Friday, 18 December 2015

Mortgage arrears crisis remains unresolved with possibility of up to 30,000 repossessions

Rory Hearne: Despite the recent Central Bank figures showing a decline in mortgage arrears there are still 37,000 mortgages for a principal dwelling (home) in arrears for over 720 days. The mortgage arrears crisis remains unresolved and continues to cause a huge amount of suffering to those affected. This blog provides an overview and analysis of the current situation based on the Central Bank figures in order to understand better the extent of the on-going crisis.

While the total number of mortgage accounts in arrears has fallen in recent years, the number of mortgages in arrears over 720 days has risen by almost 45%, from 25,940 (with an outstanding balance of €5.3bn) in 2013 to 37,269 (value of €8.1bn) in 2015. 

Clearly there is still a major problem when 12% of the entire residential mortgage accounts are in arrears, 58,000 are in arrears for over 6 months (180 days) and 40,000 mortgages to the value of €8.1bn are in arrears for over two years (720 days). 

These figures are drawn from the Central Bank's Quarterly Residential Mortgage Arrears and Repossessions Statistics (see here) that provide a very useful overview of what is happening in terms of mortgage arrears, restructuring, court cases and repossessions for both mortgages for principal dwelling houses (PDH) and buy-to-lets (BTL).

Table 1 Mortgage arrears on Principal Dwelling House 2011-2015
Total Arrears on PDH
Arrears on PHD Over 720 days
Value of outstanding mortgage in arrears over 720 days
Q 3 2015
Q 1 2015
Q 1 2014
Q 1 2013
Q 1 2012
No data
No data
Q 2 2011
No data
No data
Source: Central Bank Quarterly Residential Mortgage Arrears and Repossessions Statistics 2012-2015

But what has led to the dramatic reduction in the overall numbers in arrears? This can be explained in large part by the various processes of restructuring of mortgages that has taken place (see Table 2). While the numbers in arrears dropped by 49,827 between 2013 and 2015, the number of restructured mortgages rose by a similar 40,954. 

The restructuring has principally taken various forms of forbearance whereby there is a temporary postponement of mortgage repayments in order to avoid foreclosure (repossession) of the property. Such arrangements include; a switch to an interest only mortgage; a reduction in the payment amount; a temporary deferral of payment; extending the term of the mortgage;  split mortgages and arrears capitalisation. The Central Bank itself notes that “not all restructure types represent longer-term sustainable solutions ... For instance, short-term interest only restructures are, in general, not part of longer-term sustainable solutions”. Split mortgages, are considered more ‘long-term solutions’. Arrears capitalisation is an arrangement whereby some or all of the outstanding arrears are added to the remaining principal balance, to be repaid over the life of the mortgage.

Table 2 Number of restructured PDH mortgages in arrears  
Q 3 2015
Q 1 2015
Q 1 2014
Q 1 2013
Q 4 2012
Q 3 2012
Q 1 2012
Q 2 2011
Source: Central Bank

A total stock of 120,806 PDH mortgage accounts were categorised as restructured at end-September 2015. Split Mortgages comprise 20%, Term Extension 14%, and Arrears Capitalisation, 28%. That leaves, 38% (45,000) in largely unsustainable solutions. Furthermore approximately 30,000 (25%) of restructured accounts are still in arrears (re-defaulting). 

The various forms of restructuring are not necessarily sustainable solutions and involve various forms of reducing current payments but adding the debt on or extending out time frame of payment. If interest rates rise in coming years this could lead to significant problems. 

Buy-to-let mortgages are given to people or investors who are buying property to rent out. Many of these mortgages were sold to individuals during the boom period as an investment opportunity (often seen as a pension). They are then rented to people as private rented accommodation (so the BTL sector has major impact on private rented tenants). 

Looking at the buy-to-let mortgage arrears situation we can see that the arrears situation is significantly worse than the principal home mortgage arrears crisis. A fifth (21.7%, 30,288; value of €8.1bn) of BTL mortgages are in arrears (see Table 3) with 16.6% (22,965) in arrears over 180 days and 11% (15,275; value of €4.2bn) in arrears over 720 days. Furthermore, the numbers in arrears have only fallen by 23% since the highest point of 2012 (compared to the fall in number of PDH in arrears by 35% from its high point). The number of buy to lets restructured has not changed much indicating a major problem with long-term solutions for buy-to-let mortgages in arrears.

