Borrowers in arrears are availing of free credit

[spanners]

I dont believe the 25% price increase in the last year amounts to a bubble I think it represents a bounce off the bottom of the market which had overshot. As others have already said, for a bubble to exist, an abundant supply of credit is needed and this is not the current situation.

I'm a frequent reader of this forum but only just registered now to ask a question on the above that has been troubling me.

We keep hearing that for a bubble to exist cheap and easy credit must exist and because the banks aren't lending at high levels ergo we are not in a bubble.

But surely the level of arrears in the mortage is a form of cheap and easy credit? I am not talking about borrowers who are month or two behind but more those in longer term arrears, the only section of arrears which appears to be growing:

Longer-term arrears continued to increase, however, as the number of accounts in arrears over 360 days reached 60,995 at end-June, equivalent to 8 per cent of the total stock of PDH mortgage accounts. All of this increase was driven by accounts in arrears of over 720 days, which rose by 1,752 and now constitute 29.4 per cent of all accounts in arrears, and 70.3 per cent of arrears outstanding.

Source: Central Bank Statistics on Mortgage Arrears Q2 2014 (Can't post links but google it)

That means collectively those who have not paid mortgage in two years + are effectively availing of nearly €750m of not only cheap but free credit!

And those figures only refer to PDH mortgages, not BTL!

If you are two years behind in your mortgage the chances are you can't afford the mortgage and consequently you cant afford the house you live in. Those houses should be on the market and easing supply and prices.

In my opinion this bubble is driven by a supply problem, but the supply problem is driven by abundant credit, albeit in an inverse fashion, but ultimately the bubble is driven by credit. Just because the banks are not issuing new loans it does not mean there is no credit in the property market.

Can you follow my logic? Have I got all this wrong? I'm a bit confused every time I hear the no credit - no bubble argument.

 

[balmed out]

I hadn't thought of it like that Spanners, interesting point of view.

 

[amgd28]

I'm a frequent reader of this forum but only just registered now to ask a question on the above that has been troubling me.

We keep hearing that for a bubble to exist cheap and easy credit must exist and because the banks aren't lending at high levels ergo we are not in a bubble.

But surely the level of arrears in the mortage is a form of cheap and easy credit? I am not talking about borrowers who are month or two behind but more those in longer term arrears, the only section of arrears which appears to be growing:

Longer-term arrears continued to increase, however, as the number of accounts in arrears over 360 days reached 60,995 at end-June, equivalent to 8 per cent of the total stock of PDH mortgage accounts. All of this increase was driven by accounts in arrears of over 720 days, which rose by 1,752 and now constitute 29.4 per cent of all accounts in arrears, and 70.3 per cent of arrears outstanding


If you are two years behind in your mortgage the chances are you can't afford the mortgage and consequently you cant afford the house you live in. Those houses should be on the market and easing supply and prices.

In my opinion this bubble is driven by a supply problem, but the supply problem is driven by abundant credit, albeit in an inverse fashion, but ultimately the bubble is driven by credit. Just because the banks are not issuing new loans it does not mean there is no credit in the property market.

Spanner,
I think you have hit the nail on the head! (excuse the tool pun!)

I have not heard this analysis from any commentator, but I think your logic stacks up. As you say if the free credit that is being extended to those living in houses they are not paying for was immediately withdrawn, then housing stock would become available.

However this would also then impact the demand for rental at the lower end of the market, putting more pressure on prices as supply has not been increased.

It would be good to see an economist run the numbers on this

 

[spanners]

That's what most people say when I voice it, "Hmmm, interesting I hadn't thought of it like that"

I'm no economist, but I'd also love to see someone qualified take a look at the theory.

 

[spanners]

However this would also then impact the demand for rental at the lower end of the market, putting more pressure on prices as supply has not been increased.

I'm not sure that it would put pressure on rents. If these 60,000 odd houses come on the market, it would have a massive increase on supply of both for sale and rental stock since people who purchase them will either do so to live in or rent out.

If they are purchasing as a PDH they'll free up a rental property, if they are an investor they'll create another rental unit on the market.

Again I'd stress I'm no economist, just thinking out loud and cannot really see the flaw in the logic.

 

[Branz]

The definition of arrears needs to be explained.
I don't know what it is but this what I have seen.

I have a neighbour where the restructured loan expired end June and a new one is being delayed pending sale of a property.

He is still paying the "old" monthly payment but the letter that arrived a few days ago says he is more than 90 days in arrears for the whole lot and that blah blah blah will happen.

To say folk are 720 days in arrears, what does this mean?
Is there no agreement in place?
Are they paying nothing?
?

 

[110quests]

This arrears question puzzled me some time back and my understanding now is :

720 days would be 2 years so a person is in arrears of 2 years worth of repayments.

This total amount may have occurred historically, or through part payments over a few years or through paying alternate months or such over a longer period.

If a payment of e2000pm is due and for 4 months e1000 only is pd :shortfall/arrears e4000 = 2 months arrears for that year.

