numbers came in below trend and are testing some resistance levels:

Drawdowns data is only reported on a quarterly basis, so here is the latest (through Q4 2013):

The above shows us just how abysmal the metric performance has been over the last 3 years. Basically no life in the series to speak of.

5/11/2013: My op-ed for Journal.ie on IMHO/AIB initiative

Yesterday, Irish Mortgage Holders Organisation (IMHO) announced the new pilot scheme to help Irish mortgagees in dealing with their lender, the AIB Group (see details here: http://trueeconomics.blogspot.ie/2013/11/4112013-imhos-latest-initiative-to-help.html).

My op-ed on Journal.ie explains this new initiative and the background to the project: http://www.thejournal.ie/readme/imho-aib-group-mortgage-arrears-1160947-Nov2013/

31/10/2013: IBF data on Mortgages Approvals: September 2013

Having just covered data on Residential Property Prices here (http://trueeconomics.blogspot.ie/2013/10/31102013-irish-residential-property.html), time to also update the data from the IBF on Irish mortgages approvals.

Excluding mortgages top-ups, lending for house purchases improved in September, with total of 1,544 new mortgages approved, up 10.4% y/y. Cumulative 3mo issuance of mortgages is now up 11.5% on previous quarter and 13.4% up y/y.

Average mortgage approved, however, stood at EUR174,302 in September, down 4.78% y/y. 3mo average mortgage approved was down 0.12% on previous quarter and down 3.69% y/y.

Year-to-date (Q1-Q3) cumulative number of mortgages approved rose 7.5% y/y while average mortgage approved by value fell 2.49%.

As the result of the above, total value of mortgages approved stood at EUR269 million in September, up 5.08% y/y. Q1-Q3 volume of mortgages approved rose 5.12% y on same period 2012.

So overall, reasonable gains, but off extremely low levels.

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.

14/9/2013: IMHO signs agreement with Alsop Space Ltd

Irish Mortgage Holders Association have signed an agreement with Alsop Space Ltd that ensures that Alsop Space Ltd will not undertake auctions of repossesses Irish primary residences.

Keep an eye out for more details: https://www.mortgageholders.ie/

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

4/4/2013: IMF Analysis of Recent Personal Insolvency Reforms in Europe

In the previous post, I covered in 4 charts (via IMF research paper) the extent of the European debt crisis (link: http://trueeconomics.blogspot.com/2013/04/442013-real-debt-european-crisis-in-4.html?spref=tw ). Here, based on the same source, proposed solutions for dealing with the household debt crisis.


Per IMF:

"A number of European countries have introduced or refined personal insolvency regimes to achieve orderly resolution of the debt overhang over time." Note that here, "personal insolvency law may also cover natural persons who are engaged in business activities (traders or merchants)", which is of course something unaddressed explicitly in Irish reforms despite the fact that current system of insolvency effectively spells an end to the careers of many professionals and businessmen and businesswomen.

"For example, Estonia, Iceland, Italy, Latvia, Lithuania, and Poland adopted or amended the personal insolvency law. The Irish Parliament recently adopted an entirely new personal insolvency law to, inter alia; shorten the discharge period from 12 years to 3 years subject to certain conditions. [The bill also allows the court to require repayments for up to five years in the bankruptcy process.]

Here's a very interesting bit: "The German government is also considering a reform of the personal insolvency regime that includes a shortening of the
discharge period. [The proposal envisages to reduce the discharge period from six years to three years provided that at least 25 percent of all debt must be repaid by an individual debtor]." Now, again, interestingly, Irish reforms provide for no set bounds for repayment, thus implying that there is no set limit resolution to the post-bankruptcy liability.

"In designing such regimes, these countries have faced a number of challenges. First, unlike corporate insolvency, there is no established international best practice at all in this area, especially with regard to the treatment of residential mortgages in insolvency proceedings. Second, as individuals are involved, the design of the law is inevitably driven by social policy considerations; these include the goal to reinvigorate individual productive potential in the mainstream economy and to reduce the social costs of leaving debtors in a state of perpetual debt distress. [Note: this is obviously not a core objective for the Irish reform, as it provides virtually no protection to the borrower during the voluntary arrangements period prior to bankruptcy.] Third, the law needs to keep an appropriate balance between maintaining credit discipline and affording financially responsible debtors a fresh start. Finally, the design of the law needs to take into account institutional infrastructure that is critical to the predictable and transparent implementation of the law, including the availability and quality of judges and trustees, administrative capacity, accounting, and valuation systems. [Note: in the Irish reforms case, none of these objectives are met and in fact some are directly violated by the reforms.]"

