Key Post How much more will mortgage defaults cost the taxpayer?

[Brendan Burgess]

One interesting fact from your figures is that 17% of the total mortgages are in arrears,you can say one in five,not very promising.

That figure is only for State backed Banks,add in sub prime and other Foreign Banks,would seem the figure could rise to 25% in arrears and rising

Hi Ballaboy

The purpose of this thread is "How much more will mortgage defaults cost the taxpayer?"

So we are not really concerned with the losses faced by the sub-primes, Ulster Bank, et al.

 

[ballaboy]

An excellent fact finding presentation,gives more of an idea the problems facing the country,it neaqrly as big an epedimic as TB in the fiftys,how do we solve it or at least stall it.Thank God for the foreign Banks or we would all be somewhere off Rathlin Island

 

[Brendan Burgess]

I have added a third way of estimating the losses.

A third way of estimating the cost of defaults on home loans

Table 6 Analysis by LTV ratio of of owner occupied lending that is more than 90 days past due

|total|AIB & EBS|Permanent tsb
|€m|€m|€m
less than 50%|439|223|216
50% - 100%|1,503|853|650
101% -150%|2,468|1,439|1,029
>150%|1,772|957|815
Total|6,182|3,472|2710

Assume all properties in arrears over 90 days are repossessed and all negative equity is just written off

Table 7

|mortgage balance |estimated negative equity
|€m|€m
101% -150%|2,468|822
>150%|1,772|886
Total|6,182|1,708

It would cost the banks €1,708 m to write off all the negative equity on mortgages in excess of 90 days arrears.

 

[Shivvers]

Why try estimate the losses at all? It's pointless. It's too complex and too dynamic a scenario to estimate with back-of-the-envelope calculations like this. You are not taking into account the fact that there would be another, possibly quite severe, property crash if the banks respossessed all those homes whose values you say are recoverable, and flogged them. You are not taking into account the trickle down effect on unemployment that this would have, which would push even more people into arrears.

Just compare the scenario on losses that is materialising in current figures, assess the trajectory of those figures, and weigh them up against the worst case losses in PCAR. If, as I believe (and I have stated why), they will exceed PCAR worst case, then the banks will need more capital.

I just do not believe your figures are accurate, nor could they possibly be, given the lack of solid statistical methodology/economic assumptions. My estimates of the losses would be no more accurate.

Use PCAR as the benchmark.

 

[Brendan Burgess]

Why try estimate the losses at all? It's pointless.

This is why...

But I also believe mortgage defaults alone, Basel or no Basel, will also mean the Irish banks need more capital, and lots of it.......

Lots of people make broad sweeping statements about mortgage tsunamis and banks needing "lots of more capital" without even reading the accounts or doing any analysis whatsoever.

It is extremely unlikely that the banks will need any more capital for mortgage defaults, as my figures indicate quite clearly.

 

[Shivvers]

Lots of people make broad sweeping statements about mortgage tsunamis and banks needing "lots of more capital" without even reading the accounts or doing any analysis whatsoever.

I'll leave you to figure out the inherent irony in that comment.

Your figures indicate nothing, that is my opinion, and I've explained why. I have read all the accounts, and I have done my analysis. I explained my position in great detail on the previous page. I have challenged your figures head on, but you have yet to challenge anything I have said directly, apart from dismissing it while ignoring the detail.

I would now urge you to address the point that I have made (three times now) about PCAR and the worst case scenario versus what is actually happening in the figures, and what this tells us about the sustainability of the banks' capital position. It would add to the debate. I would urge you to address what I have said about your lack of proper economic assumptions, about the impact that mass repossessions will have on house prices, about the effect that this will have on employment, and how this will feed back into the arrears problem, exacerbating it. Brendan, house prices are still falling by the day. Your figures were out of date the moment they hit the page.

The PCAR process, conducted over many months (by a team of banking experts) does the number crunching for us - with a lot more depth and professional rigour than anything that can be found on AAM.

Just compare what is happening with what was forseen in the PCAR worst case scenario. That's all you need to do to answer the question of whether banks will need more capital.

