# The mortgage arrears problem is serious, but greatly exaggerated.



## Brendan Burgess (6 Nov 2012)

It has been described as the greatest social problem facing the country – I think we have far greater problems. 

It has been suggested that the losses facing the Irish tax payer due to home loan defaults will be far higher than the cost of bailing out Anglo and Irish Nationwide – They won’t.  

The media gives the impression that there is a tsunami of repossessions – there is not – 190 houses were repossessed by court order last year –  and around half of these were customers of sub-prime lenders. 

Mortgage arrears are said to be escalating exponentially –  they are steadily rising, but in line with the deteriorating economic situation

I have compiled a Mortgage Arrears Factfile which attempts to measure the problem

*We have a very serious problem with mortgage arrears but exaggerating it will lead to inappropriate solutions *



Over the past 12 months, the total amount of arrears outstanding increased by €500m.
The total arrears on all home loans built up over the last 6 years  is €1.5 billion – a good part of that is arrears of capital.
Half of all mortgage holders are paying the same repayments as they were 6 years ago, while the other half who have cheap trackers are paying far less each month
Almost 80% of people are paying off their mortgages according to their  original schedule despite


the  massive prices paid for properties during the bubble
15% unemployment,
the collapse in income for the self-employed
major increases in taxes and charges for those still in employment


*Mortgage arrears figures in context *


 Total home loans outstanding|€112 billion
 total mortgage arrears built up over 6 years| €1.5 billion(1.3%)
Total national debt|€150 billion 
Amount by which arrears increased last year| €500m
Amount by which national debt increased last year|€18 billion
Cost of bailing out  the banks |€60 billion *
What does “being in arrears of 90 days” actually mean? *

It could mean any of the following 



The borrower has made no payment at all in the last 90 days so the balance on their mortgage has risen.
The borrower has been paying something towards their mortgage, but not the full interest, so the balance on their mortgage is rising.
The borrower has been paying the interest in full but not the full capital repayment, so while their arrears figure is rising, the balance on their mortgage is actually decreasing.
The borrower is paying their mortgage in full every month and steadily reducing the size of their mortgage. But they built up an arrears balance some time ago and have been unable to clear it.
“Arrears” is not a very good measure of the difficulty facing borrowers. A much better measure would be whether the amount due on the mortgage has increased or decreased over the past year. 


*How does the mortgage arrears problem compare with other problems facing Irish society? *



Persons receiving Jobseeker’s and unemployment supports (2010 figures) |454,000
Persons receiving illness, disability and caring allowances (2010 figures)|302,000
Homes rented from the Local authority and voluntary sector |150,000
Receiving rent supplement or Rental Accommodation Scheme|126,000
Mortgage holders in arrears over 90 days| 66,000*


It is important to recognise what has been done for people in arrears and what more needs to be done.  *

There is a myth that “nothing has been done for mortgage holders”. But actually, a lot has been done. 

Most people who fall into mortgage arrears will recover given time and an economic recovery. A huge amount has been done for them to maximise their chances of recovery.

The Mortgage Arrears Code has banned banks from charging penalty interest on arrears
The Mortgage Arrears Code has banned banks from charging a higher interest rate to those in arrears
The Mortgage Arrears Code has banned banks from forcing people in arrears off cheap trackers
The Mortgage Arrears Code has limited banks to three calls per month to those in arrears
Banks have restructured 68,000 mortgages, around half of which have stayed out of arrears
The MARP has put an effective moratorium of between one and 5 years on repossessions for those engaging with the bank
With only 200 repossessions by court order last year, the banks are allowing people in arrears to keep their homes
16,000 people are getting Mortgage Interest Supplement
Those who bought at the top of the market are getting additional tax relief on the mortgage interest.

*But we have not dealt with the most severe problem of people with unsustainable mortgages*

While we have measures in place for the majority of people in arrears, we have done very little  for around 10,000 to 20,000 who are in serious arrears and who have massive negative equity. Their mortgages are completely unsustainable. They will never get into a position where they can pay even the interest on their mortgage.

These people need to be allowed and encouraged to sell their homes in an orderly manner and the shortfall between the proceeds of the sale of the house and the balance on their mortgage needs to be written off.
These people will not recover unless we give them a fresh start. 
They are effectively bankrupt and we need to recognize this and let them emerge from their bankruptcy


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## demoivre (6 Nov 2012)

Brendan Burgess said:


> It has been described as the greatest social problem facing the country – I think we have far greater problems.



So do I - Total Irish household debt is the largest on the planet and it has a huge negative impact on the economy, but for some reason mortgage arrears seems to make the headlines.



> Almost 80% of people are paying off their mortgages according to their  original schedule despite



At what cost to the domestic economy?


