One-in-ten mortgages in trouble as crisis rumbles on

PERCHED on a chair overlooking a wood panel-lined room in Dublin’s High Court, a bespectacled Judge Elizabeth Dunne has become all-too-used to hearing from the victims of Ireland’s economic meltdown.

Each Monday, Dunne presides over repossession hearings, with one-in-10 Irish mortgages now in trouble. At the end of last year, more than 79,000 borrowers were behind on payments or had loan terms altered due to “financial distress,” the Central Bank said on February 28.

“Things are getting worse and worse,” said Dunne, as she weighed the case of a couple about €114,000 in arrears on a €558,938 home loan, one of 74 cases on her list on March 7. “Putting off the evil day is not going to help.”

Irish mortgages account for more than a third of about €270 billion of loans that remain with so-called viable lenders — AIB, Bank of Ireland, Irish Life & Permanent and EBS Building Society.

“There has been a continual under-estimation of loan impairments in Irish banks over the past few years,” Ray Kinsella, banking professor at the Smurfit Business School, said. “I am seriously concerned about mounting loan losses in their mortgage books.”

The bad loans may be reassessed as early as this month when the Central Bank concludes a third round of stress tests on the country’s lenders. The results will determine how much of the €35bn IMF/EU bailout fund Ireland will need to draw down.

A year ago, regulators here stress-tested for a 5% loss rate on Irish mortgages. This year’s review “will take account of the deteriorating economic conditions” and hence loan-loss assumptions “may be higher,” said Nicola Faulkner, a spokeswoman for the Central Bank.

This year’s tests may stress loan books against the unemployment rate rising to 16%, house prices falling 60% from their peak and “negligible” economic growth, said analysts.

More than 300,000 households, or about 40% of mortgages, may find their mortgages are worth more than their homes, so-called negative equity, before the property market bottoms out, said David Duffy, an economist at the Economic & Social Research Institute (ESRI), which estimates that house prices will fall by as much as half from peak to trough.

Morgan Kelly, of University College Dublin, wrote on November 8 that banks face “mass mortgage defaults” and a “wave of foreclosures.”

Kelly declined to be interviewed.

Ireland has bolstered its banks with €46.3bn of additional capital over the past two years.

The IMF/EU package includes €10bn to recapitalise the banks up-front and a further €25bn of “contingency” capital to be used if required.

“When the teams from the EU, ECB and IMF arrived in November, they probably thought they would find huge holes remaining in the banks’ loan books, but they did not,” said Alan Ahearne, who was economics adviser to Brian Lenihan, the former finance minister. “It’s not that there’s some black hole in the Irish banks that hasn’t previously been discovered.”

On the other hand, Irish households’ net savings as a percentage of disposable income rose from zero in 2007 to 12% in 2009, according to the Central Statistics Office.

Irish Life & Permanent Plc finance director David McCarthy said he doesn’t believe there are undiscovered losses in banks’ mortgage books. The group, which has €26.3bn of Irish home loans, saw arrears of less than 90 days peak in mid-2010, McCarthy said on March 2, and they’ve “been falling, albeit quite slowly, since then,” he said.

“Banks are exercising huge forbearance on borrowers in arrears,” partly because of pressure from the authorities “but also because they don’t want to repossess houses as there’s no second-hand market to sell them,” said Kinsella. Lenders only held 585 repossessed residential properties at the end of 2010, according to the central bank.

While banks may be able to contain bad-loan losses on their mortgage books, “a big and ongoing problem is that a large part of their mortgage books are based on ECB tracker rates, which banks are funding at a loss,” said Karl Deeter, operations manager with Dublin-based Irish Mortgage Brokers.

Back in the High Court, Dunne is listening to how a house builder from Co . Cavan is €67,000 in arrears on a €360,000 home loan taken out three years ago.

Times are hard out there, says the man, who has a plant hire and quarrying business, but is making partial remortgage payments. “I understand that well,” says Dunne. “I see that every Monday.”

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