# Lecture on the Economic Drivers of Mortgage Arrears Thursday 30th January



## Brendan Burgess (13 Jan 2014)

Yvonne McCarthy of the Central Bank will be giving a very interesting talk to THE STATISTICAL AND SOCIAL INQUIRY SOCIETY OF IRELAND 

[broken link removed]

Barrington Lecture  
Dis-entangling the mortgage arrears crisis:  The role of the labour market, income volatility  and negative equity 

by Yvonne McCarthy, Central Bank of Ireland


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## Brendan Burgess (31 Jan 2014)

Interesting paper last night by Yvonne McCarthy of the Central Bank. You can find it here:


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_The results conﬁrm the importance of unemployment and negative equity in driving Irish mortgage
arrears, as shown by previous research. However, the results also provide new insights on the factors
associated with mortgage arrears in Ireland. Firstly, we ﬁnd that many borrowers experiencing arrears are
currently employed. The data show that many of these borrowers have experienced a signiﬁcant drop in
their income or a change in employment conditions. Furthermore, some of these borrowers are in fragile
employment, i.e. they are on a temporary contract, have been with their employer for a short time or have
a history of unemployment. In a multivariate setting, fragile employment and income changes show up as
having a signiﬁcant relationship with mortgage arrears. We also ﬁnd tentative evidence that the duration of
unemployment has an important link with mortgage distress._


She compared the profile of a group which was not in arrears with a group which was in arrears. (See next post for details of sample)

The problem in trying to determine the causes of arrears is that all the different factors are entangled.

For example, 35% of those who were not in arrears had an SVR mortgage, compared to 48% of those who were in arrears.  So in simplistic terms, those with SVR mortgages are significantly more likely to go into arrears.  But those with SVR mortgages are also likely to have much older mortgages and much smaller mortgages.  So Yvonne managed to isolate the impact of the SVR alone, by controlling for the other factors.

*
Main characteristics 
*



Explanation: 3.6% of those who were not in arrears were unemployed, compared to 14.6% of those who were in arrears.

*Marginal effect of different factors in the Probit Model 
*

According to the probit model, the Marginal Effect of having an SVR  mortgage is .07 This means that  if you control for all the other  factors, e.g. size of mortgage, Mortgage Payments to Income etc, those  with SVR are 7% more likely to be in arrears than those who have tracker  mortgages.

Factors which increase the likelihood of arrears: 



Factors which reduce the likelihood of arrears: 






MRTI: Mortgage Repayments to Gross Income


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## Brendan Burgess (31 Jan 2014)

*The sample 

*
She sampled 2,000 mortgage holders from the three main banks mortgage books.

This was a representative sample in that 25% of them had some arrears. 

They were then interviewed in detail to get household characteristics. 

88% agreed to be interviewed. 

This should give 1,760 people , but there were only 1,206 in the tables - I have asked her for clarification of this. 

I thought it a bit odd that she included Buy to Lets with the home loans. I would have thought that they were such a separate category, that they should have been omitted.  For the record, the Buy to Lets had the highest Marginal Effect of .1.


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## Brendan Burgess (31 Jan 2014)

Karl Deeter made the point that it was interesting that those in arrears were paying "only" 27.7% of their gross income in mortgage repayments.  Current lending practice allows lenders to lend a higher proportion of net income that this, so why are they in arrears? 

75% of those in arrears are employed.  However, Frances Ruane, pointed out that this related to the Head of the Household. One member of a couple may have lost their job since the mortgage was taken out. 

Public sector employees account for a good share of the mortgage arrears. 

Negative equity is not as big a factor as I would have thought. 25% of those in arrears have substantial equity in their homes.


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## Brendan Burgess (31 Jan 2014)

*What percentage of those in arrears are in positive equity? *

According to Table 4, 56.7% of those in arrears are in positive equity.  Only 33.4% are in negative equity. 

I must be reading this table incorrectly.  I understood from previous research that only 20% of those in arrears have positive equity.  And the 20% figure feels about right. 

56.7 + 33.4 = 90.1 ?


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## MortgageGuy (3 Feb 2014)

Brendan Burgess said:


> 75% of those in arrears are employed.  However, Frances Ruane, pointed out that this related to the Head of the Household. One member of a couple may have lost their job since the mortgage was taken out.



Page 6 of the report: Firstly, only 5 per cent of households that are current on their mortgage repayments has an unemployed adult household member relative to almost 20 per cent of arrears households.

[note: this is looking at _all adult household members_ not just 'head of household' as Frances indicated, that is covered next]

Secondly, _focusing on the heads of households only,_ we find that performing households have an average unemployment rate of only 3.6 per cent, as compared to 14.6 per cent among borrowers in arrears.
Interestingly, 75 per cent of arrears cases include households where the head is currently employed.

_The 'adult household member' is defined as: adults who normally contribute to the mortgage repayment, either directly or indirectly (by using funds to cover other household expenses)_


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