If full payments are maintained for following year but the e4000 is not repaid then that account is still 2 months in arrears, not a year and two months.

Some posters here tell that in some cases no payments at all have been made for years.

This is my understanding of arrears. Others here may wish to express it differently.

 

[44brendan]

He is still paying the "old" monthly payment but the letter that arrived a few days ago says he is more than 90 days in arrears for the whole lot and that blah blah blah will happen

This is a standard CCMA 120 day letter. Under CCMA guidelines this letter must be issued to all MARP clients in arrears on a 3 monthly cycle. The "blah blah blah" element is dictated by CB requirements.

 

[Branz]

This is a standard CCMA 120 day letter. Under CCMA guidelines this letter must be issued to all MARP clients in arrears on a 3 monthly cycle. The "blah blah blah" element is dictated by CB requirements.

I agree with that but to develop the point made by 110
1: Loan say of 1 mill with 20 years to run, arrears in payments of say 4k
2: the case I describe, loan term has expired, loan balance 500k

What gets reported by lender to CB as arrears for these two loans: 504K?

 

[110quests]

I agree with that but to develop the point made by 110
1: Loan say of 1 mill with 20 years to run, arrears in payments of say 4k
2: the case I describe, loan term has expired, loan balance 500k

What gets reported by lender to CB as arrears for these two loans: 504K?

Hi ircoha, Brendan has a KeyPost " understanding what arrears actually means"
from 23/11/2013. You will find it helpful.

 

[spanners]

Hi ircoha, Brendan has a KeyPost " understanding what arrears actually means"
from 23/11/2013. You will find it helpful.

So from Brendan's post:

"6 months arrears does not mean that the borrower has made no payment in 6 months.
It means that the arrears balance is the equivalent of 6 months' repayments."

but if the longer term arrears i.e over 720 days or 2 years is the only sector of arrears is growing logic would suggest that a fair proportion of thise simply have stopped paying their mortgage, or at least paying a very tiny portion of it.

Either way they are availing of free or cheap credit which is its own way driving the bubble.

 

[44brendan]

I agree with that but to develop the point made by 110
1: Loan say of 1 mill with 20 years to run, arrears in payments of say 4k
2: the case I describe, loan term has expired, loan balance 500kWhat gets reported by lender to CB as arrears for these two loans: 504K?

Every lending institution is obliged to file a monthly return on all MARS cases(HL's & BTL loans) to the CB. Arrears amount quoted are actual arrears i.e. 4K in your case. However in some cases historic arrears may have been capitalised to the loan and client may be currently on a reduced repayment schedule. This will mean that if the revised repayments are on line the loan is not in arrears.
Hope this clarifies your query!

 

[dub_nerd]

I'm not sure that it would put pressure on rents. If these 60,000 odd houses come on the market, it would have a massive increase on supply of both for sale and rental stock since people who purchase them will either do so to live in or rent out.

If they are purchasing as a PDH they'll free up a rental property, if they are an investor they'll create another rental unit on the market.

Again I'd stress I'm no economist, just thinking out loud and cannot really see the flaw in the logic.

I think your basic theory is right -- these borrowers are living on free credit. The flaw in your logic is that you are forgetting who else is living on free, or almost free, credit -- the banks! Through the LTRO (Long Term Refinancing Operations) and the latest TLTRO arrangements, the banks can borrow from the ECB using their loans as collateral. They get super-low rates of 0.15% to 0.25%. Now, the idea of this is that it allows the banks to lend to businesses and individuals, providing a stimulus to the European economy.

However, the banks may be stupid, but they're not INSANE! Why lend to dodgy customers, in a country where people are showing an increasing reluctance to pay their boom era debts? Instead you can lend to the government and get a sovereign guarantee, while making a decent margin over your borrowing costs.

Oh, and those arrears cases that you think could be pursued so that the houses can be put on the market... ARE YOU NUTS? (no, of course you're not, it's a rhetorical question and your proposal would make perfect sense in a normal world). That's the last thing the banks want to do. They can borrow 7% of their current lending in LTRO money. The last thing they want to do is start calling in those loans, and demonstrating that lots of them are junk which should never have been allowed as collateral. And flooding the market? ... no way! the banks want to keep prices up so that they can keep the notional value of their collateral high.

It's all part of the ongoing can-kicking operation whereby the longer things go on just as they are, the longer the banks have to shift their losses onto other people. They get guaranteed jam for nothing, while the costs are passed on to the taxpayers of the debtor countries and the people buying houses at inflated prices in a highly abnormal market.

 

[Gerard123]

If the banks evict people from the 60,000 houses, say three per house on average, that's 180,000 people. Where would they live? How would that not put pressure on the rental market? It would cause havoc and massive problems.

I do agree with your basic premise that the banks need to take much stronger action on people not paying or living in houses that they cannot afford. However this needs to be done on a managed and sensible basis.