# Mortgages in Negative Equity three times more likely to be in arrears!



## Brendan Burgess (25 Feb 2015)

The Central Bank has today published [broken link removed]

This is the bit which I find most useful. It is based on data as of June 2014 



This is telling us that 65% of people with PDH mortgages have both performing mortgages and are in positive equity. 
20% are performing but are in negative equity.
7% of those with positive equity, are in default. 

The ones causing most concern are the 8% who are in both negative equity and arrears. 

Since June 2014, the level of arrears has fallen and the house prices are up, so it's likely that the figure of 8% should be lower again. 

*The data suggest a very high level of strategic default. *

In theory, the main issue which should affect your ability to repay your loans is your income.  Your Loan to Value should not matter.  

But this table suggests that Negative Equity really does matter 

9.7% (7%/72%) of those in positive equity are in mortgage arrears. 

28.6% (8%/28%) of those in negative equity are in mortgage arrears. 

You must make allowance that those in negative equity have larger mortgages and so are probably more likely to be in arrears, but it should not be three times the amount. 

Brendan


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## Brendan Burgess (25 Feb 2015)

45% of PDH mortgages are on tracker while 65% of Buy to Lets are on trackers. 



What I find particularly interesting about this is the default rate is much higher on Buy to Lets, whereas it should be a lot lower as so many are on trackers. 

Brendan


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## Brendan Burgess (25 Feb 2015)

The average rate for new lending for PDHs is 4.19%
The median Original Loan to Value is 78% 
The median balance is €138,000


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## Brendan Burgess (25 Feb 2015)

The likelihood of negative equity depends on when you took out your loan


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## Brendan Burgess (25 Feb 2015)

110,000 loans have been restructured.  However, most of the "restructuring" was simply rescheduling - interest only, arrears capitalisation and term extension. 

Only around 10% were genuine restructurings i.e. split mortgages or interest rate reductions.


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## 44brendan (25 Feb 2015)

Brendan Burgess said:


> What I find particularly interesting about this is the default rate is much higher on Buy to Lets, whereas it should be a lot lower as so many are on trackers. Brendan


Not really surprising! majority of BTL borrowings are " casual landlords". I.e. They bought the BTL as a medium term investment with strategy to cash-in when the property appreciated to an acceptable level. Most had at best a marginal repayment ability to meet both their PDH mortgage payments an their BTL repayments. When things got tight, priority was given to meeting HL repayments at expense of BTL loans. They are now caught in the negative equity trap and in many cases the only repayments received on BTL loans is the associated rental income.


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## Brendan Burgess (25 Feb 2015)

We have provided for 48% of the value of defaulted loans!


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## Brendan Burgess (25 Feb 2015)

44brendan said:


> Most had at best a marginal repayment ability to meet both their PDH mortgage payments an their BTL repayments. When things got tight, priority was given to meeting HL repayments at expense of BTL loans. They are now caught in the negative equity trap and in many cases the only repayments received on BTL loans is the associated rental income.



Hi brendan 

Again, this sounds like strategic default to me.

65% of buy to lets have cheap tracker mortgages. In almost all the cases of cheap trackers I have seen, the rental income covers the full repayment.   But I take your point, investors are diverting the rent to pay their other expenses.  It's a crazy strategy as they are at risk of losing their cheap tracker as a result.

Brendan


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## 44brendan (25 Feb 2015)

Brendan Burgess said:


> .65% of buy to lets have cheap tracker mortgages. In almost all the cases of cheap trackers I have seen, the rental income covers the full repayment.   But I take your point, investors are diverting the rent to pay their other expenses.  It's a crazy strategy as they are at risk of losing their cheap tracker as a result. Brendan


I might interest you in buying a parcel of BTL loans Brendan. We have a large number of problem BTL mortgages on our books. In all cases the rental income is well below level required to cover associated P&I repayments. Yes, Dublin located BTL's are now probably an exception. Admittedly I am only privy to the loan book of 1 bank. However, I would imagine that our loan profile is broadly replicated in the books of other banks. They are all on cheap tracker rates but most have significant levels of arrears going back a number of years.


