# Central Bank paper on end of mortgage term shortfalls



## Brendan Burgess (9 Aug 2021)

https://www.centralbank.ie/statisti...owers-facing-end-of-term-repayment-shortfalls

From the Conclusion at the end: (The rest of the extracts are in order of appearance in the paper.)

The data illustrate that the current levels of, and approach to, long-term restructuring are not sufficient to solve the problems for all these borrowers. In summary, there are accounts with restructuring arrangements that even if successfully adhered too will not result in full repayment.

This "Behind the Data" (BTD) estimates the size of the cohort of mortgage borrowers facing repayment shortfalls. It is the first data collection of firms’ assessments on the long-term sustainability of all PDH mortgage accounts, assessed by the borrowers’ ability to repay the full final balance at the end of the term.

, as at March 2021, around 13 per cent of all PDH mortgage accounts are assessed by firms to have a shortfall in repaying the balance at the end of their term.  By further segmenting this cohort into different groups, we differentiate according to the level of shortfalls and complexity of circumstances.

There are four separate categories:

Account is currently in arrears; and/or
Account has not made full capital and interest monthly payments for the last 12 months under an existing alternative repayment arrangement; and/or
Repayments under an existing alternative repayment arrangement will not lead to full repayment of the account by the maturity date, and/or
Account is classified as in default or non-performing under international accounting standards.
For those accounts with both a shortfall and no agreement to cover it, the mortgage account is included in the cohort of accounts classified as having a repayment shortfall.

The scale of the shortfall is categorised by firms into four groups which are:


High ability to repay balance: the shortfall is assessed to be 10 per cent or less; or
Moderate ability to repay balance: the shortfall is greater than 10 per cent but less than 50 per cent; or
Low ability to repay balance: the shortfall is at least 50 per cent, or
Uncertain ability to repay: the scale of the shortfall is uncertain because there are not sufficient details or engagement between the firm and the borrower to facilitate the assessment. These borrowers are expected to be primarily in the "low" ability to repay category.Accordingly, the low and uncertain groups are consolidated in the analysis presented in this paper.
[The 10% appears to be of the current mortgage balance. It's not related to the value of the house or to the person's income.]



 79 per cent of accounts have positive equity (i.e. the outstanding loan is less than value of property) with the remainder in negative equity.


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## Brendan Burgess (9 Aug 2021)




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## Brendan Burgess (9 Aug 2021)

Ed Sibley made a speech at the launch and here are the extracts relevant to this 



			https://www.centralbank.ie/news/article/speech-the-need-for-continued-focus-on-resolving-long-term-mortgage-arrears-ed-sibley-13-july-2021
		


Unfortunately, not all borrowers can repay their loans in line with original contractual terms. Successfully resolving distressed debt is important to both the performance of the economy and the fair treatment of borrowers.


Approximately one quarter of borrowers in LTMA are 60 or over. It is unlikely that many of these borrowers' incomes are going to improve as they approach and go into retirement.

For these borrowers, we have found that the suite of solutions included in firms’ waterfalls is typically not sufficiently extensive or ambitious. The range of solutions does not take into account the scale of the financial and demographic challenges that exist in the firms’ LTMA portfolio. This is not just a case of requiring better use of existing waterfalls (as above), but consideration of whether the suite of solutions is sufficient. Greater innovation is required, anchored by consideration of i) resolving the underlying affordability issues; and ii) longer-term cost of credit for the borrower (and so not overly relying on long-term interest only arrangements).

While more challenged from an income perspective, these borrowers typically have lower loan to values and outstanding mortgage balances, and somewhat higher property values. Restructuring solutions exist, which enable the borrower to use their equity to support the resolution of their arrears whilst keeping them in their home, if staying in their home is a key objective for the borrower.


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## Brendan Burgess (9 Aug 2021)

I am not really sure what the problem is here?

