# Ireland has a very low recovery rate from distressed mortgages



## NoRegretsCoyote (18 Nov 2020)

The European Banking Authority published a report today on national insolvency frameworks across the EU.

It shows Ireland has extremely low recovery rates for all sorts distressed debt: commercial, residential and SME.

See below gross recovery rate on non-performing mortgages. It's basically how much is retrieved by the bank through the formal debt recovery process. For Ireland it is 12%, about a quarter of the EU average.



Anyone who thinks this is unrelated to Ireland's very high interest rates is fooling themselves.


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## Brendan Burgess (18 Nov 2020)

Hi Coyote

Very interesting

Is this saying that banks recover only 12% of the value of mortgages on which they take legal action? 

Brendan


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## NoRegretsCoyote (18 Nov 2020)

Brendan Burgess said:


> Hi Coyote
> 
> Very interesting
> 
> ...



I think so.

This is the precise text:



> The data collection enabled the calculation of the recovery rate based on the ‘gross recovery amount’ and the ‘net recovery amount’ as numerators and the ‘notional amount outstanding at time of default’ as denominator.29   *The variable ‘gross recovery amount’ variable was defined as the NPL’s notional outstanding amount that had been recovered by the bank (or where applicable, by an external debt collector) only through the formal enforcement process before or after its completion *(i.e. before any deduction of costs, including the sales proceeds or total cash recovered and costs incurred). Sales proceeds may include real estate sale after repossession or loan sale



There is also a footnote for Ireland:



> Where non‐judicial debt settlement (i.e., voluntary sale/surrender of property) is a prominent feature of workout in national financial systems distressed debt workout, judicial enforcement benchmarks will not reflect work out recovery rates, costs, or duration.



So I guess the banks (or via Central Bank who did the data collection perhaps) are claiming that true recovery rates are higher as banks lean on the borrower before actually taking them to court. Perhaps the judicial route is more common in other jurisdictions. Still, the Irish numbers seem very, very low.


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## Brendan Burgess (18 Nov 2020)

It does seem really low.  A 90% discount to the amount of the mortgage? 

I had a quick look to see what discounts the lenders sold NPLs for.  I don't think it was anything like 90%. 

If a Vulture Fund could only recover 11% of the nominal value of a loan they would want a huge discount i.e. more than 90%.

Brendan


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## NoRegretsCoyote (18 Nov 2020)

It could be a timing issue as well. Recovery could be estimated as zero if it drags on for a long time.

Either way, it tends to suggest Ireland is very much an outlier.


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## Brendan Burgess (18 Nov 2020)

NoRegretsCoyote said:


> Recovery could be estimated as zero



That would explain it.  It has to be something like that. 

Brendan


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## DublinHead54 (19 Nov 2020)

Do I read that as of the 4,872 observations 11% (~487) paid the mortgage back in full, or is it 11% of total mortgage amount lent across the 4,872 observations was recovered? 

It is data like this that I assume can lead to higher mortgage rates in Ireland, the standard Loss Given Default is ~45% and stressed LGD ~70%, Ireland is much higher. This could lead to larger impairments in the credit risk models, leading to larger RWAs, leading to higher mortgage rates.


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## Brendan Burgess (19 Nov 2020)

Dublinbay12 said:


> the standard Loss Given Default is ~45% and stressed LGD ~70%,



That is roughly what I would have expected.

So the 11% recovery must be wrong or, at least, it means something else.

By the way, what is the difference between the standard and the stressed?

Brendan


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## DublinHead54 (19 Nov 2020)

Brendan Burgess said:


> That is roughly what I would have expected.
> 
> So the 11% recovery must be wrong or, at least, it means something else.
> 
> ...



In normal market conditions if I am holding a corporate bond I would expect a ballpark 45% Loss Given Default if the issuer defaults. In a stressed market the recoveries across the sector may be less and thus a stressed or a downturn LGD is included in the model. Generally, the EBA would require this in their stress testing program, and it results in a more punitive capital amount required by the bank.


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## NoRegretsCoyote (19 Nov 2020)

Form the report:



> The loans population used in the final report encompassed all loans from participating banks: loans for which the enforcement process was completed over the last 3 years (from 2015 to 2018), independently of when the enforcement process was initiated (i.e. before 2015 or during the 2015‐2018 period), and the loans for which the process has been initiated over the 3 year period (i.e. between 2015 and 2018), even if the process was not completed by 31 December 2018.



So the population could include loans where the enforcement process began during the financial crisis or aftermath, when property prices in Ireland were very distressed.


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## Jim Stafford (19 Nov 2020)

Thanks to NoRegretsCoyot for posting that link. Very interesting reading.

The report contains a mine of information, including the statistic that the "weighted average time" to enforce an Irish debt was the longest in the EU, at 6.6 years. (However, I would suggest that statistic is very misleading as it was based on just 41 cases.) 

Jim Stafford


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