By the way, I note John Moran, the sec gen of the Dept of Finance, is much less certain than yourself about the banks' capital position. At an Oireachtas Committee meeting today, after trying to avoid the question for 20 minutes, he finally caved and said he "believed" they would have enough capital, before qualifying that by adding that it was impossible to know the true scale of the problem. Patrick Honahan has also hinted they may require more. You seem to believe otherwise.

But we know one thing for sure, the problem is much worse than they believed it would get when they recapitalised the banks.

"Extremely unlikely the banks will need any more capital...."? I'll hold you to that, because it invokes a strange sense of deja vu........

I'd appreciate it if you could address my points directly, as I have addressed yours.

 

[Brendan Burgess]

I'd appreciate it if you could address my points directly, as I have addressed yours.

Hi Shivvers

I have addressed all of your points in this post and the following two posts.

Blackrock gave no information about their loss calcualtions as far as I can see. They made forecasts but didn't show the bases of those forecasts.

Like you and many others, they see negative equity and they assume that the bank will lose all that money. They make that assumption because they developed their models in Nevada, where there is non-recourse lending.

You can take any of my calculations and challenge them. You can make different assumptions on loan losses. But you can't do that with any of Blackrock's figures.

 

[Shivvers]

I can make "different assumptions" re your figures! You have not outlined any assumptions whatsoever. You just picked a different percentage for each category (from where?) and estimated that you thought the losses would be X Y or Z. What exactly were you assuming re figures for unemployment, house prices, interest rates, enforcement costs, the profile of borrowers for each bank, etc?

I'd appreciate it if you could answer this point directly, Brendan, as it is central to the credibility of your figures. I've asked three times now.

Blackrock, as outlined in the central bank report at the time, used a pretty sophisticated modelling system that took into account all of the above economic factors. Are you suggesting Blackrock simply forgot there is recourse lending in Ireland? Blackrock's figures were also audited and rechecked by Boston Consulting Group (a little known fact). It would have been a bit remiss of both Blackrock and BCG to forget how mortgage law works in Ireland, when producing their figures.

By the way, Florida allows fully recourse mortgage lending, like Ireland. Florida had one of the highest levels of loan losses in America in its banks during the sub-prime crisis.

I am not assuming anything on losses, by the way. Back of the envelope is pointless. Just look at the bank' provisioning, like I did. You will see that they are already at 60% of the stress scenario allowed in PCAR for home loans 2011-2013. That is before the introduction of personal insolvency legislation (which will crystalise losses quicksmart for the banks). And the problem is accelerating. PCAR also ignored mortgages that were put on interest only in 2009-2011. What happens when interest-only ends and they all start to default?

It is plainly obvious that worst-case PCAR is on course to be breached by the end of next year....

By the way, Deutsche bank has estimated the banks will need another €4 billion. Do you think Deutsche Bank is wrong too?

But I would really like to see what assumptions you have made re those economic factors I mentioned above. Where did you get the percentages of 2.5%, 5%, 5% and 30%?

If you won't share the precise assumptions that were the basis for your loss estimates, there's no point continuing the debate, because your figures can't be properly challenged.

 

[Brendan Burgess]

Shivvers

What exactly were you assuming re figures for unemployment, house prices, interest rates, enforcement costs, the profile of borrowers for each bank, etc?

Economists are brutal at forecasting, except of course for Morgan Kelly who makes 4 different forecasts, to improve his chances.

The key issue is unemployment. As I have pointed out, the economists are not predicting a big increase in Ireland. Despite this, I have allowed for the number in arrears to double.

This is not a forecast. I am saying "If it doubles from the present level, we are still adequately provided..."

You will see a good profile of the LTV percentages in the most recent update.

So, in summary, I have shown through my numbers, that if things( unemployment and interest rates in particular) get considerably worse, the existing provisions are adequate.

But that doesn't suit you. You prefer like many others to say, " We are facing massive defaults" without actually crunching the numbers.

