Mortgage stats mask potential disaster for country

Back in the cold war era, regular reports from Pravda used to extoll the virtues of Soviet collective agriculture, reciting records of constantly improving wheat production.

There was usually a picture of uniformly dressed scythe wielding kulaks happy in their work. Unfortunately Pravda didn’t report the early morning queues that formed outside sparsely shelved grocery stores in the hope and expectation there would be a bread delivery that day.

The Central Bank reported last week that the number of mortgages in arrears fell further in the first quarter of 2017, highlighting that this was the 15th consecutive quarter of decline giving the impression, Pravda style, of a positive momentum and a system that is working well.

Sounds impressive until you have a look behind the headlines at the numbers. The downward trend in reduction of arrears has predictably plateaued and at the current glacial rate of progress it will take decades before normality is restored.

Of the mortgages in long-term arrears only 494 were resolved this quarter, which is a puny number when compared to the overall total. This rate of progress is likely to slow further because experts who have worked through similar arrears backlogs in the past will tell you that the more intractable difficult cases are typically the ones left to the end of the process. More worryingly the number of those in short-term arrears has shown a slight increase for the second quarter in a row. This is the opposite of what you would expect in one of the fastest growing economies in Europe with historically low interest rates and is an early warning indicator of dysfunction.

The report raised further red flags by the high number of restructured loans that have fallen back into arrears. The Central Bank reports that there are just over 120,000 mortgages that have been restructured which on the face of it sounds encouraging. You would be forgiven for thinking that restructuring means resolved. However, it would appear that there is less durability to many of these restructurings than meets the eye with the majority consisting of temporary measures such as term extensions, arrears capitalisations and interest rate reductions, rather than more sustainable long term solutions such as split mortgages, mortgage to rent or write-downs.

This would in part explain why 13% of resolutions have failed and begs the question of how many more of these restructured mortgages would unravel if the era of record low borrowing costs comes to an end as was suggested by the ECB last week.

There are three compelling reasons why the arrears problem should be tackled more quickly and on a more conventional basis. Firstly it is well established that high levels of arrears has a corrosive effect on economic growth by increasing the cost and limiting the supply of credit. In other words it has a negative impact on everyone. Secondly, there is the moral argument that the vast majority of families who find themselves in this predicament are not there due to their own fault but rather because they happened to buy a house at the wrong time whenever the state was not regulating the banks properly. Lastly there are the social consequences of leaving so many families in this predicament with the increasing stresses and strains on family relationships.

The Commission recently published a country report on the Irish 2017 national reform programme and made recommendations including encouraging a more durable reduction in non-performing loans through resolution strategies that involve write-offs for viable businesses and households, with a special emphasis on resolving long-term arrears.

In other words the current light touch approach adopted by the Central Bank is not working. To carry on with this minimalist non-interventionist approach may threaten the national recovery particularly when we are facing into the uncertainty of Brexit. It is the Commission that is the voice of reason and seems to be the best hope to lift the cloud of uncertainty and despair that hangs over thousands of Irish families.

Eugene McErlean is an expert on banking and corporate governance and has previously advised the independent alliance on mortgage arrears.

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