"A number of basic design features for an economically efficient personal insolvency law have emerged from the early cross-country experience:

• Allocate risks among parties in a fair and equitable manner; [Not delivered in the Irish case at all]
• Provide a fresh start through discharge of financially responsible individuals from the liabilities at the end of insolvency proceedings (typically after 3-5 years); [Provided in the Irish reforms]
• Establish appropriate filing criteria to make insolvency procedures accessible to individual debtors while minimizing abuse; [Irish reforms maximise potential for abuse in pre-insolvency processes of so-called voluntary arrangements by ensuring the banks have asymmetric veto power over arrangements, the banks have sole power of determination of terms and conditions for voluntary arrangements workout period, the banks control and own arbitration process, the banks are not compelled to transparently disclose their solutions and conditions for accessing these solutions, etc].
• Impose automatic and temporary stay on enforcement actions with adequate safeguards of creditor interests; [This is contradicted by the stated Government intention to speed up forced foreclosures as a part of restructuring of the banks mortgages books]
• Set repayment terms that accurately reflect the debtor’s capacity to repay to ensure an effective fresh start; and [Note: it is hard to imagine how this can be achieved in the environment of Irish reforms as outlined in the bullet point 3 above]
• Recognize foreign proceedings and enable cross-border cooperation to avoid bankruptcy tourism. [It is unclear how Irish reforms can reduce incentives to avail of the UK system given the conditions for insolvency in Ireland involve up to 6 years of voluntary work-out plus insolvency process, against 12 months in the UK].

What's happening beyond the above menu?

"The unprecedented challenge of excessive mortgage debt has prompted some European countries to introduce special legislation. [Norway, when facing its own banking crisis and recession in the early 1990s, adopted the Debt Reorganization Act in 1993 to provide debt relief to debtors who are unable to meet their obligations for a period of time. The law provides for voluntary debt settlement and compulsory debt settlement (e.g., reduction of principal of a residential mortgage to 110 percent of the market value of the residence). Now, wait, we were told that such measures (also deployed in Iceland) have never been tried and would lead to a wholesale collapse of the economy...] "

"Faced with wide-scale household mortgage distress in the aftermath of the recent crisis and the bursting of the real estate bubble, Greece, Spain and Portugal have introduced special legislation to address unsustainable residential mortgage debt burdens on households while limiting adverse effects on banks’ balance sheets and minimizing moral hazard."

All of these regimes differ in several respects:

1. "...While the Spanish regime allows financing institutions to opt into the scheme [Once a financial institution opts in, it must implement for at least two years a Code of Good Practices which provides for measures aimed at achieving a viable mortgage restructuring for debtors covered by the regime., banks’ participation is mandatory for Greece and Portugal]. 
2. ... Spain and Portugal allow mortgage debtors, subject to certain conditions and as a last resort, to transfer the mortgaged property title to the bank (or a government agency in Portugal) and obtain cancellation of the mortgage debt (up to the assessed value of the residence in Portugal). [Under the Spanish regime, the transfer of the property title and the cancellation of the debt can only happen after it has been proven that neither restructuring of the debt nor application of a partial release is viable.] Greece, on the other hand, allows the court to grant a full discharge of the mortgage debt if the debtor repays up to 85 percent of the commercial value of the principal residence determined by the court over up to 20 years. It is yet too early to assess the effectiveness of the Spain and Portugal regimes, but the Greek authorities are revisiting their framework due to its low rate of successful restructuring to date."

"A number of countries have adopted measures to facilitate out of court settlement for distressed mortgages. For example, Iceland, Ireland, and Latvia adopted voluntary guidelines or codes of conduct that provide guidance on mortgage restructurings for borrowers in financial distress. In 2012, Portugal introduced voluntary out of court guidelines for banks to restructure household debt including residential mortgages more generally with the assistance of debt mediation facilities. Estonia adopted a law effective in April 2011 aimed at supporting the out of court restructuring of debt obligation, including mortgages, of natural persons facing financial difficulties — although the procedure relies heavily on court input. To reduce the burden on the court system, the personal insolvency law recently adopted by the Irish Parliament introduces three non-judicial debt settlement procedures for household debt including a personal insolvency arrangement for settlement of secured debt up to €3 million and unsecured debt (no limit) over six to seven years. The effectiveness of these approaches in tackling mortgage distress remains to be seen."

