Brendan Burgess
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Just like any other economist, Morgan Kelly is sometimes right and he is sometimes wrong. He is spectacularly wrong on the cost of mortgage defaults.
While giving the Hubert Butler lecture in Kilkenny, in early August, Professor Morgan Kelly said:
Professor Kelly is wrong on so many counts, it beggars belief
I checked with the Central Bank and the Central Statistics Office and they do not know how many mortgages in excess of €1m are on the books of the covered banks, although I understand that the CSO may be able to produce this information in the future as part of their house price index work.
The 10,000 figure is a huge exaggeration. Rather than rely on anecdote and broker estimates, I checked directly with sources in each of the covered institutions - Bank of Ireland, ICS, AIB, PTSB and the EBS and the absolute maximum number of €1m mortgages on the books today is 2,500 and this includes principal private residences and investment properties. This represents around 3% of the total mortgage book of €98 billion.
How many of these will default? We know that around 90% of these are paying the full interest and capital repayments on these mortgages at the moment. Morgan Kelly expects a Michael Davitt type figure to lead a mortgage strike and that 25% of borrowers will default. I wouldn’t expect that doctors, dentists, solicitors and accountants will form the bedrock of this campaign, but I will use Kelly’s 25% default figure anyway.
Estimated number of €1m mortgages issued by covered banks|2,500
Estimated default rate|25%
Estimated number of defaults|625
Average loss per mortgage|€500k
Potential cost to the taxpayer|€300 million
Cost implied by Professor Kelly|€5 billion + So the taxpayer has a potential loss of €300m, not the €5 billion which Morgan Kelly implied. So he is out by a factor of around 20. And these losses have been fully provided for in the recent stress tests and recapitalisations so there will be no further cost to the taxpayer.
This is not the first time that Morgan Kelly has made an error of this magnitude. In November last year he spread panic when he said
But only a few months earlier, in June 2010, he computed the total cost of the bank bailout to be €106 billion. This included a figure of only €8 billion for Irish mortgages which represented a 20% default rate. By November he was forecasting 200,000 defaults, which would be a 25% default rate. I think that this 25% default rate is too high, but even if this forecast is correct, it will cost the taxpayer around €10 billion . How can this be “ a good deal more traumatic than the bank bailout”?
Yesterday, he said that the cost of debt forgiveness for home owners would be “only” €6 billion. Let’s say that is €4 billion for the covered banks. The covered banks have €23 billion in buy-to-lets. Even if half of these default, the cost will be €6 billion. So the total cost of mortgage defaults will be around €10 billion. Let's assume I have made a mistake somewhere in my calculations and double the cost to €20 billion.
Anglo alone will cost around €35 billion. In the most extreme circumstances outlined by Professor Kelly, the losses on mortgages will account for 10% of the total cost of the bailout. It was outrageous to characterise this as being a good deal more traumatic than the bank bailout.
Professor Kelly’s forecast on house prices has been spectacularly right. But his forecasts on the cost of mortgage defaults are spectacularly wrong. It is important that policymakers, the media and the public don’t attribute to him an infallibility which he has not earned.
While giving the Hubert Butler lecture in Kilkenny, in early August, Professor Morgan Kelly said:
With these comments, Professor Kelly implied that the state will need to provide an additional €5 billion or more to account for these losses. This is part of the reason why he says that the national debt will be €250 billion by the end of 2015. This information was based on a press release by the Irish Brokers Association, which itself, was based on anecdotes.
Professor Kelly is wrong on so many counts, it beggars belief
- It is likely that the total number of mortgages in excess of €1m is probably around 4,000 and not 10,000.
- The total number of interest-only mortgages is probably less than 2,000. Only Bank of Scotland did full-term interest only mortgages as a standard product. Some others were interest-only for a few years and then switched to capital and interest.
- These loans were given to professionals such as doctors, dentists, solicitors, barristers and accountants. While most of these have suffered a decline in their income, the vast majority can well afford a cup of coffee and 90% of them are making their repayments in full and on time each month.
- But worst of all, Professor Kelly made no distinction between mortgages given out by the covered banks such as AIB and Bank or Ireland and those given out by the foreign owned banks such as Bank of Scotland and Ulster Bank for which the taxpayer has no liability. None of the covered banks did full-term interest only loans as standard, so there are probably fewer than 100 of these – not 10,000.
I checked with the Central Bank and the Central Statistics Office and they do not know how many mortgages in excess of €1m are on the books of the covered banks, although I understand that the CSO may be able to produce this information in the future as part of their house price index work.
The 10,000 figure is a huge exaggeration. Rather than rely on anecdote and broker estimates, I checked directly with sources in each of the covered institutions - Bank of Ireland, ICS, AIB, PTSB and the EBS and the absolute maximum number of €1m mortgages on the books today is 2,500 and this includes principal private residences and investment properties. This represents around 3% of the total mortgage book of €98 billion.
How many of these will default? We know that around 90% of these are paying the full interest and capital repayments on these mortgages at the moment. Morgan Kelly expects a Michael Davitt type figure to lead a mortgage strike and that 25% of borrowers will default. I wouldn’t expect that doctors, dentists, solicitors and accountants will form the bedrock of this campaign, but I will use Kelly’s 25% default figure anyway.
Estimated default rate|25%
Estimated number of defaults|625
Average loss per mortgage|€500k
Potential cost to the taxpayer|€300 million
Cost implied by Professor Kelly|€5 billion +
This is not the first time that Morgan Kelly has made an error of this magnitude. In November last year he spread panic when he said
This hit the headlines internationally with papers such as the Guardian claiming that “a new wave of toxic [mortgage] debt could sink the country entirely”
But only a few months earlier, in June 2010, he computed the total cost of the bank bailout to be €106 billion. This included a figure of only €8 billion for Irish mortgages which represented a 20% default rate. By November he was forecasting 200,000 defaults, which would be a 25% default rate. I think that this 25% default rate is too high, but even if this forecast is correct, it will cost the taxpayer around €10 billion . How can this be “ a good deal more traumatic than the bank bailout”?
Yesterday, he said that the cost of debt forgiveness for home owners would be “only” €6 billion. Let’s say that is €4 billion for the covered banks. The covered banks have €23 billion in buy-to-lets. Even if half of these default, the cost will be €6 billion. So the total cost of mortgage defaults will be around €10 billion. Let's assume I have made a mistake somewhere in my calculations and double the cost to €20 billion.
Anglo alone will cost around €35 billion. In the most extreme circumstances outlined by Professor Kelly, the losses on mortgages will account for 10% of the total cost of the bailout. It was outrageous to characterise this as being a good deal more traumatic than the bank bailout.
Professor Kelly’s forecast on house prices has been spectacularly right. But his forecasts on the cost of mortgage defaults are spectacularly wrong. It is important that policymakers, the media and the public don’t attribute to him an infallibility which he has not earned.