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## Margot Tenembaum (25 Feb 2015)

We bought a house in 2006 for 310,000 on 100 percent mortgage with a standard SVR.
In 2004, our next door neighbours bought it for 170,000 on 90 percent LTV with tracker.
In 2002, a good friend bought a larger house in the same estate for 100,000 on 90 percent LTV and a tracker mortgage.
It's obvious that the size of the mortgage / high SVR were more important than strategy in determining our fate.
The 'strategic default' argument is a red herring in my opinion / experience and is loved by certain wonderfully altruistic heads of banks who are apparently worried about the taxpayer and the risk of moral hazard (as opposed to their remuneration and pension package).
After all, how many people want to willingly lose their home, destroy their credit rating, lose control of their finances, return to an insecure and volatile rental market  after years of home ownership, run the risk of being denied access to a basic bank account, end up in front of a judge for the first time in their lives  etc.?


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## Brendan Burgess (25 Feb 2015)

Margot Tenembaum said:


> It's obvious that the size of the mortgage / high SVR were more important than strategy in determining our fate.



The size of the mortgage certainly.  But it should not account for three times the default rate.  

Strangely enough, the stats show that there isn't a huge difference between default rates on SVRs and trackers. I find this hard to understand, but the stats seem to show this.  Part of the reason is that people who bought with trackers bought at the top of the market and so have higher mortgages. 

Why did you take out an SVR in 2006 and not a tracker?


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## Brendan Burgess (25 Feb 2015)

44brendan said:


> We have a large number of problem BTL mortgages on our books. In all cases the rental income is well below level required to cover associated P&I repayments. Yes, Dublin located BTL's are now probably an exception.



I fully understand that for SVRs. But is it the same for trackers?


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## Margot Tenembaum (25 Feb 2015)

Why did you take out an SVR in 2006 and not a tracker?[/QUOTE]

We asked for a tracker, but were refused on the basis that it was 100 percent mortgage.


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## michaelm (26 Feb 2015)

Brendan Burgess said:


> You must make allowance that those in negative equity have larger mortgages and so are probably more likely to be in arrears, but it should not be three times the amount.


Or maybe it just is; what multiplier would you put on it?  If there are so many strategic defaulters then we all should know some; how may AAMers know a strategic defaulter?  I don't know any strategic defaulters and I don't know anyone who knows a strategic defaulter.


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## Delboy (26 Feb 2015)

michaelm said:


> Or maybe it just is; what multiplier would you put on it?  If there are so many strategic defaulters then we all should know some; how may AAMers know a strategic defaulter?  I don't know any strategic defaulters and I don't know anyone who knows a strategic defaulter.


Not something most people would likely admit to!

Karl Deeter has a blog and he interviewed one such Strategic Defaulter last year. Interesting reading.

There's also been a few court cases of people not paying their mortgages but still sending the kids to private schools.

Or the Killiney pensioner couple from a few years back....remember them! All the Socialists ran out to the leafy suburb to camp outside their house and stop the eviction...and then the full news came out of rents being pocketed on a grand scale!


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## Madangan (3 Mar 2015)

And some of these so called strategic defaulters have strategised that they will pay the electricity bill on their principal residence or their car insurance or feed their kids using the rent on their buy to let rather than pay the Bank back money on a property they will lose anyway in the long term.

I call that a bloody good strategy.


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## Brendan Burgess (3 Mar 2015)

michaelm said:


> If there are so many strategic defaulters then we all should know some; how may AAMers know a strategic defaulter? I don't know any strategic defaulters and I don't know anyone who knows a strategic defaulter.



I am astonished that you don't know any of these.  I have heard the debt campaigners saying the same thing.

Around 20% of those in arrears (it might be a bit lower now)   have not submitted an SFS and are paying nothing on their mortgage.

I frequently talk to people who insist on paying their credit union in full instead of paying their mortgage.

I know people who hide their income from their lender.

There are about 600,000 people with home loans.
The vast majority 95% will do their very best to meet their loan repayments.
Around 5% will play the system.
That is about 30,000 people
There are around 70,000 in arrears over 90 days
Probably around half of them are playing the system.
OK, let's say the 5% is too high and it's just 2.5%
That is still around 15,000 or 20% of those in arrears who could be paying a lot more.

Brendan


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## michaelm (3 Mar 2015)

Brendan Burgess said:


> I am astonished that you don't know any of these. I have heard the debt campaigners saying the same thing.


