October 29, 2012
In the next few years, one of the biggest challenges faced by the domestic Irish economy will be what to do with the tens of thousands of people who are in mortgage arrears now, and the tens of thousands of people who will get into difficulties, but have yet to realise it. So when trying to quantify the problem, we need to have a stab at assessing the ‘known knowns’ as well as the ‘known unknowns’.
The known knowns are rising all the time. Latest Central Bank figures reveal that 128,000 mortgages are in arrears. This figure has been rising rapidly over the past few years, and is likely to keep rising as incomes fall, taxes rise and unemployment continues to grind slowly upwards. The domestic economy, where most of us work and live, is not getting any better – indeed, one of the biggest problems is the debt overhang itself, which is dragging investment and savings.
The picture at the moment shows that 128,416 – or 16.8 per cent – of all private residential mortgages are in arrears. Of those, 45,165 (5.9 per cent) of all private residential mortgages are in arrears of less than 90 days. Some 17,553 (2.35 per cent) are in arrears of between 90 days and 180 days, and 65,698 (8.6 per cent) are in arrears of more than 180 days. The total number of residential mortgages stands at 761,533, so nearly 17 per cent are in arrears already. These are the known knowns.
Now, let’s consider the known unknowns. These are the tracker mortgages, of which there are about 400,000 in Ireland. Tracker mortgages account for close to 60 per cent of the â‚¬26 billion in residential loans issued by Permanent TSB. Just over half of AIB’s â‚¬27 billion mortgage book is accounted for by trackers, but the prize for King of the Trackers goes to Bank of Ireland, with 62 per cent of its total â‚¬28 billion residential mortgage book.
Over half of the total residential mortgages in Ireland are trackers, and 85 per cent of these loans were taken out between 2004 and 2008, so a lot of them are likely to be under water and much more underwater than the average profile. The total value of trackers is now â‚¬51 billion. Just to put that into context, if you were to spend â‚¬1 million a day, it would take you 139 years to spend that much money.
Trackerville – a new area of suburbs financed by tracker mortgages – is a ticking time-bomb, because all these mortgages are being subsidised by the banks. The trackers are costing borrowers 1 per cent above the ECB rate, so 2 per cent interest per year. Deposit rates for medium-sized sums are higher than that, which is why the banks have to charge higher interest rates on all other loans just to try to claw back some of the money they are losing on trackers.
The vast majority of people with trackers are paying less now per month than they did when they took out their mortgages at the height of the boom, when ECB rates were higher. However, most mortgage durations are 25 years or more. The later the mortgage was taken out, the more chance it has of being longer than 35 years – and some are out to 37 years.
Trackers are time-bombs because interest rates are at their lowest level ever right now. There can be little doubt that, over the course of a 25 – or 30-year mortgage, interest rates will return to their long-term norm for Europe, of above 4 per cent – not least because, if the eurozone economy recovers, there will be a big incentive for the Germans to wring whatever inflation there is out of the system via higher rates.
This will cause mortgage defaults in Trackerville, at a time when we thought it was all behind us. It could be in four or five years’ time – we will be reminded that the biggest mortgages in absolute terms are the trackers so, as normal interest rates rise, arrears and defaults will rise more quickly in Trackerville than in the rest of the country.
This is the challenge: not just to fix the arrears problems now, but to fix the problem in full. It is not just the right thing to do, it is essential, because we can’t have domestic spending recovery without sharing the debt burden.
So even those of you who feel uneasy about the prospect of a grand ‘debt bargain’ must realise that, in the present situation, everyone loses. This is because the economy and your income can’t recover if people are not spending, and people can’t spend if they have too much debt.
In any economy, we are all surprisingly dependent on each other. My spending is your income and vice versa.
In addition, the longer this goes on, the more the banks become zombie banks incapable of breathing credit into the market. A deal must be done right now.
The banks set aside â‚¬16 billion in the last capitalisation round to cover bad loans in the residential market. Taking the total mortgage lending book of â‚¬112 billion, the implied total default on the entire book is about where we are now in terms of arrears, 16 per cent. However, not all these arrears will be total write-offs, so there is enough cash in the tank now to do a debt for equity at 50/50 right now. This gives the punter a break and the bank an upside option over time.
But maybe the reason the banks have been tardy in moving – after all, they were dressed down by the Central Bank last week – is that they think â‚¬16 billion isn’t enough. If it isn’t, we need to go back to Frankfurt and come up with a figure that covers all bases and say to the ECB: “We need more cash and you will have to cough up.”
We know the Germans need a success in Ireland. We know that we can only have success if the total banking problem is solved, and we know that the pending mortgage crisis has not been addressed yet.
Wouldn’t it be sensible to put it all in one big bang solution?