23/3/2013: Sunday Times 10/03/2013

This is an unedited version of my Sunday Times article from March 10.


Some two years ago in these very pages, I have described the prospects for the Irish economy as following a flatline trend with occasional volatility. In other words, back in the beginning of 2010, the economy’s prospects for the near-term future were consistent with an L-shaped recovery: stabilization followed by near-zero growth.

Taking the first three quarters of 2012, in headline terms, the above prediction has translated into 2009 to 2012 GDP growth of just 0.22% per annum, GNP decline of  0.16% per annum and domestic demand drop of 4.81% per annum. Again, let’s take a look at the above numbers from a different angle. Compared to the pre-crisis levels, the latest GDP data shows that over 2011-2012, Irish economy was able to close just 22% of the gap between GDP peak and the Great Recession trough, implying that it will take Ireland through the end of 2014 before we get our GDP back to the half-point of the Great Recession. At the same time, Domestic demand continued to hit crisis period lows in 2012 and all international projections show that 2013 will be another post-2007 low for these data series.

With these rather depressing statistics in mind, one is warranted to take with a grain of salt ever-more frequent and boisterous pronouncements from the Government that Irish economy has ‘turned the corner’. Ditto for the ever-more saccharine messages from the EU policymakers to the ‘best pupil’ in their austerity policies ‘class’.

And the most recent data – through Q4 2012 and January-February 2013 – is offering no signs of any statistically significant improvements in the economy compared to the rather abysmal 2012.

Mortgages arrears were once again up in the last quarter of 2012. While the rate of increases was markedly slower than in previous quarters, number of accounts currently in arrears 21.4% year on year. As of the end of 2012, some 186,785 private residencies-related mortgages are either in arrears, in temporary restructuring or in the process of repossessions – almost 25% of all accounts outstanding  if we were to use as the base total accounts numbers comparable across the 2009-2012 horizon.  All in, some 650,000-700,000 Irish residents are currently under water when it comes to paying on their original mortgages. Some turnaround in the economy to witness.

Data for January-February 2013 on new cars registrations shows that not only the motor trade is continuing to suffer from on-going collapse in sales, but that there is no indication of any substantial improvement in either the Irish households or the Irish SMEs outlook for the future. New private cars registrations are down 20% year-on-year over the first two months of 2013, while new goods vehicles registrations are down 21.4%. This shows clearly that Irish consumers are not engaged in purchasing large-ticket items and, supported by the declines in durable goods consumption evident in the retail sales data, signals that consumers have little real credence in the ‘green shoots’ theory espoused by our Government officials and business leaders. Lack of demand uplift in goods vehicles, on the other hand, shows that when it comes to capital investment, Irish businesses are also refusing to buy the hype of economic turnaround. In any cyclical recovery, capital expenditure, especially on rapidly depreciating items such as vehicles used in transporting goods for wholesale and retail trade, logistics and transportation services, is one of the leading indicators of improving economic conditions. Data for the first two months of this year shows no such uplift.

Core retail sales, once stripping out motor sales, are showing a slightly more upbeat activity. While all retail business activity has declined on average over 3 months through January 2013 compared to year ago, some encouraging signs of uplift were present in the Department Stores sales, and sales of electrical goods when it comes to volume and value of sales. Nonetheless, two factors continue to characterize Irish domestic consumption: extremely low activity from which any increases might take place, and exceptionally anemic trend in any rises we do record.

On the investment front, gross domestic capital investment remained basically unchanged in the first 3 quarters of 2012 compared to 2011,ann there are currently no signs that this situation has changed since the end of Q3 2012. We are now into the fourth consecutive year of gross investment failing to cover amortisation and depreciation of the capital stock accumulated over the years of the Celtic Tiger. Recalling that our growth success over 1992-1998 was predicated on a rapid catching up in capital stock and quality relative to our, at the time more prosperous European partners, this means that the ongoing crisis is effectively erasing any capital gains achieved post 1999.

In short, domestic side of the economy shows no green shoots of any harvestable variety. And the potential headwinds we are likely to face in the near-term future are still severe.

In property markets and when it comes to mortgages arrears, we face a long list of risks that are yet to play out.  Impacts of property taxes introduced in the Budget 2013, the upcoming lifting of the banking guarantees,  and the saga of the Personal Insolvency regime reforms all represent distinct threats to the fragile stabilisations achieved in these areas of the economy.

