David McWilliams on tracker mortgages

I think I might be biased, so could someone explain what this means. I thought that tracker mortgages were good for borrowers and bad for banks? Am I misreading this article?

Ireland’s major issue is the mortgage debt crisis that is building up. There are over 120,000 people in arrears and 400,000 on tracker mortgages. 80 per cent of of tracker mortgages were given out between 2004 and 2007. The majority of those are in negative equity. When these interest rates rise, and they will, there is going to be a another wave of massive mortgage defaults and that could come in about four or five years time.



.... I think we have to prepare for this in advance rather than waiting for four years time and saying we should have done something. I can guarantee that is going to happen, I guarantee that if we don’t do something about it now we are going to wake up on the centenary of the 1916 Rising and have mass mortgage default on tracker mortgages.

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Lots of trackers out there at historical low rates...therefore people can afford to pay them now, despite negative equity.
A few years from now when rates rise, a lot of people wont be able to afford to keep the payments going and won't be able to sell up due to Negative Equity

He wants to head off this 'crisis' before it arises

thats how it reads to me!

Yes, that's my reading too. There are lots of people who would be in trouble but for the fact that they have low interest trackers. David McW is predicting a rise in the tracker rates which will push these people into mortgage default - and it will only be those on trackers because those not on trackers are already in trouble/default.

I was watching the two of you on tv recently and it would appear that you do not share the same views on all banking issues and that can be good. I am not in a position to dispute the figures about numbers in arrears or on tracker mortgages. I would agree that given the time frame that tracker mortgages were being given out that quite a large proportion of them are in negative equity. A lot of the trackers were given out at between 90 and 100% of purchase price. The ECB rate will eventually go up, when and by how much is speculative. If the ECB rate went to 4.5% I could see a lot of carnage in that scenario but I certainly do not know how we can prepare for that. There were so many different packages of Trackers eg, Interest only, Interest only for a given period and reverting to another type of mortgages, 100% trackers, Investment trackers, Home purchase trackers, 20 to 30 year trackers etc. etc. The only good side that I see is that where people that got trackers between 2004 and 2007 and have been paying P and I will have a reasonable amount paid off their mortgages in 4 or 5 years time. I do not see the ECB rate rising by any serious amount over the next 4 years given the economic mess Europe is in.

Essentially tracker mortgages are masking the full extent of the mortgage crisis.

Artificially low ECB rates are resulting in artificially low mortgage repayments.

When ECB rates rise back up to regular levels of ~4%, then repayments will rise accordingly and that mortgage arrears figure of 120,000 will go up and up.

Example

Mortgage €300,000
Term 25 years
Rate ECB + 0.85%

At ECB = 0.75%
Monthly Repayment = €1,214

At ECB = 3.75%
Monthly Repayment = €1,685

Trackers are bad for banks now as the ECB rate does not reflect the rates that they borrow at. Theoretically in the future the ECB rate could rise significantly due to economic conditions in the important euro countries. The banks may potentially not have the negative spread between a high ECB rate and the rate that they can borrow at on international markets. Unlikely but for the purpose of filling newspaper columns, why not!

For customers if the ECB rate rises significantly mortgages that are not in trouble now could become distressed. Basically it is a broad generalization that if bad things happen more people could be in mortgage difficulty. Next week rising ECB rates could be replaced with 'higher unemployment', 'falling earnings', 'high property taxes', 'higher cost of living' etc.

There is a logic to planning for the worst case scenario but that does not mean that very expensive actions should be taken now based on that worst case scenario.

It seems a bit odd to suggest that Tracker Mortgages will be a problem. Tracker rates are unambiguously good for borrowers. If there ever comes a time where tracker rates are a disadvantage then borrowers can switch to SVR or fixed rates.

It is hard to envisage a situation where a tracker rate will disadvantage the borrower so it is hard to see how it could lead to problems. Higher interest rates could lead to problems but that is a separate matter.

Consider a €250,000 ECB + 1% tracker rate mortgage taken out in June 2006 over a 25 year period.

With the ECB rate at 2.75% this would have meant a monthly repayment of around just under €1,300. By June 2008 the ECB rate had risen to 4.25% and the monthly repayment would have risen to closer to €1,500. Today the ECB rate has fallen to 0.75% and the payment is around €1,100

By June 2016 there would be something close to €170,000 outstanding on the mortgage. If the ECB rate was to be at 4.5% the payment would rise back up to €1,400.

It can be seen that the June 2016 payment with the ECB rate at 4.5% is €100 lower than the June 2008 payment when the ECB rate was at 4.25%. Interest rates may rise but the impact will be reduced by the capital repayments people are making now. Also inflation will mean that the real difference between €1,500 in 2008 and €1,400 in 2016 will be even greater.