Table 3 Buy-to-let mortgages in arrears and restructured

Total arrears
Arrears > 720 days
Q 3 2015
Q 1 2015
Q 1 2014
Q 1 2013
Q 4 2012
Q 3 2012
Source: Central Bank

Ireland one of the worst mortgage arrears/default crisis in Europe
The scale of the mortgage arrears crisis Ireland is shown through a number of ways. Firstly when we add the totals in arrears from the PDH and BTLs we see that 122, 579, or just under 14% of mortgages are in arrears (default). Furthermore, 52,544 mortgages are in arrears over 720 days. 
Another way to get a better understanding of the scale of the crisis is to add together the number of mortgage accounts in arrears, with the numbers restructured and not in arrears (mortgages that have defaulted at some point). 

When we look at these as a proportion of the overall mortgage numbers we see that the total mortgages that are either in arrears or restructured is almost a quarter (24%) of total PDH mortgages. In value terms this rises to 29% (€29.4bn) of the total mortgage value (€102bn) is either in arrears or restructured.  For the BTLs this figure rises to over a third (36%) of all BTL mortgages being affected by arrears or restructured. Combining all residential mortgages (BTL and PDH) we can see that 231,821 mortgages or a quarter (26%) of all mortgages have defaulted (in arrears or restructured) in Ireland.

And Ireland continues to face one of the worst mortgage arrears (default) crisis in Europe (see Figure 2).  While these rates are for 2013, our current default rate of 11% for PDH and 21% for BTLs still put us facing one of the worst mortgage arrears and default crisis in Europe.

Figure 2 Mortgage Balance Default Rate by Country (%), 2013

Repossessions and court cases
We can see from Table 4 that 23,367 legal proceedings have been issued by lenders since 2012 to enforce the debt/security on a PDH mortgage. There has been a significant increase in the amount of legal proceedings in the last two years with the number rising from approximately 300 a quarter in 2012 to over 3000 a quarter in 2014. 

In total numbers it increased by 300% between 2013 and 2014 (rising from 3,846 in 2013 to 11,424 in 2014). It has continued at this high number with over 7,000 issued this year already. Court proceedings concluded in 2,895 cases in 2015 (just up to September) up from a total year figure of 2,195 in 2014 and almost double the 1,478 that concluded in 2013. While the courts have granted repossession or sale order in 1,314 cases so far this year, this is up on 968 cases in 2014 and is over double the number of repossessions orders (626) cases in 2013. 

In terms of actual repossessions 1,195 properties were taken into possession by lenders during 2015 (of which 564 were repossessed on foot of a Court Order, while the remaining 631 were voluntarily surrendered or abandoned). This compares to 1,311 repossessions in 2014, 766 in 2013 and 602 in 2012.  This gives a total of 3,874 repossessions of principal dwelling houses since 2012. 

Extrapolating out these figures we can estimate that if the 23,000 currently issued legal proceedings go to court then we are likely to see 45% of these end up in repossession which equates to at least another 6,000 repossessions. But that assumes no more legal proceedings are issued. Given that there are 58,000 still in arrears over 180 days and 37000 over 720 days that would suggest there could be an additional 35,000 legal proceedings to be issued. This would bring an additional possible 16,000 repossessions.   

Table 4 Legal proceedings and repossessions 2012-2015

Legal proceedings issued PDH
Court proceedings  concluded
Court grants repossessions/sale order
Repossession by lender
Q 2 2015
Q 1 2015
Q 4 2014
Q3 2014
Q 2 2014
Q 1 2014
Q 4 2013
Q 3 2013
Q 4 2013
Q 1 2013
Q 4 2012
Q 3 2012
Q 2 2012
Q1 2012

In regard to the BTLs (see Table 5) there were 640 repossessed in 2015 so far compared to 460 in 2014. So combining the BTLs and PDH there were 1,711 repossessions in 2014 and 1835 for the first 9 months of 2015 which suggests that 2015 will see an increase again in the number of repossession over 2014. 

Table 5 Buy-to-lets repossessions 2014-2015

Q3 2015
Q 2 2015
Q 1 2015
Q 4 2014
Q 3 2014
Q 2 2014
Q 1 2014

There have been significant issues raised from the appointment of rent receivers to BTL properties such as evicting private tenants and a number of cases reported of people and families becoming homeless as a result. In this context it is worrying to see the rise in rent receivers being appointed to BTL properties. During the first quarter of 2015 rent receivers were appointed to 886 BTL properties, bringing the stock of accounts with rent receivers appointed to 5,965 which 8 times the number of rent receivers appointed in the first quarter of 2012 when 103 were appointed and the total stock of BTLs with receivers appointed was just 566. 