On business investment front risks are also mounting, rather than abating. Continued lack of bank credit and strong indications that in the near term Irish banks are likely to follow their other Euro area counterparts in dramatically hiking the retail interest rates for both existent and new loans.

When it comes to consumers’ appetite for spending, latest consumer confidence data shows significant deterioration in confidence in February, compared to January 2013 and to 2012 average. If anything, when it comes to consumers’ reported outlook for 2013, things are getting worse relative to 2012, rather than better.

Which leaves us with the Government’s old favorite signal of the recovery: Irish exports.  The hype about Irish external trade prowess is such, that even a usually somber IMF has recently waded in with a lengthy paper outlining how Ireland is likely to turn back to Celtic Tiger era prosperity on foot of booming exports.  In summary, the IMF missive, titled Boosting Competitiveness to Grow Out of Debt – Can Ireland Find a Way Back to Its Future concluded that “Ireland is poised to return to its path of strong growth and low imbalances” on foot of “enhanced competitiveness”.

The idea that ‘exports-led recovery’ is Ireland’s only salvation from the systemic and structural crises we face is not new. Previous Government put as much credence into this proposition as the current one. Alas, this idea – as I have pointed out repeatedly – is simply not reflected in the reality of the Irish economy for a number of reasons.

It is true that Irish exports growth has improved significantly during 2009-2012 period, rising from negative 3.75% in 2009 to a positive 6.25% in 2010 and 5% in 2011. In the first three quarters of 2012, exports of goods and services were up 6.8% on the same period of 2011.

Alas, the composition of our exports has shifted dramatically toward more services exports, as opposed to goods exports. In addition to reducing the overall level of real economic activity and employment associated with every euro worth of exports, this shift also has meant a number of changes that further divorce our external trade activity from economy. Firstly, most of employment creation in the exports-oriented services sectors, such as International Finance and ICT services, is oriented toward specialist, highly educated foreign employees, instead of domestic unemployed or underemployed individuals. Secondly, services exports are associated with greater cost (or imports) intensities as they require higher payments for patents and intellectual property, which are neither taxed in Ireland, nor are developed here. This means that while exports of services generate high revenues, much of these revenues is not captured within our economy. Thirdly, exports of services, as opposed to exports of goods, are more concentrated in a handful of giant MNCs. This fact, known as the ‘Google effect’ drives up the cost of hiring skilled workers for Irish SMEs, reduces margins at Irish enterprises, lowers investment into Irish SMEs, and actually undermines our competitiveness, rather than improving it.

In short, booming exports along the current trend can actually cost this economy its ability to sustain indigenous entrepreneurship and investment in the long run. Instead of supporting growth and recovery, the green shoots of some of our exporting activities can turn out to be super-strong weeds of the economy suffering from a classical Dutch disease where resources flow to an increasingly inefficient use in specialist sectors, exposing the society and the economy at large to future adverse shocks.

Lastly, as with other indicators, the latest data, covering only goods exports, shows that our external trade is suffering from a significant slowdown in global demand and the pharmaceutical sector patent cliff. Once again, I warned about both of these factors more than a year ago.

At the same time, on the more positive note, the ongoing US and global economic recovery should provide some support for goods exports from Ireland, especially in the areas relating to capital investment goods and equipment in months ahead.

In short, the miracle of the ‘exports-led recovery’ is simply nowhere to be seen at this point in time, despite the fact that exporting activity continues to expand and despite the fact that this activity represents the only bright spot on our economic horizon.

After five years of the greatest economic crisis in the modern history of this nation, it is time to ask our political leaders a question: at what point in time does one’s rhetoric of economic turnarounds becomes an unbearable burden to one’s political and social reputation? For the previous Government it took just under 3 years to face the music of its own making. For this Government, the clock is ticking on.

Box-out:

Having achieved a relatively underwhelming progress on restructuring the Promissory Notes of the IBRC, the Government has turned its attention in recent weeks on attempting to restructure our debts to the European sides of the Troika. However, the issue of the Promissory Notes is still an open topic. Last week at a conference in Brussels I had a chance to speak to some senior decision makers from the European Parliament and the EU Commission who unanimously voiced their concern over the potential for the ECB to alter the terms and conditions of the Irish Promissory Notes restructuring deal. ECB has two material powers to do so. Firstly, it can simply alter by a majority decision the technical aspects of the deal. Secondly, the ECB has the ultimate power to determine the overall schedule of the sales of the long-term bonds issued to replace the Promissory Notes to the private investors. This latter power is very significant. Under the current arrangement, the Central Bank of Ireland has committed to an annual schedule of minimum disposals of bonds. Based on this schedule, the cumulative long-term benefit of the deal to Ireland can be estimated in the range of Euro 4.5-6.3 billion over the 40 years horizon. Accelerating the rate of disposals by a third on average over the deal horizon can see the net gains to the Exchequer declining by more than a quarter. Hardly a confidence-inspiring outcome for the Government that put so much hype behind the deal.

