# "Why the mortgage crisis could be a €40 bn problem"



## Brendan Burgess (5 Sep 2011)

This is an example of how bad the analysis of our problem can be 

Why the mortgage crisis could be a €40 bn problem

This is Dan White in yesterday’s Sindo with a picture of Morgan Kelly to add gravitas to the piece. 

  “it's hard to see how the Irish-owned banks can escape with losses of much less than €40bn on their mortgage books.”


  Here is a summary of his figures 


total mortgages||€100bn
  Default  rate|25%| €25bn
  Loss on €60bn trackers|22%|€13bn
  Total losses ||€38 bThis article is so full of mistakes, it’s just incredible 

  Total owner occupied mortgages of Irish banks: €74 billion 
  Total owned if you exclude 85% of Bank of Ireland: € 56 billion  - not €100 bn

  So he starts with almost double the relevant number.  He never mentions residential investment mortgages, so it’s reasonable to assume that he is referring to owner occupied homes only.

  “half of all Irish mortgages are under water …
  House prices have further to fall…
  The average house price is still 6 times average earnings…
  Means that banks are looking at 25pc write down on their mortgage books” 

  It means nothing of the sort. 

  7% of the market is in arrears over 90 days. It will probably increase and it is higher for those in big negative equity. So let’s say that it increases to 20% and that they *all* default. And let’s say that the lender loses 60% on all these loans. 



Total loans| €56 billion
  In negative equity| €28 billion
  20% default| €5.6 billion
  60% loss on these| €3.36 billion    Total provided for in stress tests: €5.7 billion or €4.2 billion if you exclude Bank of Ireland. 

*How could you get a 25% loss on the mortgage book? *
  50% of mortgages won't be in negative equity, so the banks won’t lose on these. 
  You would have to assume that all mortgages in negative equity default
  You get a 50% negative equity with a 100% mortgage and a price fall of 50%.  Houses have fallen 50% from the peak, but most houses were bought outside the peak so the price falls have been lower. Some mortgages were 100% but the vast majority were not. 
Some mortgages of less than 100% LTV will end up in over 50% negative equity due to arrears.

  But it is almost impossible to come up with a 25% loss rate. 

Even  Morgan Kelly comes up with a 10% loss rate which is 20% of mortgages default with an average loss of 50%. (his estimate of €5bn to €6bn was based on 10% of €56 bn) 

*So how much will the banks lose on trackers *
  White says: 22% of €60 bn - €13 billion 
  Trackers form 50% of the €56 billion
  Correct tracker figure: €28 billion

  It’s very hard to calculate the loss on these. Certainly a third party would not pay €28 billion for these, when they could lend this money out at standard variable rate. 
  If you take into account the losses on trackers, then you should also take into account the future profit on non-trackers. They will balance each other out. 
  Even if you reject that argument, then you must accept that the defaults on trackers will be a lot lower. 
  If I have a mortgage of €200k and a house worth €100k, the maximum loss is €100k. 
  White adds the default rate to the 22% discount on trackers. 
  If the tracker has lost the bank 22% of €200k – that is €44k, so the additional loss is €54k or 54%
  Many trackers will trade up and so surrender their trackers early. So the correct future  losses on trackers is about 10% or €2.8 billion. 
  As of now, the banks are borrowing from the ECB at 1.5%, so it could be argued that they are making money on these trackers. 

*Summary of losses and  assumptions *


default losses|€3.36 bn
  Tracker losses|€2.8 bn
  Less double counted |1.5 bn
  Net losses|€5 bn  Although only 7% of mortgages are in arrears and  most will recover, it is assumed that 20% will actually default through voluntary surrender or repossession.
  The bank will recover only 40% of the value of defaults. 
  Trackers should be written down by 10%


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## Brendan Burgess (7 Sep 2011)

Ronan Lyons estimated the arrears problem to cost around  €1 billion  in December 2010. I have estimated it to be up to €3.36 billiion but I used very conservative estimates. I would expect it to be around €1 billion as Ronan suggests.

http://www.ronanlyons.com/2010/12/1...the-banks-a-e100bn-problem-or-a-e1bn-problem/


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## RMCF (10 Sep 2011)

But facts don't make good copy in papers when they are trying to make a story sound worse.


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