herald

Thursday 19 July 2018

96,000 MORTGAGES ARE IN TROUBLE. HERE'S WHAT NEEDS TO HAPPEN NOW

THIS week the Central Bank published figures showing that almost 56,000 homeowners were more than 90 days in arrears on their mortgages at the end of June, up 6,000 on the previous three months.

Almost 70,000 mortgages have been restructured by lenders, of which 30,000 have once again fallen into arrears. What this means is that almost 96,000 mortgages, approximately one in every eight home loans, are either in arrears or have been restructured.

As the proportion of mortgages in trouble has risen, the calls for some sort of debt forgiveness have grown. Among those who have joined the clamour are UCD economics professor Morgan Kelly, Ireland's very own Dr Doom, who has put the cost at a relatively modest €6bn.

With all due respects to Professor Kelly, I suspect that he is massively understating the true extent of the problem.

When the €40bn of mortgages that they have securitised or sold to investors are taken into account, the Irish banks have about €135bn of home loans on their books, of which about €115bn are to homeowners and the remainder to buy-to-let investors.

The most recent house price statistics, which were published by the CSO this week, show that prices are now 43pc down from their 2007 peak and still falling. Unfortunately, with very few properties actually selling, the official house price data is highly suspect.

The auctions of distressed properties, where houses and apartments have been selling at anything from a 60pc to 75pc discount to their peak values, almost certainly provide a far more accurate picture of the true state of the market.

Faced with such a collapse, a €6bn mortgage restructuring fund, the equivalent of just over 4pc of all mortgages outstanding, wouldn't even come close to aiding all of the homeowners in trouble with their mortgages.

Tens of billions of euro will be needed to fix the mortgage mess.

In a paper published in early 2010, the ESRI calculated that a 50pc fall in house prices would result in approximately 55pc of all mortgages being underwater. As we have already reached this stage, that translates into approximately 427,000 of the country's 777,000 mortgages now exceeding the value of the house or apartment on which they are secured.

While homeowners are still meeting the repayments on the vast majority of these underwater mortgages, the longer the situation is allowed to drag on without a solution, the more of these mortgages will get into trouble.

Even where they continue to meet the repayments, homeowners stuck in the negative equity trap have cut back on their spending, which is why retail sales are so depressed.

First-time buyers are particularly vulnerable. Every year from 2005 to 2008 over 60pc of the home loans approved for first-time buyers were for more than 90pc of the value of the property as against 15pc-22pc for second-time buyers over the same period.

If nothing is done, hundreds of thousands of homeowners are at risk of losing their homes. This would represent an economic and social catastrophe of unparalleled proportions.

Quite clearly doing nothing is not an option, no matter what ministers choose to tell us.

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