Brendan

 

[Shivvers]

There's no point continuing this. You cannot back up your figures. You cannot show your assumptions, because there were no assumptions involved. You just picked a percentage off the top of your head. Sorry, Brendan, but I can't give credence to figures calculated this way. It does nothing but give people the wrong impression about what's likely to happen. It's counter productive.

A proper estimate of losses would have been underpinned by key assumptions (if unemployment hits X, losses will be affected by Y.... if unemployment hits B, losses will be affected by C). The same for interest rates, the same for enforcement costs, the same for house prices, the same for a whole host of factors.

The figures you provided had none of this. Sorry, but they are guesses, not estimates. Estimates don't just guess percentages, they arrive at the percentages after taking into account their assumptions.

Assuming that, because unemployment is not expected to increase much, therefore arrears will not increase much, is just plain silly. The longer unemployment stays high (the rate doesn't need to increase), the more the level of arrears will accelerate. Why? Because the longer an individual remains unemployed, the higher the chance they go into arrears. People blow through redundancy cheques, savings, loans from family/friends etc.... Then they finally crack and go into arrears. The unemployment rate might stay the same same, but the number of long-term unemployed (the most relevant figure to mortgage arrears) is sky-rocketing. These are the people who will go into arrears, and their numbers are increasing steadily.

That is why we are seeing a spike this year in defaults, while unemployment stays the same. The rump of people (especially building workers and the like, who can't get new work) who lost their jobs in the crash of 2009 have held out for as long as they can, but can hold out no more. They are defaulting now.

Why did you choose to double the level of arrears? Why not triple? Why not multiply by 1.5 times? Your figures are too arbitrary.

You chose to make your calculations public, and also to make them a Key Post. This invites comment. People, such as me, are entitled to criticise your figures, because they are just plain wrong.

I have shown exactly why I think the banks will need more capital: the figures, as I outlined previously, suggest they will breach worst case PCAR. I have explained myself fully. You haven't.

That's my last word on this, because you are declining to show your assumptions (presumably because there were none).

 

[Brendan Burgess]

I think you are simply not reading the replies I made to you.

You have the same gut feeliing as the majority that the taxpayer is going to get swamped by losses on mortgages. But you won't do anything to back up your gut feeling. I have done the analysis. I have assumed that things are going to get a lot worse. I have exaggerated all the negative outcomes, and still conclude, from three different approaches, that the provisions are adequaute.

I have exaggerated all the problems.

• I have shown a doubling of the arrears levels, although I think that they are unlikely to double
• I have assumed that 25% of them will default - although I believe that most of those in arrears will recover in time
• I have assumed that the banks will lose 70% of the mortgage value on those defaults, although the average loss is likely to be around 44%, and not 70%
• I have made no allowance for the fact that the owners of the securitised loans will take some of the cost, especially in the worst case scenario.
• I have made no allowance that the providers of Mortgage Indemnity Guarantees will take some of the hit.

 

[Shivvers]

According to Fitch today, one fifth of all Irish mortgages are expected to default in a realistic scenario. That makes the estimates in the OP of this thread look rather quaint by comparison.

 

[SeamusCoffey]

According to Fitch today, one fifth of all Irish mortgages are expected to default in a realistic scenario. That makes the estimates in the OP of this thread look rather quaint by comparison.

There will always be a gap between different estimates but that alone is insufficient to favour one estimate over another. Official statistics show that 1-in-10 owner-occupied mortgages are 90+ days in arrears and all indications are that a figure of 1-in-4 is likely for buy-to-let mortgages. There are important differences between these classes of mortgages and, unsurprisingly, more emphasis has been on owner-occupied mortgages.

The Fitch analysis is interesting and is worth reading. In their base scenario they see 10% of the following mortgages defaulting:

- loan is not in arrears;
- full-time employed borrower with full income verification and no adverse credit history;
- amortising loan paying monthly; and
- loan purpose consisting of purchase/refinancing of the primary residence.

This might happen but we are about four years into a massive crisis and we are now at the stage where 1-in-10 of all owner-occupied mortgages are 90+ days in arrears.