Maybe I'm in the minority not knowing any.  If strategic default is as prevalent as is suggested in some quarters I'd have expected to personally know someone who is playing the system.  Burglary, for example, seems to be prevalent and off the top of my head I personally know at least eight people who have had their home burgled.  It's entirely possible that even your lowest guess could be overestimating the issue by a sizable multiple.


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## Brendan Burgess (3 Mar 2015)

Hi Michael

We might move in different circles. 

I would know about 6 people who have had their homes burgled, but I don't know any burglars.  Or I probably know them, but don't know that they are burglars. 

I am sure that you know many strategic defaulters, but they are not admitting it to you.

Brendan


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## Gerry Canning (3 Mar 2015)

Strategic defaulters are undoubtedly a % of all defaulters.

I think the word {strategic} is a bit mis-leading.
Some I know , we could class that way, but to me it seems they have more of an Ostrich mentality and have yet to properly accept their predicament.
eg . No holiday, eg ,No Sky TV.
I think they are starting to be forced into  a proper sorting.
I am not a Bank fan, but am seeing in many cases acceptable and sustainable solutions being offered.
I think Banks are to a degree being more active and sensible.


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## 44brendan (3 Mar 2015)

We have a reasonable number of "strategic defaulters" on our books. It's a contentious term and they would generally see themselves as such. Broadly speaking when calculating ability to repay mortgages in arrears we measure current spending against "reasonable living expenses" as per Insolvency Guidelines. These are not strictly enforced but we would question cases where spend is significantly above the level per family size. Expectation is that the client(s) will prioritise the mortgage above other loans. There are some exceptions allowed where a car may be repossessed or where a short term loan can be cleared and these can be negotiated.
Most clients co-operate and flexibility is given. However, there are other clients who will not curtail expenditure and continue to pay amounts well below that considered as affordable. These would be the "strategic defaulters" and would be prioritized for removal from MARP and acceleration of Legal Proceedings. Virtually all of these are in significant negative equity on their homes!


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## epicaricacy (3 Mar 2015)

I remember being very surprised as a fresher when a lecturer informed us that Economics was premised on the idea of a rational consumer.
We frequently speak about the collective 'madness ' / irrationality of our house buying behaviour during the Celtic Tiger. However, what's irrational about buying an asset that's appreciating in value and that required none of your own money (100 percent mortgages) - especially, if the vast majority of the population have no formal training in Economics and are unaware of boom / bust cycles?
Selective defaulters are also acting rationally - if in significant negative equity and if little or none of their own money was involved in securing the property, especially in a largely consequence free environment. 
It could be argued that those struggling to pay for an over priced 'asset' (liability) are acting irrationally - especially in areas outside of the main urban areas where rent is affordable.


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## breakonthru (4 Mar 2015)

epicaricacy said:


> ..if in significant negative equity and if little or none of their own money was involved in securing the property, especially in a largely consequence free environment.



This is the case in our situation, on loans totalling 1.3 million only 8K has been repaid and that from rental income..

My excuse for not paying full cap and interest is that the surplus identified in our SFS to the bank goes towards setting up a business that in turn will create a sustainable income to pay off the loan within the loan term. There is zero logic in paying the bank any capital until such a time that my income is sufficient to cover all overheads and a basic lifestyle. Once that is achieved then the bank can get a look in..

At all times the bank is free to petition the high court for bankruptcy and start repossession proceedings. The time it will take them to do this, the costs involved, the myriad delaying tactics i can use etc should be sufficient to push out bankruptcy to a point that when it does happen, i'll be in a better position of control.

Indeed, negative equity off approx €700K has been very much in my favour.


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## Delboy (4 Mar 2015)

Well, what can one say to that!


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## epicaricacy (4 Mar 2015)

It's a perfect example of economic rationality at work. I've friends who didn't act rationally in their dealings with their bank(s) and they ended up being treated with disdain - e.g. a couple who continued to pay their full mortgage out of their redundancy lump sum for 20 months until all of it was gone and, after a further 12 months of paying a restructured amount, they were 'forced' into voluntary sale the minute the MARP period ended. When faced with a powerful adversary - such as a bank - it's imperative to act as 'break on through' is acting. After all - as my friends quickly found out - there are no rewards handed out for 'good' behaviour.


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