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## 44brendan (6 Nov 2012)

I acknowledge the points made and the core point that the majority of mortgage holders are currently meeting their agreed repayments. However, I would be extremely surprised if the arrears position does not get a lot worse in the next 2 years. From discussions with friends/colleagues, who in the majority are in well paid employment, their net income/expenditure has suffered badly in the past 2/3 years. Up to now, most have kept their head above water, but all are extremely worried about the coming budget. Family holidays/clothing/meals out/ entertainment have all been paired back to the core and most are now in a position where overdraft or credit card is used to supplement basic expenditure. Mortgage payments have been met, as most are extremely reluctant to go "cap in hand" to their bank looking for some reduction on repayments. However, I believe that this experience is far more reflective of the bulk of compliant mortgage holders than the perception that those who are currently paying can afford to keep paying.
I would be very interested to see the changes in arrears stats over the next 12 months. If they have'nt changed substantially at that time, I would be prepared to accept your summation Brendan. However, I remain sceptical.


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## RichInSpirit (6 Nov 2012)

@ Brendan B. I was thinking of starting a thread on arrears. Not strictly a mortgage arrears thread.  But I have to think about it a bit more first.


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## Novaman (7 Nov 2012)

Brendan,

Thanks for posting detailed reply to my original queries re mortgage figs etc. On the face of it


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## Brendan Burgess (7 Nov 2012)

44brendan said:


> . From discussions with friends/colleagues, who in the majority are in well paid employment, their net income/expenditure has suffered badly in the past 2/3 years. Up to now, most have kept their head above water, but all are extremely worried about the coming budget.
> 
> ...
> I would be very interested to see the changes in arrears stats over the next 12 months. If they have'nt changed substantially at that time, I would be prepared to accept your summation Brendan. However, I remain sceptical.



Hi brendan

Interesting points. 

In general, if someone keeps their job, they tend to pay most or all of their mortgage. So, I agree that most people will see their income fall after the Budget. But will that push them into arrears or restructuring? 

So the 78% are paying their original mortgage on schedule may drop. But if they reschedule, all it will mean is that they will be saving less each month than they were before the budget. Paying capital off your mortgage is just another  form of saving. 



> using their  overdraft or credit card is used to supplement basic expenditure.  Mortgage payments have been met, as most are extremely reluctant to go  "cap in hand" to their bank looking for some reduction on repayments.



Why?  As I have pointed out, paying capital is a form of saving. It makes no sense to borrow at overdraft levels to pay off capital on a mortgage where the interest rate may be as low as 1.5%.  

It's a pity that the MARP is such a complex process. They should be able to call their lender and extend the term or get an interest only period over the phone. 

Brendan


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## manninp2 (7 Nov 2012)

> Why? As I have pointed out, paying capital is a form of saving. It makes no sense to borrow at overdraft levels to pay off capital on a mortgage where the interest rate may be as low as 1.5%.



I think that point needs to be broadcast more. Borrowing to pay the capital portion of your mortgage is foolish.

I also think we have an asymmetry of information between the banks and the borrowers.

We also assume that banks will give correct information and advice, as BOI have shown this week they cannot be trusted to do so.

Cases where people are borrowing to pay mortgages or going hungry and/or cold to keep up with payments are probably more common than we think. People's pride means many in this situation would never admit it.

Something as simple as clearly showing each month how much of your total payment was interest and how much was capital and advising on your payment priorities.

1) Food, light & heat
2) Health & home insurances. Transport costs for work/seeking work.
3) Basic TV, phone & Broadband. Small entertainment/club membership expenses, remember peoples mental health matters. I'm talking a pint or two a week or a trip to the cinema or local sports club membership. Small clothing allowance.
4) Mortgage Interest
5) Mortgage Capital
6) Unsecured debt repayments
7) Nice to haves e.g. Sky Sports or a foreign holiday


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## truthseeker (7 Nov 2012)

I wonder how many mortgages are not in arrears because they are being serviced by savings and/or redundancy payments as opposed to an income?


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## Shivvers (13 Dec 2012)

Still think it's a "greatly exaggerated" problem?

[broken link removed]



> The report on arrears and repossessions for  the third quarter of 2012 shows that 86,146, or 11.3%, of private  residential mortgages are in arrears of more than 90 days.
> The figures look at the three months to the end of September and they compare with 81,035 or 10.6% at the end of June 2012.
> The Central Bank notes, however, that the rate at which arrears figures are increasing is slowing down.
> More than 80,000 of these mortgage accounts were classified as restructured by mortgage lenders.


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## Importer (13 Dec 2012)

Personally, I dont trust the data coming from the banks. I believe the situation is much worse than reported. The reports are part and parcel of the banks "survival" mechanism

Since this crisis commenced, the actual situation has always been a lot worse than the reported situation.

From day 1, when the most senior bankers informed us that the bank problem was a liquidity problem rather than the massive insolvency problem that it is,I would take all such reports with a very large grain of salt.

Anecdotal evidence would suggest that the lid is about to blow over the next two years and I believe that.


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## Brendan Burgess (13 Dec 2012)

Shivvers said:


> Still think it's a "greatly exaggerated" problem?
> 
> [broken link removed]



Absolutely. 

The total arrears on PDHs accumulated over the past 6 years is €1.6 billion. 

Roughly equivalent to the amount the state overspends each and every month. 

A big problem - but one which is greatly exaggerated.


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## Shivvers (15 Dec 2012)

How is it "exaggerated"? Is somebody exaggerating the figures? What came out this week is just raw data.

