How many mortgages are in trouble?

There seems to be some disagreement about the extent to which residential mortgages in the State are in trouble. In the Dail yesterday FG leader Enda Kenny suggested (citing Morgan Kelly) it was 100,000 but that was rejected by the Taoiseach who claimed that the number was about 70,000 – “There was some suggestion that at least 100,000 mortgages have seen negotiated repayment reductions or defaults. This significantly overstates the situation. The figure is closer to 70,000, which includes restructured payments and the arrears figure of 36,000.” Enda was referring to the article penned on Monday this week by economist Morgan Kelly writing in the Irish Times who claimed “between negotiated repayment reductions and defaults, at least 100,000 mortgages (one in eight) are already under water”. This entry examines the figures.

Firstly I think there are three categories of mortgages that are in trouble

(a) Those in arrears over 90 days. Whilst our new-ish Financial Regulator is trying to force banks to adopt a common definition of when arrears first occur, he is at present publishing quarterly figures for mortgage arrears based on what the banks tell him using their own definitions. The latest quarter available is Q2, 2010 which showed that there were 36,438 mortgages in arrears for more than 90 days (and of these, 24,797 were in arrears for more than 180 days). The arrears have grown consistently over the past year (before which the banks didn’t even produce aggregate figures) as shown below and the betting would be that the Q3, 2010 figures which won’t be released until December will show an increase to over 40,000 as there has been a fairly consistent (and indeed slightly accelerating) 4,000 increase in each quarter in the past year.

(b) Those mortgages whose terms have been restructured. Again there is no definition of what a “restructure” comprises but it is widely assumed to mean (a) putting repayments on an interest only basis for a period of time (b) extending the period over which the mortgage is to be repaid with a consequent reduction in monthly repayments (c) some form of payment holiday where the interest is rolled up for a period and principal payment deferred (though importantly not forgiven). There are no reliable figures on the present level of restructured mortgages but in April 2010, Charlie Weston did an article in the Independent where he claimed that an estimated 3,000 mortgages a month were being restructured and that the IBF had said that a total of 30,000 mortgages had been restructured and that this figure “dated back to the first or second week in January”. So you could take a stab at the present number as being 30,000 plus (10 months to the end of October 2010 x 3,000) = 60,000. That would clearly be an estimate. If a mortgage has been restructured and is operating in accordance with its restructured terms then presumably it is no longer in arrears, so a 60,000 estimate would be additional to the estimated 40,000 in arrears.

(c) Mortgages in receipt of State assistance – mortgage interest subsidy. Some people facing hardship with repaying their mortgages are entitled to claim support. The most recent estimate given is, I think, from this exchange in the Oireachtas in October 2010 where the Taoiseach said “it is worth recalling that the Government has already provided help to over 16,700 families with the mortgage interest subsidy scheme.” It is not clear if this is the number currently being helped or if it is some historical cumulative figure. It is also not clear if there is any overlap between this 16,700 figure and mortgages in arrears or restructured. However it is clear that there is some level of hardship before the State pays the mortgage interest subsidy and it may well be the case that a proportion of these 16,700 mortgages (perhaps even a large proportion) are additional to those mortgages in (a) and (b) above.

So whose figures are more likely to be closer to the reality – the Taoiseach’s or Enda Kenny’s/Morgan Kelly’s – I would have said the latter’s based on the above. Unfortunately restructured mortgage statistics aren’t reliably collated nor is the overlap of mortgage interest assistance with the other two categories examined.

It is worth pointing out that at the end of June 2010, there were 789,000 residential mortgages in the State, some 1.6m households and some 2m dwellings.

UPDATE: 13th November, 2010. The Independent’s Personal Finance Editor Charlie Weston writes on this subject today. Whilst apparently ignoring those in receipt of mortgage assistance he reports that the likely figure is 70,000 mortgages being in trouble as he claims that those which have been restructured amount to 45,000 (not 60,000 as estimated above using Charlie’s own reporting and estimates earlier in the year) and that some 15,000 of these 45,000 are included in the banks’ own statistics on arrears.” “The figure for those who are struggling to repay their mortgage is 70,000 tops. Where Morgan Kelly got his figures, I don’t know,” a [n unidentified] spokesman for the Irish Banking Federation said, insisting that there had been no attempt to massage the figures.” Elsewhere in the article Charlie tells us that it is 70,000 people that are having difficulty – well that claim is definitely wrong as the average household in the State has 2.75 souls so 70,000 mortgages in difficulty would imply 192,500 people are in difficulty – the entire population of Cork, not Galway. I still tend to think Morgan Kelly’s 100,000 is closer to the reality – if the arrears are growing at 4,000 per quarter then to mid Q4 of 2010 that would imply 43,000 in arrears formally plus 45,000 on Charlie’s numbers (on what basis would a restructured mortgage that was complying with its terms be in arrears?) plus some part of mortgage assistance homes estimated by the Taoiseach in October at 16,700. Regardless though whether it’s 70,000 or 100,000 mortgages it is still a major issue and I regard the situation at present to be a denial of the realities – compare Ireland with Nevada and you’ll see what I mean.

