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Monday 20 August 2018

Dan White: Give us all a break on mortgage arrears or we'll never recover

When Wilbur Ross, the American "king of bankruptcy", goes wooing, he doesn't believe in adopting a subtle approach. No sir. Instead he announced his wish to take control of EBS in an interview with business news channel CNBC. This is the commercial equivalent of megaphone diplomacy.

Unfortunately, with the government and the Irish-owned banks still in denial about the need to massively write down the €150bn of mortgages secured against Irish homes, Ross's in-your-face negotiating style may force a long-overdue rethink.



Falling

Consider the facts:

Since house prices peaked in early 2007 they have fallen in value by at least 50pc. And they're still falling with many analysts now privately predicting that they will fall by a further 50pc from their current level, i.e. a cumulative fall of 75pc from the top of the market.

This is bad news for the 790,000 Irish homeowners who have mortgages secured on "their" homes and the banks which have lent them a total of almost €150bn.

Already, more than 36,000 homeowners are in arrears on their mortgage repayments. In fact, the true level is even higher as the arrears figures published by the Financial Regulator don't include homeowners experiencing problems with mortgage repayments who have come to a temporary arrangement with their lenders.

When these homeowners are added to the pot, the real level of arrears is much higher, probably at least twice the published level. And it's still rising.

Last week, ratings agency Standard & Poor's published figures showing that the arrears levels on pools of mortgages which Irish sub-prime mortgage lender Start had sold to investors were running at between 13pc and 45pc. While Start's mortgages would almost certainly be of a lower quality than those of the more established lenders, last week's figures almost certainly point to an explosion in the level of mortgage arrears at all lenders in the coming months.

The EBS, which has been controlled by the state ever since it received €1bn of fresh capital from the government earlier this year, has about €15bn of mortgages outstanding secured against 83,000 homes. This gives it just over 10pc of the market both by the value and the number of mortgages.

Traditionally, its lending has been concentrated among public sector workers, particularly teachers, nurses, gardai and civil servants. Under normal conditions, this should mean its mortgage book was of a higher quality than that of other lenders.

It also has a far lower proportion of loss-making tracker mortgages on its books. Only about one-fifth of the EBS's mortgages are trackers, compared to as much as half at some other lenders.

Unfortunately, these aren't normal circumstances -- far from it. With house prices after collapsing and arrears soaring the old rules no longer apply. Even people with "good" jobs now find themselves being put to the pin of their collar to meet mortgage repayments while the outlook for homeowners who have lost their jobs is truly grim.



Cajoling

And what is the government, which under the guise of NAMA is buying bad loans from builders and property developers with a book value of more than €80bn, doing about this? The answer would appear to be as little as it can possibly get away with.

Apart from cajoling the banks to extend a 12-month repayment moratorium to homeowners who admit to their problems, the government has done sweet Fanny Adams.

We have reached the stage where the need for drastic action to deal with the problem of arrears can no longer be denied. This will almost certainly include significant write-downs for many homeowners.

When the government and banks are as deep in denial as ours on mortgage arrears, megaphone diplomacy is the only worthwhile sort.

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