More mortgage holders opt out of payments

Ireland’s mortgage arrears crisis is set to deteriorate further as more borrowers deliberately opt not to make repayments.

New research by Davy warns there is a growing culture of “strategic non-payment” of debt following a “confused regulatory response” to the ongoing crisis, which the stockbroker claimed included “inappropriate constraints” on banks from contacting delinquent borrowers.

Davy predicts banks will have to repossess a greater number of properties than to date to remove the problem posed by borrowers deliberately choosing to miss repayments on housing loans.

“Repossessions will have to rise, particularly in the buy-to-let sector, to provide a credible threat against strategic non-payment of arrears,” said Davy’s chief economist, Conall MacCoille.

However, Mr MacCoille said fears about the negative impact that a potential flood of repossessed properties would have on the housing market might be exaggerated, based on a similar experience in the US. Instead, he argued, the floor and recovery started earlier in housing markets where the timeframe for repossessions was shorter.

In Ireland, the problem has also been exacerbated by delays in bringing in legislation to address a 2011 High Court ruling that removed what Davy described as “the credible threat of repossession”.

In its report, Davy said mortgage arrears have already passed its estimated peak of 16.5% by value. It stated that repossessions and debt writedowns via the use of split mortgages would have to rise in order to provide more clarity on the true extent of loan losses suffered by Irish banks.

The report pointed out that the US experience of dealing with delinquent mortgage debt showed 40% of cases resulted in some form of debt writedown.

According to the latest figures from the Central Bank, there were 95,554 owner-occupier mortgages in arrears of more than 90 days at the end of March. It equates to 12.3% of all such mortgages — up from 11.9% in Dec 2012.

A further 29,369 mortgages of buy-to-let properties or 19.7% of the total were also in arrears of over 90 days at the end of March — up from 18.9% at the end of 2012. Another 79,689 owner-occupier mortgages are classified as restructured, with 76% meeting their new repayment arrangements.

It is estimated that a third of distressed borrowers are unemployed. New evidence suggests that mortgage repayments account for more than 60% of the income of a quarter of all householders in mortgage arrears.

As a consequence, Davy, argues that even debt writedowns may not be sufficient for many borrowers.

Another problem is any changes to interest-only payments for buy-to-let investors may not be sustainable, given the older age profile of such borrowers, many of whom are retired.