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Have we become too big to fail?

I must say that on these overcast wintry mornings, I am a little surprised when I emerge from the house that someone from the ECB doesn’t leap from a nearby bush with an umbrella to shelter me, Formula 1 brolly dolly style, in case I get pneumonia. You see I am beginning to self-actualise that I am “too big to fail” – not me personally (sadly) but as a citizen of a State that owes so much to the ECB.

The reason for this growing recognition is EU Competition Commissioner, Joaquin Almunia’s speech given to the European Banking Federation in Brussels last week. You probably wouldn’t have guessed that Joaquin (Chimo to his friends) was a bit of a stand-up comedian but here’s what he had to say about Ireland and Irish banks:

“Ireland has been particularly hit by the financial crisis. Apart from the drying up of access to wholesale funding, Ireland and the Irish banks had to face the collapse of the Irish property market and a considerable downturn of the economy. All the banking system –with the exception of foreign owned entities- were affected. As the bill for the rescue of the Irish banks has increased, so has the pressure on Irish sovereign debt.

The Irish authorities responded to the crisis by providing guarantees, an asset relief scheme (NAMA) and recapitalizations. The scale of their intervention was enormous. The Commission has authorized 286 billion Euros of support measures, over 170% of Irish GDP equivalent to 60.000 Euros per person.

The Commission is now in the process of assessing the restructuring plans of Allied Irish Bank, Anglo Irish, INBS and EBS. The restructuring plan of Bank of Ireland was already approved in July 2010.

In dealing with the Irish financial entities, the Commission needs to balance the necessity of addressing the distortions of competition caused by the large aid granted to Irish banks with any financial stability concerns that arise.”

This was the first time that I saw this quite precise figure – €286bn, and I started to wonder what it represented. It plainly isn’t the bank guarantee – as that eejit from the Department of Finance said in his letter to the Financial Times in September 2010, the guarantee was now worth “only” €523bn (just 3.5 times our GDP, and not 4.8 times as claimed by the FT). So the €286bn plainly isn’t the guarantee. So what is it? And I have asked Senor Almunia’s press office for an explanation and to date they have not responded but if they do, it might be the case that the explanation below is wrong. But here’s what we know:

(1) NAMA was given approval in February 2010 to operate in accordance with the NAMA Act which allows the agency to issue up to €54bn of NAMA Bonds which can be cashed at the ECB. There is provision for an additional €5bn but that wasn’t intended to involve the EU.

(2) Anglo has had, to date, approval for up to €25bn of State funding. That may rise another €5-10bn under recently announced DoF scenarios (that is €29.3bn in the expected case rising to €34.3bn in the expected worst case)

(3) Irish Nationwide Building Society has had €2.7bn approved and there is another €2.7bn announced to give a total of €5.4bn

(4) AIB and BoI have to date received €7bn from the National Pension Reserve Fund. And the announcements in September mean the State may be about to inject a further €3.5bn in AIB

(5) EBS has received €0.35bn so far and depending on the sale now being considered, there may be an additional injection of €0.5bn required.

But the maximum total of the above is only €110bn. What about the remaining €176bn. Again I don’t know but I do know that the ECB has already placed €121bn in Irish banks according to data released in October 2010 and according to the Independent today the ECB has bought €64bn of “European government debt” which includes Irish debt (UPDATE: 14th November, 2010. The Sunday Tribune in November 2010 has claimed that some €18bn of government debt is now held by the ECB).. The €286bn may represent the €110bn above plus €121bn (UPDATE: 14th November, 2010. €130bn as at 29th October, 2010)  placed with Irish banks plus some Irish government debt. Again I stress that this is my guessing and it may be wrong and the EC may provide a clarification which might totally contradict the above. UPDATE: 12th November 2010. The Competition Commission Press Office has provided a response “The amount quoted by the Commissioner was the sum of the recapitalisations and the amounts of liabilities effectively guaranteed under the ELG (not the maximum exposure allowed in the budget). The latter amount changes every day. Some of the figures are confidential, so we can not communication (sic) a precise break down. The figure does not include the NAMA” Hmmm, I would have thought the ELG (Eligible Liability Guarantees) figure was far higher but regardless, that is the response. However the thrust of this entry is dealing with our liability to the ECB and that liability is in the €130-200bn range.

