# Central Bank study show that 40% in deep arrears not engaging with lender



## Brendan Burgess (6 Dec 2017)

Central Bank study issued today:

An Economic Letter entitled  Borrower-lender engagement during the Irish mortgage arrears crisis looks at the issue of borrower-lender engagement in considering why, despite some progress, mortgage arrears rates, particularly among those in arrears of more than two years, remain stubbornly high in 2017.The key findings are:


·  New estimates show that 61 per cent of borrowers in deep-arrears had engaged with their lender by the end of 2016. This figure rose to more than 70 per cent for those with arrears of less than 720 days.

·  Unlike engaged borrowers with lower arrears balances, those in deep arrears in the majority received temporary modifications in the past that have since elapsed. This pattern points to the important role of permanent, sustainable restructuring arrangements in the resolution of the mortgage arrears crisis.

·  Engaged borrowers are likely to have larger loans than non-engaged borrowers. In general, however, the explanations for non-engagement are likely to be more idiosyncratic and borrower-specific than anything identifiable in the data.

*Notes: *
For the purposes of this research, an \Engaged
Borrower" is dened as any mortgage for which
we see in the data any of the following:
1.The loan is marked as being permanently
modied.
2.The loan is marked as currently being in a
temporary modication.
3.The loan is marked as having completed a
Standard Financial Statement (SFS).


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## Brendan Burgess (6 Dec 2017)

"The implication is that
there are 9,680 mortgages (associated with over
eight thousand unique properties) that are in the
deepest state of arrears and have had no engagement
with these ve lenders. Coupled with the
1,676 non-engaged mortgages in the 361-720 DPD
group and the 2,250 mortgages in the 91-360 DPD
group, these represent the most dicult cases for
policy makers and lenders faced with resolving the
NPL crisis in the Primary Dwelling House segment
of the mortgage market."

So...
Total _accounts _in arrears over 90 days and not engaging: 13,606 (9680 + 1676 +2250)
= unique properties of around 11,000 (The average property has 1.2 accounts associated with it.)


Only 20% of people less than 1 year in arrears not engaging

39% of those over two years are not engaging.

*Note:*

The first thing to note is that, of
664,981 Primary Dwelling mortgages outstanding
and in the data at end-December 2016, 151,263
or 22.7 per cent are measured as having engaged
with their lender. 109,512 of these engaged mortgages
are currently at Zero DPD, i.e. they have
no arrears. It is not surprising that such a large
share of engaged borrowers are currently at Zero
DPD, given that all permanently modied mortgages
automatically switch to Zero DPD when an
arrears capitalization forms part of the modication.


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## Brendan Burgess (6 Dec 2017)

Regardless of
the mortgage modications potentially available
to customers, if borrowers in deep levels of mortgage
arrears do not engage with their lenders, the
inevitable outcome is a continued accumulation
of arrears balances and eventual repossession proceedings.
Alternatively, lenders may exercise options
to sell portfolios of loans where deep-arrears
borrowers have not engaged. From a banking
point of view, such non-engaged in-arrears borrowers
have the potential to delay the resolution of the
NPL problem on Irish bank balance sheets.


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## Brendan Burgess (6 Dec 2017)

"I extend on these estimates by showing the outcome
of the engagement for those who engaged.
This analysis shows that early attempts at temporary
modication were made and failed for many of
the engaged borrowers that are currently in 720+
arrears. Those engaged borrowers in arrears of less
than one year, on the other hand, are far more
likely to have received a sustainable, permanent
modication as a result of their engagement with
their lender. These diverging patterns based on
modication type highlight the importance of the
quality and sustainability of solutions oered by
lenders, and point to the continuing need for more
such solutions to be issued to aid the resolution of
the mortgage arrears crisis."

Not sure if this is correct reasoning. 

Many borrowers needed only temporary modification.  They got that and they recovered. 

Brendan


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## Brendan Burgess (6 Dec 2017)

"I finish the empirical exercise by asking the
question: are engaged and non-engaged borrowers
dierent? The answer to this question could
potentially aid policymakers in targeting interventions
to encourage engagement among the nonengaged
group. The data suggest that there are remarkably
little dierences between the two groups:
the share of loans in Dublin and on tracker mortgages
are identical across the two borrower types,
while average borrower age, loan age and current
loan to value ratio are indistinguishable across the
groups. The only noticeable dierence uncovered
in the analysis relates to loan size: within a given
arrears group, those with larger loan balances are
more likely to have engaged."

That is very interesting. Someone on a tracker is just as likely not to engage as someone on a non-tracker. 

Brendan 

BTW - why is it when I copy and paste from a PDF, the letters "fi" disappear as in "difference" and "finish"? I corrected finish manually.


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## Brendan Burgess (6 Dec 2017)

"The results are striking: of 15,264 loans that have engaged and are in 720+, just 16 per cent have received a permanent modication, while 64 per cent had received a temporary modication that has since elapsed, with another 13 per cent having never had a modication arrangement. These gures are in stark contrast to the group of earlier arrears engaged loans: the share of permanently 
modied loans among the engaged group is 67 and 51 per cent in the 1-90 and 91-360 DPD groups, respectively. These findings suggest that the arrangements that have been arrived at between lender and borrower have been characterised by lower levels of sustainability than those among the lower-arrears groups._ If the 720+ group is to be resolved while remaining in the Irish banks' mortgage portfolios, deeper and longer-lasting restructure arrangements must be arrived at_." _my italics 
_
I don't see this at all.  They are very different populations. We would need to know a lot more about the history and characteristics of the 720+ group. A lender will grant a permanent modification such as a split mortgage, only if the lender expects that the modified mortgage is affordable and that it will solve the problem.  This group did not get permanent modifications randomly. 

Brendan


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## Brendan Burgess (6 Dec 2017)

I am trying to figure out this graph. 

Let's take the most right hand pair of bars. 

They are the borrowers in 720+ days of arrears 
Their average LTV is 100% 
Half have engaged, but half haven't.   

Compare this to the Left hand pair of bars. 
They are in 1-90 days arrears 
Their average LTV is about 60 days
A little over half of them have engaged - but not much different from the 2 years + arrears. 

This tells us that those who are 720+ in arrears are much more likely to be in negative equity. 

Brendan


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## rob oyle (6 Dec 2017)

Brendan Burgess said:


> View attachment 2377
> This tells us that those who are 720+ in arrears are much more likely to be in negative equity.



Brendan, not sure if I'm clearing the fog but would it be the case that if you're to much in arrears then you're more likely to be in negative equity, because you haven't been paying down the capital? This would mean your mortgage is 'growing' at the size of your interest rate each year...
So it's a circular reference - you're in negative equity because you're not paying down your mortgage and you're not paying down your mortgage because you're in negative equity?


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