‘Strategic defaulters’ is the loosest terminology

The mortgage situation continues to bedevil both political and economic commentators. It does this in an almost complete vacuum, and, as we know, nature abhors a vacuum, and so there is chatter and verbiage. Out of this chatter has come a series of memes.

Memes are social genes — they propagate and mutate, sometimes becoming full- blown urban legends, other times lurking in the collective subconscious like recessives only emerging to render their carrier sterile, blind, and damaged.

One such meme is that over one-third of mortgage arrears are by “strategic defaulters”. That is a delicious meme. The words sound precise and weighty, and convey an image of hordes of well-heeled investors sipping Pimm’s while debating their financial future with advisers. Are there people who make cold, calculated decisions to walk away from their loans and leave the State to pick up the mess while they continue in the style to which they have become accustomed? Assuredly there are, and the vast majority are in Nama, multi-million bankrupts and defaulters.

We know very little about mortgage default in Ireland. We know how many mortgages are in arrears. As of Mar 2013, this stood at 142,000 residential and 39,000 buy-to-let. Note that this is not the same as the number of persons, who are fewer — but by what amount we do not know.

Some residential mortgages are really buy-to-let. Other persons have multiple mortgages. Others are joint mortgages. Others have both buy-to-let and residential mortgages. In any case the first thing we do not know is: how many persons are affected directly by mortgage arrears, either as principles (mortgagees) or as direct family members.

Bear in mind that there are 1.7m households in the State. Even if every case was a single discrete person and nobody had both a residential and buy-to-let mortgage, we would be talking about approximately one-in-10 of all households. In reality, the number is probably lower.

These mortgage numbers account for 18.3% of all residential mortgages and 23.1% of total value, 26.3% volume and 35.2% for buy-to-let.

This is pretty horrific but, when we look at the actual amount in arrears, we realise there is a much smaller amount at risk. In buy-to-let, we have total arrears of €1.1bn, or 3.8% of outstanding. For residential, we have €1.9bn, or less than 2%. Thus the problem is relatively small. Even if one-third of all were strategic, we are looking at one middle-sized Nama borrower.

We do not know what percentage of this small percentage of mortgage default is “strategic”. In fact, worse, we have no clue what that means. It is the loosest of terminology.

At one level, we have people who make a decision to prioritise essential family expenditure on health and food over mortgage — these are what we might call ‘shouldn’t pay’; then we have people who have extreme difficulty in juggling mortgage and other payment — these are what we might call ‘can’t pay’. Then we have the defaulters who simply refuse to reduce their lifestyle expenditure, the ‘won’t pays’. We do not have a working definition.

Some research suggests defining it as not being current on mortgage, while being current on other loans. Given that there has been a remarkably small decline in the amount of money outstanding on credit cards, it is reasonable to imagine that some at least are keeping this in play (being current) while not being current with the mortgage.

Others define it as being 90 days plus in default for more than two months, while having financial means to not be in default. Others define it as defaulting to gain a short or long-term financial advantage, which is almost tautological and which ignores the fact that the long-term disadvantages almost certainly outweigh any short-term liquidity advantages. So a second thing we need to find out is what the various stakeholders consider to be strategic, as opposed to accidental, or liquidity, or any other form of default.

We also know little about the circumstances of the people in default. The Central Bank published some excellent reports in 2011, but we are ignorant now of the inter-relationship between levels of unemployment, negative equity, after-tax income changes over the last half decade and levels of arrears. Research from the US shows unemployment and reduced savings balances are the main things which tip people into default.

Nor do we know what the final tipping point is. It is, from US research, rarely a cold economic decision, giving the lie to the strategic nature of default. It is much more an emotional decision, where people find themselves unable to cope.

The consequence of this is that more aggressive bank processes are likely to shock people into more arrears, not less. Combined with the fact that US research also suggests that social herding is important, the more people you know who have defaulted is an important determinant of whether you default.

If many strategic defaulters can be prevailed upon to start paying, a risk emerges of reducing social stigma from default which, combined with the emotional triggers, will increase default.