# What makes a mortgage unsustainable?



## Roamer808 (10 Apr 2012)

In a different post Brendan made an informed guess of 10,000 unsustainable mortages in this country that must be addressed if the population is to move forward. In financial terms, what defines a mortgage as unsustainable?

Is it a ratio of debt to loan?  
Is it a figure that when divided across future years of the mortgage term returns a 'never can pay' outcome?


----------



## CadillacMan (13 Apr 2012)

In my naive opinion, I would have thought current income comes into the equation somewhere,


----------



## drs (13 Apr 2012)

My understanding is that when the mortgage payments are greater than approx 35% of net after tax income, then it is viewed as unsustainable.

But that may not be the definition that Brendan used


----------



## itsallwrong (13 Apr 2012)

Not saying you are wrong drs (welcome to aam), but if someone clears €2000 a month after tax and their mortgage is even €1000, thats 50%.  That must mean virtually every mortgage in the land is unsustainable!


----------



## drs (13 Apr 2012)

@itsallwrong

Before all this recent madness started (i.e. pre y2k) there were some rules of thumb that people followed when assessing how affordable a mortgage was.

Some "rules", such as the 3.5 * first earner + 1.5 * second earner's gross salary rule were predicated on traditional IRL mortgage interest rates being in the ~8% range (with a little offset to reflect how couples leveled their tax credits pre mccreevy's equalization)

But the core principle has been that the mortgage payments should not be more than 1/3rd-ish of your take home pay...

Each bank has their own version of 1/3rd-ish, e.g. 33%, 34%, 35% etc.

When stress-testing for affordability, the bank adds 2 or 3% to the interest rate, and then redoes the payments calculation. If the payments at current rate +2 or 3% are greater than their version of 1/3rd... then they deem that you cannot afford the mortgage.

Some people argue that it is total loan repayments that should not be above the 1/3rd-ish... some times they up the cut-off to 40%.

In any case, each bank decides its own criteria when making their offer. Oh and their calculations are likely more complex than the rough-cut calculation.

We don't know what basis the guestimate of 10,000 was made, but here is another way to guess:

between 2000 and 2007 there were approx 75,000 new homes built per year.

That gives about 600,000 new homes during the bubble.

Let's suppose 1/6th of those never actually completed the purchase as a result of the crash... that gives about 500,000 new homes.

Let's assume that house-hold trading up will consume a new home, as there will be a chain if you are trading up and that chain eventually consumes a new home (excluding death of owner)

So that gives us 500,000 mortgages initially assessed based on very low ECB rates.

There is approx 1/5th of those in 3 months or more arrears by the current stats. And I remember seeing a stat somewhere that said there are approx 700,000 mortgages in the state.

So we now have all the people in arrears evidence that their mortgage is unsustainable, and we need to add the people who are just eeking by from the remaining total of 400,000...

I am frankly not seeing where you'd get 10,000 as the total of unsustainable mortgages from that back of the envelope...


----------



## DerKaiser (13 Apr 2012)

My view on unsustainable would be a likely inability to meet even the interest repayments for a couple of years or more.

There are 70,000 mortgages in arrears. Some will be sorted by restructuring the payments and some will be naturally resolved through an improvement in the mortgage holders finances. On the other hand, there are probably people living off savings at the moment who will add to the number. 

Another way to look at it is the number of unemployed with mortgages. We are unlikely to see a drop in umemployment for a number of years, so most of these are unsustainable.

You really would need case by case estimates of those in arrears from the banks to make a good estimate.

Say the true eventual number turned out to be 40,000 with an average loss of €100k, that would mean an ultimate cost of €4bn. If you immediately gave out €4bn in debt forgiveness there would be a chance of many people getting it who could have got by with others not getting it but needing it in the future, thus inflating the bill further.

In my opinion there must be a number of these that are already very clear cut e.g. where an unemployed persons mortgage would not be sustainable even if they found work, or where massive arrears have no hope of being repaid. I would agree with the sentiment of initially identifying the 10,000 very clear cut cases where default is inevitable and applying €1bn of write downs, debt forgiveness, etc. Further major assessments could be made in a phased manner.

Large scale debt forgiveness has to occur, but it can initially be only seen to occur in the most extreme cases.


----------



## ClaireM (13 Apr 2012)

I think some of the banks are classing a mortgage as unsustainable if the borrower is unable to make interest only payments.


----------



## Brendan Burgess (13 Apr 2012)

DerKaiser said:


> My view on unsustainable would be a likely inability to meet even the interest repayments for a couple of years or more.
> 
> .



Spot on. 

If someone can pay the interest on their mortgage, their mortgage is sustainable. 


The Expert Group on Mortgage Arrears, of which I was a member, brought in the Deferred Interest Scheme, which allows those who can pay 66% of the interest on the mortgage, to defer the balance for up to 5 years. Most of the banks have agreed to this, although there doesn't seem to have been many cases in practice, which surprises me. 

*There are some other factors to consider as well *

Around 30% of those in arrears have positive equity in their homes.  It could be argued that their mortgages are sustainable even if they can't pay the interest. The interest is rolling up, but would be eventually deducted from the sale proceeds. If their home is too big for them, then they would be better off selling it.

Around 18,500 people are in receipt of Mortgage Interest Supplement.  It probably makes much more sense for the government to pay this than to be faced with the problem of rehousing them. This would be especially true if they have appropriate housing and cheap trackers and low loan to value.


----------



## itsallwrong (14 Apr 2012)

Very good data folks. 
Is there a percentage of arrears that the bank would say 'here you are never coming out of this'.
Say you owed arrears that equal to 10% of the principle?

Do they have a benchmark that says you are over the ratio.

What then? How long are they willing to let that go on?
I don't want debt forgiveness, yet!. Fair rates would be nice.

I am sure if debt write off comes, it will not be without strings attached.


----------