Fitch's "realistic scenario", as you put it, is for 1-in-10 performing owner-occupied mortgages to default on top of those already in arrears. Their figure is also for all mortgages with higher defaults assumed for buy-to-let mortgages.

Some more comments and the full report can be read here.

 

[DerKaiser]

According to Fitch today, one fifth of all Irish mortgages are expected to default in a realistic scenario. That makes the estimates in the OP of this thread look rather quaint by comparison.

Is one fifth of all Irish mortgages about 150,000?

It's not that far removed from the 120,000 estimate.

It would turn a predicted €2.6bn loss into a €3.25bn loss. Doesn't really change the fact that the losses have been provided for in the recapitalisations if a €4bn+ allowance was made.

 

[Shivvers]

Is one fifth of all Irish mortgages about 150,000?

It's not that far removed from the 120,000 estimate.

It would turn a predicted €2.6bn loss into a €3.25bn loss. Doesn't really change the fact that the losses have been provided for in the recapitalisations if a €4bn+ allowance was made.

Er, Brendan wrote with his figures that "The current level of provisions could cope with up to 50,000 defaults or repossessions."
He estimated that 120,000 would enter arrears. He did not estimate that 120,000 would eventually default. Big difference. Brendan, in his figures, actually estimated that only 30,000 would default.

So, Fitch is estimating that the problem will get three times worse than what Brendan has estimated the system can currently cope with. Fitch estimated that the number of defaults would be 5 times what Brendan has estimated.

Brendan and Fitch are miles apart, DerKaiser.

 

[DerKaiser]

My bad, thanks for the clarification!

 

[Sunny]

Seamus Coffee's post is a good post. The research by Fitch does not suggest that Irish banks are facing a tsunami of mortgage defaults that they are not already capitalised for.

That's not to say that the banks won't need more capital in the future but people using this report as evidence that they will are mistaken.

 

[Shivvers]

Seamus Coffee's post is a good post. The research by Fitch does not suggest that Irish banks are facing a tsunami of mortgage defaults that they are not already capitalised for.

That's not to say that the banks won't need more capital in the future but people using this report as evidence that they will are mistaken.

I didn't use the report of evidence of anything. I merely said the report dwarfed Brendan's estimates, which appear to me to be extremely arbitrary calculations with no rigour in their formation. Brendan has estimated 30,000 defaults. Fitch, with its army of analysts, is estimating about five times this number.

The Fitch report makes no estimation of whether the banks need more capital or not. My assessment of whether the banks will need more capital was based on the fact that the current trajectory of default figures suggest they will easily breach the "adverse" scenario outlined by BlackRock when the banks were recapitalised. Not on the Fitch report.

If the banks breach the "adverse" scenario the banks were capitalised to cope with, the banks are likely to need more capital.

 

[Sunny]

I didn't use the report of evidence of anything. I merely said the report dwarfed Brendan's estimates, which appear to me to be extremely arbitrary calculations with no rigour in their formation. Brendan has estimated 30,000 defaults. Fitch, with its army of analysts, is estimating about five times this number.

The Fitch report makes no estimation of whether the banks need more capital or not. My assessment of whether the banks will need more capital was based on the fact that the current trajectory of default figures suggest they will easily breach the "adverse" scenario outlined by BlackRock when the banks were recapitalised. Not on the Fitch report.

If the banks breach the "adverse" scenario the banks were capitalised to cope with, the banks are likely to need more capital.

I agree that it is impossible for someone to make accurate estimates in this matter but I don't understand why you are criticising Brendan for making assumptions when you yourself are making an assumption on the current trajectory of default figures and how it will easily breach the "adverse" scenario. It might well happen but at the moment, it is far from a foregone conclusion that it will. And certainly Fitch with their army of analysts as you say are not supporting your assumption. Indeed Fitch seem to be only predicting the base case scenario of the stress tests.

 

[Shivvers]

I didn't criticise him for making assumptions. I criticised the assumptions he made and the way he made them.