The Central Bank is clearly happy that a 65 year old living in a mortgage free home can take out a Life Loan i.e. they can borrow money and roll up the interest without making any repayments.

If so, why should they be worried if a 50 year old reaches the end of the mortgage term set 20 years ago owing €60k?

Brendan


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## Brendan Burgess (9 Aug 2021)

What should lenders and borrowers be worried about?

People who are making no repayments who are in deep negative equity.


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## NoRegretsCoyote (9 Aug 2021)

Brendan Burgess said:


> I am not really sure what the problem is here?
> 
> The Central Bank is clearly happy that a 65 year old living in a mortgage free home can take out a Life Loan i.e. they can borrow money and roll up the interest without making any repayments.
> 
> If so, why should they be worried if a 50 year old reaches the end of the mortgage term set 20 years ago owing €60k?



At borrower level interest-only from retirement til death generally isn't a big deal once there is enough positive equity.

My guess is that at system level it means the banks need to keep a lot of expensive capital deployed for these kinds of loan for decades.


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## Brendan Burgess (9 Aug 2021)

There are two completely separate categories here.

First, you have people who have rescheduled their mortgage but will have a shortfall when the original mortgage term ends.

Second, you have people who are paying little or nothing - they are a completely different category.

There is very little in common between the two categories and they should not even be discussed in the same paper. Adding the two numbers together and saying 13% of people face a shortfall is meaningless.  It's worse than adding apples and oranges. It's adding terminal cancers and skin conditions together. 

I will confine my comments to the first category - those who are paying off their mortgages, but will have a shortfall when the mortgage matures.

Mary took out a mortgage when she was 35  of €200k over 30 years.  She has paid every payment when it was due. After 20 years, the balance on her mortgage will be about €90k.  No problem for her, for her lender or for the Central Bank. She will have the mortgage cleared on schedule at age 65.

Her next door neighbour John , also aged 35, took out a mortgage of €200k , but over 20 years.   But he ran into difficulty and rescheduled his mortgage. Unfortunately for him, at the end of 20 years, there will be a shortfall of €90k.

They have identical circumstances, but yet the Central Bank deems John's loan to be non-performing. This makes no sense.


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## Brendan Burgess (9 Aug 2021)

Peter is aged 60. His mortgage of €80k will mature when he is 65 and there will be a shortfall of €50k.  A big problem for the Central Bank.

His next door neighbour, Ann, is 60 and is mortgage free.  She has just taken out a Life Loan of €150k from  Seniors Money and will be rolling up the interest.  No problem for the Central Bank.


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## Brendan Burgess (9 Aug 2021)

Mortgage lenders make their money by lending to well secured borrowers at a profitable mortgage rate.

If a 65 year old is paying a variable 3% interest on a €100k mortgage secured on a €300k house, that is very profitable lending. 

The last thing they want is for this person to clear the loan. 

I would much prefer to lend €100k interest only to a 65 year old with a €300k house than to give a repayment mortgage of €100k to a 25 year old over 30 years on a house worth €120k. 

The administration would be a lot simpler. The default rate would be a lot lower.


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## Brendan Burgess (9 Aug 2021)

This muddled thinking by the Central Bank has real life consequences. 

The Central Bank and Society generally put pressure on the lenders to do deals with their customers in arrears.

permanent tsb's preferred solution was the split mortgage.  They were very generous with an average of 50% of the mortgage warehoused and no interest charged on the warehouse.  When the mortgage rate was twice the rate being charged in other eurozone countries, these split mortgages were still very profitable. 

Huge numbers of permanent tsb customers got a great deal.  Time is a great healer for most mortgage problems.  The house increases in value, the person's income recovers, they get an inheritance and they can get back on track. 

The Central Bank gave ptsb a choice. Make a 100% provision for the shortfall or treat the whole mortgage as non-performing. 

So permanent tsb was forced to sell these very profitable mortgages to a vulture fund. 

