Residential Mortgage arrears continue to grow – 5.13% of mortgages now 90 days or more in arrears. Worrying increase in arrears owed for more 180 days

Our new-ish Financial Regulator, Matthew Elderfield, has today published the residential mortgage arrears figures for the third quarter of 2010. Here is the latest together with the historical figures (no data was accurately collated before Q3, 2009.

The figures show the number of mortgages in arrears for more than 90 days has increased by 4,034 from the previous quarter, very slightly down from the 4,110 increase recorded in the previous quarter. However the 91-180 day+ arrears have increased by only 782 whilst the 180 day+ arrears have increased by 3,252, showing an acceleration in the rate of growth of this component. This is worrying because arrears due for more than six months are more likely to result in default.

Repossessions continue at an incredibly low level – just 81 in the quarter. The 12 month moratorium on repossessions will expire in February 2011. However there is evidence of emerging legal precedent protecting home owners. And a new group, New Beginning, is providing free legal and financial advice to home owners in difficulty and they had quite a success yesterday.

As to the question of how many mortgages are in trouble – you would certainly include the 40,472 announced today and remember that is to the end of September 2010. The trend would suggest that another 2,000 are in arrears today as we are mid-way through Q4, 2010. In addition to the arrears, a number of mortgage holders have restructured their mortgages by deferring repayments in some manner (commonly (a) going on interest-only repayments (b) a complete holiday with both principal and interest rolled up to be repaid in full later and (c) reducing repayments with the roll-up of any shortfall for future repayment).  No figures are reliably reported on these restructurings but Charlie Weston last week estimated there were 45,000 mortgages that had restructured though he claims some of these will be shown in the arrears figures (15,000 in fact). In addition there are mortgage holders in receipt of state assistance and the Taoiseach told the Dail last month that some 16,700 had received some assistance but it was unclear if that was cumulative or the position today and also if any of these 16,700 overlapped with the restructured or those in arrears. My view is that the 100,000 estimated by Morgan Kelly last week is closer to the reality than the Taoiseach’s claim of 70,000. Regardless though at an average of 2.75 people attached to each mortgage (the average household size), the numbers unable to meet their mortgage repayments is substantial.

The group set up to examine options for dealing with mortgage distress has finally produced its report today. There will be further comment here once it has been analysed.

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It’s not Ireland that needs a bailout – it’s the European lender of last resort, the ECB.

Suspicion seems to stalk our land at the motives of our friends elsewhere in Europe, friends that seem intent on foisting a bailout on us regardless of our wishes. The primary suspicion is that our neighbours, particularly those directing the ECB, want Ireland as a sovereign to sign her name on the dotted line of a bailout agreement, with the bailout funds destined for our broken banks. And in so doing we effectively convert an unsecured loan to the banks by the ECB to a sovereign loan secured upon the State and her citizenry. Yes there is a strong argument that since the government passed a law (at break-neck speed based upon inaccurate information at the height of the credit crisis in the fall of 2008) which guaranteed bank liabilities that we have already made the ECB loans to banks sovereign and secure. But laws can be reversed and in truth this lending has been to commercial banks and not to a sovereign for the operation of its state. Minister for Finance Brian Lenihan says the debts of the banks equate with the debts of the sovereign but in truth he says a lot of things that turn out not to be accurate.

That bank debt is separate to sovereign debt has been the subject of a delicate dance in recent months. Senior bondholders are to be invited by Minister Lenihan to “amicable discussions” – why would they bother RSVPing if their debts were sovereign debts?

It is perhaps worth looking again at that famous NY Times graphic from 1^st May 2010 based upon information from the Bank for International Settlements. The graphic is misleading because it includes the usual debts of international finance houses based in our International Financial Services Centre and which are not really part of the problem we face today but it does illustrate the international dimension to our banking debt crisis. [UPDATE 17th November, 2010. The BBC citing the Bank for International Settlements say that today some ” foreign lenders still have $170bn (£107bn) invested in Irish banks. Of this total, $46bn has come from German banks, $42bn from British banks, $25bn from US banks, and $21bn from French banks.”] What we seem to have today are debts owed by the Irish banks to the ECB of €90-100bn on 29^th October, 2010 and are likely to be well north of that today. A bailout is not required for our day to day funding – “we are fully funded into the middle of 2011” plus we have a €25bn (effectively €14bn once you strip out investment in the Irish banks) in the pension reserve which should get us to 2012 without the need for any borrowing for day-to-day expenditure. And with privatisations, even at firesale prices, we should be able to fund our day-to-day costs to 2013 by which time, the deficit should be down to a 5% level which should not deter lenders. So the bailout is required for our banks. And if it is indeed for our banks then a number of questions suggest themselves