But if the above analysis is correct, it means that the ECB is exposed to Ireland to an extent which might be causing no little concern in the heart of Europe. Now the ECB is not according to the analysis above today exposed to the full €286bn alluded to by Sr Almunia. NAMA bonds are likely to be about €30bn now, not €54bn (and the word on the street is that NAMA might be about to produce a new business plan which will include a better estimate of its bond exposure to assuage our European friends’ concern and, separately, to recognise potential funding issues at the agency) and I am not sure that the banks have yet cashed NAMA bonds at the ECB. Much of the Anglo and INBS and EBS cost is from promissory notes which will only become real cash (presumably from the ECB as they appear to be the only ones that will significantly lend to Ireland at present). But the €121bn from the ECB in Irish banks plus some sovereign debt is real enough. So I mightn’t be worth €60,000 of future debt repayments but I am worth a considerable amount.

Now in Ireland over the past couple of years we have become nauseous at the “too big to fail” concept. At the start the joke with our property developers was “owe the banks €1m and can’t repay and you have a problem, owe them €1bn and the banks have a problem”. The joke has gone flat as we are now paying for the lunacy of the mid to late 2000s. Last December 2009 the citizens were on the receiving end of a €3bn fiscal contraction in the Budget which was described as the worst and were told that we had turned a corner. Now we are a month away from a Budget that is set to effect a €6bn deficit. People are angry and worried. There’s 13.6% unemployment representing about 275,000 people. In addition, another 175,000 receive some form of income support which gives us a Live Register of 450,000. This in a country with a workforce of 2m and an overall population of 4.5m. Those who are in work are relatively well off if they are not trying to service a mortgage on property (and despite what our Taoiseach said yesterday, it does appear that 100,000 of mortgages are in trouble – taking account of 36,000 in arrears over 90 days in Q2, 2010 and the 30,000 restructured mortgages at the start of 2010 which was growing at 3,000 per month and the 17,000 mortgages in receipt of some state benefit, there will be overlap but it may not be unrealistic to say there are in excess of 100,000 mortgages in difficulty out of a total of 800,000 mortgages).

So is there any value to recognising the huge debt that has now been built up? Firstly to say that Ireland has a very good credit record and even after the dreadful 1980s the country repaid massive debt at interest rates in the same zone as those charged today. The psyche in Ireland is also, I would say, honourable – we don’t look kindly on deadbeats that try to evade their responsibilities. That said, might there be some value in seeking a stimulus package from our neighbours to partly offset the hardship that the forthcoming Budget will deliver? Might our friends in Europe be willing to donate a capital budget to build much needed schools, hospitals, broadband networks, clean energy production, transport infrastructure? A €5-10bn stimulus might mean that unemployment rates might come down so that the €60,000 per head of intervention might be repaid. Commissioner for Economic and Financial Affairs Olli Rehn has just departed these shores after a whistle-stop tour in which he met many of the stakeholders in the financial crisis. All political parties are reporting that he seems to be approaching our crisis in a consultative, as opposed to dictatorial, fashion. That may be because he has a reputation as a decent  politician that has avoided any major controversy or conflict in his long political career – it may also reflect the reality that Ireland is too big to fail and if there is not political/societal buy-in to a solution, then the ECB may be on the line for a massive bad debt.

As to Chimo, the comedian. Immediately after his revelations on the Irish crisis in his speech, he turned to the yang of the financial problem – German banks (the ying being Irish property developers unable to repay loans based on cheap German deposits seeking interest-paying homes).

“Unlike Irish banks, German banks suffered mostly from their exposure to foreign investments. This is mainly the result of the low profitability of their domestic retail and commercial banking activities –some of them with serious problems in their business models- which led them to venture into low margin high volume business at a large scale. Several public and private banks required bail-outs by the Government. Beside IKB, Commmerzbank and Hypo Real Estate, this concerned a number of Landesbanks: Sachsen LB, Bayern LB, LBBW, HSH Nordbank and WestLB.

Again, the total authorized measures were extremely high –over 615 billion Euros, but obviously a smaller proportion than in Ireland: around 26% of the German GDP.”

I bet that one got the bankers smirking. But the one that brought the house down was Chimo’s closing remark “We must take decisions, at the EU and the global level. We request you to cooperate. I’m confident your answer will match our expectations. Thank you.” Though the bankers probably had the decency to wait for Senor Almunia to leave the building before the hysterical laughter started.

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