You can take any problem, quantify it in euro, compare it to government spending and then herald it as "exaggerated" on the basis of the raw numbers. But that's nonsensical - why are you comparing those two particular figures?

The overhang of mortgage debt, arrears etc is the single biggest economic problem facing the state. It is what's ruining the economy, delaying recovery, and it eventually feeds into the monthly deficit because by killling the economy it kills tax revenues.

You are just plain wrong on this one, Brendan. You are dramatically underestimating the cumulative economic impact of the mortgage debt issue, and its likely future impact.


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## Brendan Burgess (15 Dec 2012)

Shivvers said:


> The overhang of mortgage debt, arrears etc is the single biggest economic problem facing the state.  It is what's ruining the economy, delaying recovery, and it eventually  feeds into the monthly deficit because by killling the economy it kills  tax revenues.



Hi Shivvers

This is exactly the type of exaggeration I am referring to. Thank you for illustrating my point so clearly. 

We have many economic, problems and to assert that "the overhang of mortgage debt, arrears etc" is the single biggest economic problem seems clearly wrong to me. 

We have €111 billion  of mortgage debt on PDH's.  The total arrears is €1.6 billion. 

I don't know what you mean by the "overhang".  

I would have thought that the lack of growth in our major export markets was a much greater problem. 

We will have around €200 billion of government debt and another €100 billion of pension liabilities by the end of 2013. That seems to me to be a much bigger problem. 

Next year, we will spend around €13 billion more than we take in from taxes. That is resulting in the increases in taxation and charges which , I would imagine, is doing far more damage than the €1.6 billion in arrears accumulated over the past 6 years. 

The government has cut the capital expenditure budget to €3.5 billion which must have a bigger negative effect than running up another €500 million of arrears.

We have around over 14% unemployment which, I think, is around 450,000 people. That seems to me to be  a bigger drag on the economy. 

We have around 70,000 mortgage holders in arrears over 90 days. What does this mean? It means that they are not paying off the capital and interest on their loan in accordance with the agreed schedule. 

Over the past year, borrowers repaid €5 billion of capital while running up €500k of arrears.  One of our big economic problems in Ireland is that people are saving and not spending.  It would probably boost the economy if we all took a capital holiday for two years and spent the money in the economy instead.  That would increase the arrears and presumably the "overhang" whatever that is. 

We simply don't know how much of this arrears of €1.6 billion is arrears of capital.  I suspect a good part of it is. 

There is a lack of consumer and business confidence. 

This is due to 


the lack of demand
 the extent of negative equity
 the extent of mortgage arrears
The problems in the buy to let sector
 the level of other consumer debt
 the high level of unemployment
 the fear that people will lose their job
  the  massive government debt
the massive budget deficit
the very high levels of taxation of the higher paid
So, to assert that "It [the overhang and arrears] is what is ruining the economy, seems wrong to me.

By grossly exaggerating the problem and by not accepting that the solutions in place at the moment gives most borrowers in trouble the time they need to resolve their problem, it is further damaging confidence and delaying economic recovery.


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## Time (15 Dec 2012)

The number of repossessions is low due to a legal issue that is preventing much more happening. When the law is changed I would expect to see that reach 1000 plus per year. 

I certainly don't think the problem is being exaggerated.


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## Importer (15 Dec 2012)

First of all you must decide if you trust the arrears figures that are being put out. I for one do not trust them at all............

These figures are masking the carnage that exists on the ground but not represented in the figures

1) It doesn't include people who are on interest only and hanging on by their finger tips.
2) It doesn't include people who are in unsustainable arrangements with the banks where the monthly repayment is less than the interest charge
3) It doesn't include people who are in severe negative equity who have managed to make payments so far but will eventually give up.
4) It doesn't include the people who have successfully negotiated moratoria with the banks who are making no payments at present
5) It doesn't include the huge number of people who are in NE and under huge duress after relationships have broken down.
6) It doesn't include the people who are hanging on, waiting for the Personal Insolvency Act.

So why would I question if the figures are correct ? Why might banks not want to show a higher figure

1) The higher the arrears figure, then the higher the impairment provission that the banks need to make. Impairment provisions hit the banks bottom line directly and erode its capital base. The banks are already undercapitalised and are trying desperately to keep a cap on the Impairment provisions.

2) High arrears figures can result in instability. If its widely believed that a lot of people are in arrears, then it may induce others to go into arrears - domino effect

This thread is entitled "The mortgage arrears problem is serious................". In fact mortgage arrears is not the core problem at all. It is just one symptom of the problem. The problem is "Personal Insolvency in Ireland" .
Mortgage arrears is just one dimension of it.


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## itsallwrong (16 Dec 2012)

Well put Importer..

Exactly the point I was pushing at in 
http://www.askaboutmoney.com/showthread.php?t=171985

The real figure of people in arrears is a lot 
bigger than the media figure being kicked around.
The age old saying 'treat people like mushrooms, keep them in the dark 
and feed them ....
I think the real amount of arrears is going to be hidden for as long as possible.
It is a big real problem but there are equal or bigger problems looming..
It's a normal political thing to point the attention at one problem and avoid another usually bigger one.


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