Despite an entire page of the 2011 Programme for Government being devoted to “housing and distressed mortgages”, the start of the 32nd Dáil doesn’t read well. The number of mortgage arrears cases is now over 25% higher, having reached a peak in 2013. Around 40,000 borrowers are threatened with repossession proceedings and face the prospect of losing their homes.
Adding to the housing crisis is a shortage of accommodation for those already homeless and construction of new homes lagging substantially behind the needs of the population. Rents, if you are fortunate to find a property to rent, will gobble an excessive amount of your take-home pay. For those meeting their mortgage payments, the costs of Irish standard variable loans are among some of the most expensive in Europe.
A recent report from the Central Bank also indicated that loans to SMEs are also the dearest in Europe by some considerable margin, making the cost of goods and services more expensive. These developments are not unconnected.
The Central Bank will point out that the number of loans in arrears has fallen 40% from the peak and that the trend is progressing downwards. However, when you look behind the trend, the figures are less reassuring. The rate of decrease is likely to slow because easy cases are likely to be resolved. That leaves the more intractable and complex cases to be dealt with. You may recall the repeated use of the phrase “case-by-case” in relation to dealing with mortgage arrears. However, this “case-by-case” approach hasn’t led to a totally happy outcome. After seven years of case management, there is still a disproportionate number of cases based on temporary short-term arrangements. The red flag is the fact that 25% of cases purportedly restructured end up back in default.
Amazingly, in cases restructured by way of a permanent interest rate reductions, the rate of re-default is over 50%. The main advantage of taking this amount of time to examine every case on an individual basis is that when a resolution is reached it should be suitable and sustainable. These figures tell us that if 25% of cases have patently unsuitable solutions, it is probable that many others are also in unsuitable arrangements struggling to keep up with their repayments. What this means is that the “case-by-case” approach isn’t working as intended. The process supervised by the Central Bank is defective and is unlikely to result in a permanent long-term resolution of the arrears problem within any reasonable timescale.
So how does this affect the majority of people who don’t have an arrears problem? To begin with it is likely that the interest rates you are being charged on your loan are higher than would be necessary for a bank unburdened by a poorly performing loan book. The interest rate spread in Ireland is much higher than its European peers. Several factors are important in determining this spread. Loans are priced taking into account the credit risk, which is elevated in Ireland due to the high-level of non-performing loans.
Secondly, competition is weak which is partially attributable to the high level of credit risk and long-term arrears that deter new players from entering the market. Bank profitability is constrained by the high levels of non-performing loans, which increase funding costs and tie up bank capital. Investors and other banks are less willing to lend to banks with high levels of non-performing loans leading to higher funding costs.
Reducing the level of non-performing loans to more normal levels is therefore crucial to support credit growth and remove the drag that currently impedes economic activity in Ireland.
Of more immediate importance is the impact an unresolved arrears problem is having on a dysfunctional housing market. It was to be welcomed that the first item on the agenda during the recent discussions on forming a new government was housing and homelessness.
In Iceland, arrears were cut by 50% year on year as a result of a government action plan and are now at low single digit levels. There is no reason why Ireland couldn’t achieve this if there was a willingness to tackle the issue more directly.
- Eugene McErlean is a leading expert on the banking industry and corporate governance.