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Archive for February 17th, 2012

This morning the Central Bank of Ireland released its mortgage arrears and repossession statistics for the quarter ending 31st December 2011. The figures show a progressively worse deterioration in arrears. The Q4,2011 figures are shown below along with the historical series since Q3,2009 when the series was first created.

 

Of the 768,917 mortgage accounts in the State, 70,911 (9.22%) are in arrears of more than 90 days and of these, 53,086 mortgage accounts are in arrears for more than 180 days, equal to six months. With six months plus of arrears, accounts have a high probability of defaulting.

In addition to the above figures, which are appalling, 36,987 mortgage accounts have been restructured and are performing. In half these cases, the restructure is so as to repay interest only. Other restructured formats include repayment holidays, or reduced capital repayments.

In other words, 107,708 mortgage accounts are now either in 90-day-plus arrears or are not being repaid according to the original loan agreement. That’s one in seven mortgage accounts.

The above statistics, in addition to being personal nightmares for the families and borrowers involved, are a nightmare for the economy depressing demand, threatening bank balance sheets and possibly indicating a wave of repossessions which will undermine property prices further. Banks are suggesting the Government’s dithering on personal insolvency arrangements – the latest is the heads of a bill have been published, and the final bill is to be published in April 2012 and it will be enacted some time after that, but it may be some months. There are a code for dealing with mortgage arrears which presently just appears to be kicking the problem down the road.

Here is a comparison between Ireland and the UK, showing that Ireland suffers far more from arrears but far less with repossessions. With our negative equity and unemployment, the writing appears to be on the wall for a major adjustment in how arrears are dealt with. Banks are already complaining that borrowers are strategically not paying mortgages in order to take advantage of any imminent bankruptcy legislation.

 

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Fianna Fail TD Sean Fleming has promised NAMA a show-down on the subject of NAMA’s interest income reported in its accounts. Whilst we’re waiting for High Noon, the Sinn Fein finance spokesman, Pearse Doherty has extracted information from NAMA this week which shows that NAMA is receiving far less interest in cash terms than it is showing in its accounts – €249m less in fact for the first nine months of 2011. Why? Because NAMA uses a convoluted accounting method to calculate what interest the Agency thinks it should be getting.

It’s unfortunate that the Effective Interest Rate (EIR) method of calculating interest means that interest income recognised now is greater than the actual cash coming in the door. It could theoretically be the other way round, with income less than cash received, but we wouldn’t be so concerned in that case, because cash is trusted more than some convoluted accounting calculation. We are also living through the legacy of a banking collapse which had previously seen banks booking rolled up interest and deferred interest as income, and we know now only too well that such practices led to over-inflated bank profits which later vanished and were replaced with crippling losses. So NAMA should expect its disclosure of its interest reporting policies to be met with guffaws of cynicism, and if NAMA were a little more transparent then this may not have been an issue at all.

What do we learn:

Because the EIR method uses projections of interest that will be received in future, NAMA can expect further questioning about the basis for those projections. Remember NAMA originally thought it was going to make a €5bn profit in Net Present Value terms, its latest business plan shows a central  scenario profit of €1bn. NAMA thought Irish property values were at a bottom in November 2009 and yet both commercial and residential have fallen by 20-30% since then. So NAMA might understand if its projections for interest income are robustly tested –  the Agency’s history with financial projections hasn’t exactly been covered in glory.

We also learn that for the at 30th September, 2011 the average blended rate charged on performing loans (21% of the NAMA total by reference to original par values, 24% of the total number of loans) was 3.4% per annum – that is likely to have come down by about 0.5% in the last quarter of 2011 as the ECB reduced its benchmark interest rate by 0.25% in each of two months during Q4,2011. So the betting is the average blended rate today would be 2.9%.

However we also learned that in respect of the non-performing loans that NAMA also receives some interest and that it worked out at 0.38% per annum by reference to the original values of the loans. So to illustrate, if NAMA has €74bn of loans, about €15bn are performing and paying interest at 2.9% now. Of the remaining €59bn, NAMA is getting 0.38% or €224m per annum which is useful.

UPDATE: 23rd February, 2012. In the Dail yesterday, the Sinn Fein finance spokesperson Pearse Doherty focussed on NAMA’s accounting for interest received and receivable. It fell to the Minister of State at the Department of Finance, Brian Hayes to field the questions. The exchange is here, and the upshot is that the Department of Finance is satisfied that because the Comptroller and Auditor General has not raised any issue with NAMA’s EIR accounting for interest receivable that all is fine and dandy. Reference was also made to  ” comments made at the Committee of Public Accounts, NAMA has advised that it is examining with the Office of the Comptroller and Auditor General how it could enhance its disclosures on the movement in the original par value of NAMA’s loans”. What doesn’t inspire confidence is junior Minister Hayes claiming that NAMA had “supremely discounted” the loans acquired from the banks. As we have seen property values in Ireland have decline 20-30% since November 2009 – NAMA’s valuation date – and NAMA paid a 10% average Long Term Economic Value, to boot. The EIR methodology subjectively depends on NAMA’s expert view of what will be realised from the underlying security, and given NAMA’s unwarranted optimism which has been proved wrong at practically every turn, this EIR methodology should give us cause for concern.

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