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.
NAMA Wine Lake 
“wholly anecdotal and not based on any robust, structured, or in-depth analysis of the situation.”
For once, I agree with Michael Noonan.
At least Gregory Connor attempted some kind of analysis. While I would not agree with his figure of 35% being applied across the board to both OO and BTL mortgages, his 35% may not be far off the mark. One has to look carefully at the definition used by GC.
“Strategic arrears denotes the amount of funds voluntarily not paid on mortgages by homeowners and buy-to-let investors who have the ability to meet the payments but choose not to do so. The available funds are spent on current (non-necessity) consumption or redirected elsewhere, outside the control of the mortgage-holding bank. Distressed arrears are the “can’t pay” component of mortgage arrears and strategic arrears are the “won’t pay” component.”
So if a parent chooses to delay or not pay BTL mortgage because he or she has to fund college expenses for children, is that a strategic default?
How about golf club fees?
How about a foreign holiday? Or two?
The GC figure for OO is imho far too high.
However, all BTLs (100%) could in fact be considered strategic default in the sense that an investment is loss making and holding onto the loss making investment is a strategic decision to defer the loss, for whatever reason.
Of course the really big defaulters get out under the shield of limited liability, whereby debt, sometimes loaded onto the company to boost an owners style of living or his or her ego, is defaulted on under the limited liability umbrella of the company.
Wouldn’t it be great to see the CB produce an analysis of bank bad debts, broken down between personal and corporate.
Before we get too excited about residential mortgage default, it is still in the halfpenny place when it comes to corporate default.
If Michael Noonan can convince the Department of Finance and/or the Irish Central Bank to provide access to anonymized data on an unbiased randomly selected arrears cases (just monthly income and other key characteristics) I could try to give a more structured and robust estimate. At least my evidence-based conjecture led to a valuable public discussion. And I still suspect my conjectured estimate is reasonable, as the proportion of strategic arrears in overall arrears, hence a weighted blend of the (higher) BTL proportion of strategic arrears and (lower) OO proportion of strategic arrears.
@GC
The definitions vary across the ocean.
In the US people are not expected to go hungry to pay their mortgage as they are in Ireland where routinely there are stories, even on here, of people eating one small meal a day, just to keep the (state owned) bank happy. In the US it is at least expected that you feed yourself and your children before the words ‘strategic default’ are used.Maybe even buying a decent car is considered a priority.
I would think strategic defaults in Ireland are driven more by the hopelessness of the Irish situation in a macro sense rather than individual factors, with everyone thinking ‘sure something has to give’.
There might be an interesting correlation between the age demographic and strategic defaults in Ireland which might not exit n the US.
I can only imagine the bias and blatant disrespect toward all things American you must face in your work in Ireland.., or maybe things have changed.
Michael Noonan appears to be spinning a bit here. He says:
“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.”
He is asking listeners to believe it is possible that the rising number of mortgage arrears are not, repeat not, being driven “in part” by strategic defaults. Is there anybody that actually does think there are no strategic defaults?
If there is no “robust, structured, or in-depth analysis” of particular phenomena, are analysts supposed to assume they do not exist?
If there was no strategic defaulters,there would be no need to have rent receivers,B of I recently announced that over 1,000 have been utilized.This is specifically targeted at ‘strategic’ defaulters,no info on number off properties or loans affected.
A major blunder occurred this week,clear demarcation and separation btw. BTL and PPR could have been achieved.BTL foreclosure/repo does NOT involve eviction,vacant possession is not a prerequisite to resale.
As such there is no need for judicial review,only 22 states in the US have judicial review for foreclosure of PRINCIPAL PRIVATE HOMES !
BTL’s are simply bets or ‘put options’ on resi. investment that soured-non emotional just profit/loss-with some tax implications !
The Indo today has a ludicrous piece evoking those well know property experts NCB-check NWL posts-its not worthy off linking or comment-scaremongering and blatant nonsense.
Deadbeat and strategic defaulted BTL landlords are preventing new entrants from getting a ‘bargin’ and the more astute too,why is the current irish govt, protecting this class of speculator/gambler…..
The collateral or security is ‘ring fenced’ by the current govt.’s policies and is getting cash starved and run down…last orders at the last chance saloon for this crowd of gamblers.
Significant new legislation and dramatic changes in bank/customer relations instead of a shotgun gun approach why not a rifle,pilot these new programmes in a clearly defined area..say a postal code in Dublin ending in a even number.
D4 perhaps? Nice discount store there…not Knightsbridge
@Dorothy, Hi DJ perhaps D4 but as these are all “new” and possibly subject to challenges etc.
Why not concentrate the repo/foreclosure efforts where the bankers are familiar with….economies of scale and all that,but D6 perfectly fine too!
Heard that store has closed,apparently fixer uppers/tear downs the way to go,capital can be a major hurdle……you are as witty as ever:)
I know one very aggressive strategic defaulter with 4 BTL’s in Dublin in very rentable locations. Mortgages were issued by Permanent-TSB with no requirement for a personal guarantee. All properties are deeply under water and he has been collecting the rent on the properties for the past two years and using it to pay off an entirely different commercial loan on which he had given a personal guarantee. He is quite happy to hand back the keys to PTSB but is happy to pocket the rent in the meantime. Surprisingly, PTSB has not at all been aggressive in pursuing my friend. Incidentally, my friend’s (very valuable) principal private residence was many years ago transferred to his spouse so he isn’t that worried about the loan with the personal guarantee either other than the fact he has a current and continuing business use for the particular commercial premises.
I think we certainly need more analysis on BTL mortgages for which no personal guarantees were given. I suspect the strategic default rate on these could be extremely high.
I always find it interesting that we never see any condemnation of strategic corporate default. It’s just business as usual. It only seems to be an issue when the little people might be allowed to play corporate games.
Also interesting that the good professor is based in Maynooth the intellectual home of Irish Social Justice. Well at least we have a new Pope who seems to be interested in the poor.