10/9/2012: Irish Households Debt Overhang: IMF note

IMF published today three papers relating to Ireland's economy. Each of interest on its own merit and I intend to blog about them.

However, here's a chart that actually summarizes pretty well both the extent of the Irish crisis and the sorry state of affairs expected as we exit it:

Here's IMF's explanation for the household deleveraging process out of what is - by the standards of the chart above - a historically unprecedented debt overhang.


"Under the current forecast, households would reduce debt gradually from about  210 percent of disposable income to 185 percent by 2017. Building on the forecast of the
savings rate, the debt path is calculated based on the IMF desk forecast for a muted recovery
of disposable incomes at below GDP growth. Further, the debt path assumes that households use about half of their savings to retire debt, and new lending growth remains moderate, increasing from 1.6  percent of GDP in 2012 to 5.3 percent by 2017."

Now, give it a thought, folks.

1. Irish crisis in mortgages is well in excess of anything represented in the above chart;
2. Irish deleveraging over 9 years (2009-2017) will yield mortgages debt reduction of just 25 percentage points even if we use half of our entire savings to pay down the debts;
3. This painful deleveraging will still Ireland's mortgages markets in wore shape in 2017 than the second worst peak  of the crisis (the UK) back in 2007.

And here's the chart showing that all the debt paydown to-date has had zero effect on arresting the degree of Irish households leveraging (debt/asset value ratio) as underlying asset values of Irish properties continue to fall:

It is clear from the above that the Irish Government is out to lunch when it comes to dealing with the most pressing crisis we face - the crisis of severe debt overhang on households' balancesheets.

15/6/2012: IMF Review : Mortgages Arrears & Household Wealth

In the previous post I promised a closer look at the IMF analysis of the household wealth and mortgages in Ireland. Per Article IV consultation paper:

Mortgage arrears continued to rise as some households struggle with high indebtedness. 

• Household’s net wealth peaked in mid-2007, but has since declined by 37 percent largely due to the collapse in housing prices. 
• By 2011, households’ deleveraging efforts have reduced debt by 13 percent from its end 2008 peak. 
• Declining incomes have, however, meant the overall household debt burden has eased by only 3 percentage points to 208 percent of disposable income in 2011, although there has been some relief from lower interest rates. 
• Income declines, especially on account of the rise in unemployment, have also driven the increase in the rate of mortgage arrears on principal private residences to 10.2 percent of mortgage accounts and 13.7 percent of mortgage balances at end March 2012. 
• The share of mortgages that have been restructured—predominantly through payments of only the interest due or somewhat more—rose to 12.6 percent at end March 2012, but more than half of restructured loans are in arrears, indicating that deeper loan modifications are needed in some cases.

 More charts from the IMF:

In IMF news, rental yields are now closer to stabilization levels, but house prices are averaging 10 times average disposable per capita income, implying ca 4 times average disposable per-family income. In my view, prices will need to reach 3-3.5 times before the property market becomes affordable in the current conditions. This, however, is a longer-term target, with intermediate target being most likely even lower at 2.5 times (given credit conditions and general economic conditions). Also note, the above do not account for upcoming property taxes and for future reductions in disposable income due to tax increases.

Meanwhile credit condition remain horrible:

Chart above clearly shows that although interest costs and interest rates have declined, deleveraging did not take place. This stands in sharp contrast to the US and UK, where deleveraging of the households was more aggressively underpinned by bankruptcies and repossessions. Another issue is that declines in interest rate burden apply primarily to tracker mortgages.

Charts below highlight rapidly accelerating problems with mortgages defaults:

Chart above shows the decomposition of restructured mortgages, highlighting the extent of significant changes in the overall mortgages burden under restructuring (interest only 35%, below interest-only payments at 14%, payment moratorium at 4% and hybrid at 5%, implying that at the very least well over 50% of all restructured mortgages are not delivering on capital repayments).