By 2016 borrowers from the 2004 to 2007 period will be 12 to nine years into their mortgages. The ECB rates will not stay at 0.75% for ever. The most likely direction at the moment is down. Interest rates will rise but the tightening cycle will be steady and gradual so as not to dampen any recovery. Rate rises of 25 percentage points are likely but probably no more quickly than every three months. It will be a few years before rates begin to rise and even then it will take a few more years to get to even 4%.

When we took out our mortgage in 2006 our tracker int rate was 3%. We experienced hikes that tookrate up to 5+% ....then they fell and continued that way when things started to go belly up... Only differnce now is disposable income v differnt... A lot lot less and undoutedly will continue that way.

I think that McWilliams is singling out Tracker Mortgages unnecessarily here. Yes it is unequivocal that when interest rates do increase, albeit in the short term they will rise to where they were last year, and therefore by and large leaving people no better or worse off. Indeed the highest interest rates have been since 2001 was in July 2008 when the ECB rate hit 4.25%, some time after the 2004-2007 window he puts forward.

However there are two key issues that he misses (or are excluded from the quote), if interest rates go up, so do ALL mortgages, not just Trackers. Thus it is somewhat disingenuous to single them out seperately. Secondly, negative equity is irrelevant in many of the 400,000 cases he quotes due to the old maxim that negative equity only arises when you want to sell.

If there are to be defaults on mortgages due to future interest increases, the type of mortgage will be irrelevant. Those that will be in difficulty will be the ones barely keeping their heads above water now not the type of mortgage they have.

thejournal.ie said:

When these interest rates rise, and they will, there is going to be a another wave of massive mortgage defaults and that could come in about four or five years time.

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I think he predicting a hefty interest rate hike and the distress this will cause to people on cheap (low margin) trackers. People on svr's have already felt the pain.

The interview doesn't say how he suggests this "problem" would be tackled but perhaps he is suggesting a "collar and cuff" style tracker such as is available in the UK. Tracking ECB but cant go above or below an upper or a lower limit.

Or perhaps he suggests something discussed here many times over the years ie to fix of part fix over a period. I suggest that for this to work the fix/part fix needs to be available over the entire life of the mortgage and not just 1, 3 or 5 years.

SeamusCoffey said:

It seems a bit odd to suggest that Tracker Mortgages will be a problem. Tracker rates are unambiguously good for borrowers. If there ever comes a time where tracker rates are a disadvantage then borrowers can switch to SVR or fixed rates.

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no point switching when SVR's will always be above the tracker rate.
Trackers are great now for all of the 400,000 on them. But say they go up 3 or 4% in the next few years, then there could be a lot of people within that cohort who'd be in real trouble, as they simply won't be able to afford them then
Thats what McWilliams is trying to geta cross

Séamus

Higher interest rates could lead to problems but that is a separate matter.

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You have put it far more eloquently than I could ever have.

AJ

People on svr's have already felt the pain.

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The pain is not over for those on SVRs. The average SVR rate is 4.5% at the moment, while the average tracker rate is probably less than 2%.

When the ECB rates rise, those on SVRs will get hit % for %, for the foreseeable future. If the ECB rate rises to 3% those on trackers will be paying between 4% and 5%, much the save as those on SVRs are now. Those on SVRs will be paying around 7%

I can guarantee that is going to happen, I guarantee that if we don’t do something about it now we are going to wake up on the centenary of the 1916 Rising and have mass mortgage default on tracker mortgages.

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This is what is so annoying about his pronouncements. He is not just making an economic forecast - he is guaranteeing it.

His forecasting record is not great. [broken link removed]is what he said before that other guarantee which he inspired.

The beauty of guaranteeing deposits is that you use no money – not a penny. Instead, the government is using its sovereign credit as the country with Europe’s lowest debt/GDP level to restore confidence in the system. The civil service view appears to be that such a guarantee would subject Ireland to the risk that people withdraw money, disbelieving the state.

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The mortgage arrears crisis is complicated. There are many reasons not to be so pessimistic:

When interest rates rise, it will probably be in response to some form of economic recovery. That will presumably improve incomes for people making the higher mortgages more affordable.

As Dermot pointed out

where people that got trackers between 2004 and 2007 and have been paying P and I will have a reasonable amount paid off their mortgages in 4 or 5 years time.

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Over 80% of borrowers are currently paying the full interest and capital according to the original mortgage agreement. The longer they do that, the less they owe. They may well get into difficulty, but they can reschedule it and as they owe so much less, the reschedule will be more effective.

It is a complex issue and and needs tailored solutions for each separate group. Not a broad brush "forgive debt to put money in people's pockets"