Professor Gregory Connor, the Irish-American finance and economics lecturer at Maynooth has taken a stab at the level of so-called “strategically defaulting mortgages” in Ireland today. It is a very thorny subject because “strategic defaulters” can afford to repay their mortgage but they choose not to, because they think a distressed mortgage will give them a better bargaining position in the future, for example, in negotiating a debt writedown. So, there’s something sneaky and malicious about “strategic defaulters” as compared to the common-or-garden mortgage defaulters who simply can’t afford to repay their mortgages.
A month ago, Professor Connor produced a blogpost for irisheconomy.ie in which he suggested that at least 35% of Irish mortgage arrears were driven by “strategic defaulters”. The 35% was lifted from US studies, and because the decline in Irish property prices has now been more severe than in the US, the Professor believes the true level of “strategic defaulters” in Ireland is more than 35%, however the Professor acknowledged the severe difficulties with collating data on this thorny subject and his blogpost really acted as a basis for debate.
In the Dail this week, Minister for Finance Michael Noonan dismissed the 35% claim saying it was “wholly anecdotal and not based on any robust, structured, or in-depth analysis of the situation.” Mind you, there was no proposal to study the issue, which is relevant to the ultimate cost of sorting out the mortgage crisis. The Minister was responding to a series of questions from the Fianna Fail finance spokesperson, Michael McGrath.
The full parliamentary questions and response are here.
Deputy Michael McGrath: To ask the Minister for Finance his views on whether information supplied to banks by customers through the standard financial statement contradicts suggestions that up to one third of mortgage arrears cases are strategic defaults; and if he will make a statement on the matter.
Deputy Michael McGrath: To ask the Minister for Finance his views on the fact that approximately half of restructured mortgages fall back into arrears; the way this information will influence the design of solutions to mortgage arrears difficulties; and if he will make a statement on the matter.
Minister for Finance, Michael Noonan: I propose answering Questions 46 and 47 together.
The recently published Central Bank data on mortgage arrears for the end December 2012 shows that at end-December 2012 out of a total stock of 79,852 private dwelling houses, just over 37,000 restructured mortgage accounts were in arrears. The data shows that the accounts in arrears include accounts that were in arrears prior to restructuring where the arrears balance has not yet been eliminated, as well as accounts that are in arrears on the current restructuring arrangement.
The Deputy will be aware that the Central Bank yesterday announced new specific time-bound targets for the six main banks to ensure early and measurable progress by banks in resolving mortgage arrears cases in a durable manner. The Central Bank will also in the months ahead, set demanding quarterly targets for the conclusion of sustainable solutions and for the subsequent performance of those solutions. Progress will be monitored closely and the Central Bank will take any further action which will be deemed necessary.
The suggestion that the rising number of mortgage arrears is in part being driven by increased levels of strategic default, that is individuals deliberately withholding payments when they are in a position to service their debt in hope of gaining concessions from lenders, is wholly anecdotal and not based on any robust, structured, or in-depth analysis of the situation.
In the context of the engagement between banks and borrowers on the provision of long term and durable solutions, the Central Bank has indicated that it expects that banks will have more challenging and in-depth conversations with borrowers on the reasonable priority that should be afforded to mortgage repayments, having regard to other commitments and payments by a household.