Analysis: Irish mortgage arrears manageable – for now

By Jodie Ginsberg and Lorraine Turner

DUBLIN (BestGrowthStock) – Levels of Irish home loan arrears are manageable for banks for now but could present a serious future risk to the country’s economy without additional support for homeowners.

Markets are nervous that mortgages could be the next black hole for Ireland’s savaged bank sector, which is being propped up with a massive injection of state funds, if government budget cuts drive unemployment higher, rates rise and house prices slump further.

In a comment piece in the Irish Times signed by ten economists and mortgage experts on Thursday, the writers estimated that a fall of 55 percent in house prices from the peak — and they’ve already fallen by half — would put 60,000 households in arrears, worth around 10 billion euros ($14 billion).

“In the context of an overall bank bailout scheme of 50 billion euros and rising, it is relatively small but at the individual level, and equally importantly, at the level of the real economy, it is a very real problem indeed,” they wrote.

“Individual households in debt do not spend, they do not invest: they attempt to pay down debt when and where they can and they hoard cash,” it said.

The authors recommended some kind of debt forgiveness mechanism that set the cost of restructuring at levels where households’ ability to pay preserved the value to lenders.

“In Ireland, such a formula would most likely lead to an implicit writedown of at least 30 percent of the more recent mortgage amounts on average, yielding an expected cost to the entire system of circa 37 billion to 49 billion euros.”

However, Professor Brian Lucey, one of the article’s authors, stressed this level did not imply the need for an additional state bailout for the banks.


Figures to the end of June, the latest available, show around 4.6 percent of the 800,000 private residential mortgages in Ireland are in arrears (defined as being behind payments for more than 90 days), a rise of 12.7 percent from end-March.

In terms of overall mortgage debt, the value of these accounts is 6.9 billion euros — or 5.8 percent of the 118 billion euros worth of residential mortgage debt in Ireland.

Prime Minister Brian Cowen told parliament this week that including householders who have restructured their debt, some 70,000 were technically in arrears.

Crucially, repossession levels remain low after the government introduced rules in February requiring banks to wait a year before applying for repossession orders. Figures from the financial regulator show just 387 residential properties were repossessed in the year to end-June.

That could spike once the 12-month ban ends but most analysts believe it will remain within manageable levels.

“The banks at the end of the year should have provisions of 2 to 3 percent built up to offset … loan losses,” said Ciaran Callaghan, a Dublin-based banking analyst.

Even if potential provisioning of 5 percent was needed that would mean an additional 600 million euros of losses for Allied Irish Banks and Bank of Ireland which Callaghan said should not sound alarm bells or drive up sovereign yields further.

Bank of Ireland’s trading update on Friday may shed further light on a situation which is veiled by the level of restructurings that are taking place.

The 50 billion euros already put aside for the banks is a “reasonable buffer” said Antonio Garcia Pascual, analyst at Barclays Capital.


Historically, unemployment has been the trigger for a major jump in mortgage arrears.

Unemployment has rocketed in the past five years from around 4 percent and is expected to remain broadly unchanged from its current 16-year high of 13.6 percent, according to the latest Reuters poll.

Anxious to hold onto their homes, many Irish borrowers are also making their mortgage repayments top priority, ending up in arrears on other bills or relying on help from relatives to see them through.

In addition, interest rates — another trigger for mortgage default — are not expected to rise significantly soon.


Nevertheless, investors are spooked by the experience of the United States, Ireland’s central bank governor acknowledged this week.

“A read across … from concerns in the U.S. that American banks could experience further loan-losses given the slow recovery of the property market there may also have caused observers to question the adequacy of loan-loss provisions in the Irish residential mortgage books,” Patrick Honohan said.

Honohan reminded his audience that the stress case used by the central bank for Irish residential loan books was well outside historic experience.

But recent Irish experience is that worst case scenarios have often been met — and exceeded. Even last month the government was sticking to its estimates that 7 billion euros would be needed to bring down its deficit.

It has now more than doubled that.

“The next act of the crisis will rehearse the same themes of bad loans and foreign debt, only this time as tragedy rather than farce,” economics professor Morgan Kelly wrote earlier this week. Kelly’s previous forecasts, often at the extreme end of estimates, have frequently proved accurate.

“This time the bad loans will be mortgages, and the foreign creditor who cannot be repaid is the European Central Bank. In consequence, the second act promises to be a good deal more traumatic than the first.”

(Editing by Ruth Pitchford)

Analysis: Irish mortgage arrears manageable – for now