(1) The State funding of the banks has most recently (30^th September, 2010) been estimated by the Department of Finance at €46bn – see here. Is this funding estimate still valid?

(2) If the funding estimates above are no longer valid, why is that? Is it because new losses have been identified at our banks? Remember that independent analysts have put losses at the banks north of €65bn. You would hope the official estimates were better considered and accurate but experience over the past two years has shown the independent analysts to have been more accurate in the past at least.

(3) Why has ECB funding increased from €95bn in August to €130bn at the end of October? The answer is likely to be a mix of deposit flight and redemption of bonds covered by guarantees and repaid on their due dates. But that should be a temporary funding spike if the assets of the banks are accurately valued. So what’s the problem?

(4) The EFSF cannot lend directly to banks. It has to lend to a “country programme”, that is sovereign lending.  As regards our banks, that’s what the ECB is there for – lender of last resort. Because no-one else will practically lend to the banks, we’re there – at the last resort. So why doesn’t the ECB continue with its role?

(5) I am noticing that the fiscal adjustment (Ireland’s adjustment to bring its spending in line following the collapse in revenues that came with the bursting of the property bubble, the international credit crunch and the 11% reduction in GDP) is increasingly being blurred by our friends elsewhere in Europe with the cost of our broken banking system. The two are different – we have a broad-based political commitment from parties representing 85% of the population to a fiscal adjustment to bring our deficit:GDP % back to 3% in 2014. Our country has delivered major savings already and I would expect that there should be some confidence that we can get back to the target by 2014 albeit with a lot of painful adjustments. Why are others blurring the fiscal problem with the banking costs?

(6) Our two main banks, Bank of Ireland and Allied Irish Banks both passed a European stress test four months ago. Look again at the base and adverse scenarios with present estimates for 2010. On every metric (other than interest rates) we are doing substantially better than even the base case scenario. And on interest rates, because we are borrowing from the ECB, actual rates should be 0.5-2%. If the environment in which our banks operate is far better than that envisaged by even the base case scenario then why should the ECB be worried about its lending to our banks?

So to the good men and women from the ECB, EFSF, European Commission and IMF presently prowling the corridors of our banking and political structures, why don’t you decamp and fly over to Frankfurt and foist your funding on the ECB? Why pervert existing structures so that bank funding can be foisted on the sovereign?

UPDATE: 18th November, 2010. It has been pointed out “sensu stricto” that the ECB is not a traditional lender of last resort, that is a provider of funds to illiquid banks at penal rates.  There is ambiquity in this area as this exchange from a press conference with ECB President Jean-Claude Trichet in April 2010 demonstrates

Press: I think that the mystery behind this whole IMF debate is that Europe has one weak point, namely it has no lender of last resort. I would like your comments on whether you believe that Europe can do without such a lender of last resort in the future because the governments also say they are not lenders of last resort. So who will be responsible in the end?

Jean-Claude Trichet: As regards the lender of last resort function, I am not sure I follow you, because we have a central bank in the euro area, which is the ECB, as the captain of the team, and the members of the team. And together we have all the functions, and we are fulfilling all the functions of a central bank in any other economy. In any case it is a very vast economy. So I do not see your point.

The “point” I would guess was not seen as it seemed inconceivable that one bank that was illiquid (that is, suffering a temporary cash shortage as opposed to insolvent where the value of its liabilities was greater than the value of its assets) would cause any problems to the vastly resourced ECB. But with more than €100bn advanced as emergency temporary funding to Irish banks, the “point” is now 100% relevant. So as “captain of the team”, why is the ECB not “fulfilling all the functions of a central bank in any other economy”? Eh, Jean-Claude? Eh?

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