In contrast, AIB's split mortgage was much less generous. It was much harder to get a split mortgage from AIB and the amount warehoused was much smaller. It cost AIB very little to make a full provision for the shortfalls, because they were much smaller. 

So the Central Bank penalised permanent tsb for their generosity.  And customers who would prefer to be with a mainstream lender ended up owned by vulture funds. 

All because of the Central Bank's failure to understand that these mortgages are very profitable and classifying them as non-performing is crazy.


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## Brendan Burgess (9 Aug 2021)

What has the "end of term" got to do with it? 

The most relevant date would be the person's retirement age. 

A 25 year old who took out a mortgage over 20 years who is facing a shortfall at age 45 is not a problem. 

A 65 year old with a mortgage shortfall might be a problem. 

Brendan


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## SiobhanK (9 Aug 2021)

Brendan Burgess said:


> This muddled thinking by the Central Bank has real life consequences.
> 
> The Central Bank and Society generally put pressure on the lenders to do deals with their customers in arrears.
> 
> ...


Brendan - I don't think the CBI are at fault for this - rules in relation to NPL's come from Europe...


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## Brendan Burgess (9 Aug 2021)

Hi Sk

They are part of the rule makers so they need to fix the rules.

But they were enthusiastic about forcing permanent tsb to sell their profitable warehoused loans. 

Brendan


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## lff12 (10 Aug 2021)

Brendan Burgess said:


> https://www.centralbank.ie/statisti...owers-facing-end-of-term-repayment-shortfalls
> 
> From the Conclusion at the end: (The rest of the extracts are in order of appearance in the paper.)
> 
> ...


This is LONG LONG overdue. Its bizarre that is has taken decades for the sector to notice that people already in arrears for a big bill like a morgtage almost certainly cannot pull out 2 or 3 payments they previously missed a few months later.


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## lff12 (10 Aug 2021)

Brendan Burgess said:


> There are two completely separate categories here.
> 
> First, you have people who have rescheduled their mortgage but will have a shortfall when the original mortgage term ends.
> 
> ...


You have a point there - there is a huge difference between Tom who missed 5 payments last year and is back making payments but couldn't possibly pay 5 payments in one go, and Joseph who hasn't paid anything for 6 or 7 years.  I'm not clear why they frame it as an "end of term" problem either, its as much of an issue surely if someone is in arrears in their term.

The issue I would see is a failure to remedy scenarios where people are back earning after a gap in earnings, but couldn't possibly make up the arrears - and that would be SO easy for banks to resolve with a little will.

Plus they've always been like this - my father was 6 months in arrears just a couple of months before the end of his mortgage term in 2005, when banks were under less scrutiny, and they were howling about starting the repossession process. In the end he had a heart attack and the insurance payment cleared it in full plus all his other borrowings and outstanding tax owed. This business of insisting that arrears are repayable is crazy when most people get into trouble because they've experienced a significant income drop in the first place - its not like something is going to come along to make up for the missing months of earnings.


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## Brendan Burgess (10 Aug 2021)

lff12 said:


> a failure to remedy scenarios where people are back earning after a gap in earnings, but couldn't possibly make up the arrears - and that would be SO easy for banks to resolve with a little will.



If the borrower engages, the lender will always find a solution for these guys.  Capitalisation of arrears or extending the term. 

The problem is that the Bank's criticisms of the lenders might make the banks more reluctant to offer solutions to these guys.


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## Brendan Burgess (10 Aug 2021)

lff12 said:


> my father was 6 months in arrears just a couple of months before the end of his mortgage term in 2005, when banks were under less scrutiny, and they were howling about starting the repossession process.



That is very unusual. 

I suspect that they were not howling at all.

They were just issuing the warnings which they were obliged to issue. 

Brendan


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## Brendan Burgess (12 Aug 2021)

I have sent in a submission to the Central Bank on this paper which I attach to this thread. 

Brendan


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