Vulture funds increasing their share of mortgage arrears 
There are a number of factors that will determine the rate of repossessions. One of those is the involvement of ‘non-bank entities’ or vulture funds who have bought the loan books of the former Anglo Irish Bank and Irish Nationwide Building Society. These vulture funds and international financial institutions now hold 47,461 mortgage accounts (PDH and BTL combined). Of this number, 19,818 are in arrears of more than 90 days, with 13,050 of these in arrears over 720 days. Therefore, these funds hold almost 25 per cent of all mortgage accounts in arrears of more than 720 days. They have doubled their holding of the total Irish mortgage stock in just two years from just 2% of the total stock in 2013 to 5% in 2015 (6.3% in value terms).  There is a concern that such entities will, as property prices rise, try to repossess properties.

Table 6 Non-bank entities (vulture funds) mortgage stock and arrears
% Of total mortgage stock
% Of total mortgage value
Arrears over 90 days (value)
2015 Q 1
19,818 (4.6bn)
2014 Q3
18,064 (3.8bn)
2014 Q 2
15,457 (3.3bn)
2013 Q 3
9,050 (2bn)

More repossessions and stark inequality in dealing with mortgage arrears crisis

While Ireland has not seen the level of repossessions as Spain, a country that experienced a similar housing crash, we could yet see a flood of repossessions. There have been approximately 4000 repossessions so far, but with 58,000 mortgage accounts in arrears over 180 days on their primary home, and 15,000 buy-to-lets in arrears over 720 days, Ireland could yet see repossessions reach five or six times the current numbers. This could bring us closer to the Spanish levels of mortgage repossessions. 

The comparison with Spain is interesting when trying to analyse why we have not seen Spanish levels of repossessions and evictions in Ireland. Part of the reason has clearly been a political decision here in Ireland to avoid fomenting wide spread public anger. It is likely that this political decision has been carried out through a number of means including the slow changes to the law to enable repossessions (2013 Conveyance Law), a reluctance to give the capacity to the courts to deal with the increasing volume of cases, and in particular the strong influence exerted by government through ownership of the major banks (which is different from Spain). 

Irish history as a post-colonial country has resulted in a particular politico-cultural heritage that gives evictions a particularly emotional connection and widespread abhorrence. The political and governing institutions understood this during the crisis. The current Irish political system would have been severely challenged if the widespread public revolt over water charges in 2014 and 2015 was combined with the additional popular anger had tens of thousands of repossessions of family homes been taking place at the same time.   
The personal and human impact of the arrears crisis is often lost in the discussion of statistics in this area. This also means that the wider social and economic costs of the arrears crisis are not given sufficient credence, for example the impact on children living in these households, employment opportunities and physical and mental health costs – the destruction and loss of valuable human capital.  This impact was described by the stress-management councillor from the Phoenix Project who have helped 18,000 mortgage arrears cases : 

“What we are seeing are people coming in with toxic levels of stress, and it is stress they have been living with for years.…
…When they come in they feel like total failures…Their self-confidence and their self-esteem have been floored....
…For many it’s the same as dealing with a death. We see the same anger, denial, bargaining and depression. But the difference between death and debt is that in this situation they also have to survive. They have to try and put food on the table…” (quoted in The Irish Times see article here).

As the economic recovery continues, the political system and institutions are likely to be feeling more confident that they can deal with the fall-out from a rising number of evictions and repossessions that are likely to happen without fair and sustainable solutions for those in long-term arrears. Without the issue of arrears being raised in the election a new government is also likely to allow things proceed at a faster pace.  

In terms of inequality, the issue of mortgage arrears and repossessions stands as another stark example of the unequal treatment of ‘ordinary’ people in contrast to the preferential treatment of those with power, wealth and influence. Unlike Iceland, which wrote off the debt of those in serious arrears (paid for by a levy on the banks), here in Ireland the large debt write-downs were restricted to millionaire developers and wealthy billionaires. 

There needs to be a reassessment of the possibility of debt write-offs and sustainable solutions (such as providing the funding for local authorities to extend on a wider scale the mortgage to rent scheme) for those in long term arrears. Particularly, in the context where the very banks that are repossessing and forcing arrears repayments are making massive profits again (AIB made a profit of €1.1bn last year and Bank of Ireland looks set to make over a billion in profit this year).

Dr Rory Hearne is a Senior Policy Analyst at TASC. You can follow him on twitter @RoryHearne

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