Buy-to-let arrears have been allowed to fester

The publication this week by the Department of Finance of mortgage arrears figures highlights the festering lethargy that has characterised much of the Irish response to the financial crisis.

Buy-to-let arrears have been allowed to fester

That it publishes slightly different figures on the same issue as the Central Bank, highlights the embedded inability of the Irish State to engage in any sort of joined-up thinking. The Central Bank data is end of March; the Department of Finance, end of April. They use slightly different presentations and slightly different emphases on the same dataset.

Why is this duplication allowed? Why is it needed? Why do we not have one official source, weekly or monthly or quarterly, from one state agency, providing one comprehensive dataset? Do the Central Bank and Department of Finance not talk to, or co-ordinate with each other?

As to what the figures show, it is frankly horrific. There are 17% of all residential mortgages in arrears, the vast bulk being in deep arrears, that is over 90 days.

These account for about €2.4bn or some 10% of the outstanding loans. These need to be dealt with carefully, and humanely.

Where the problem lies is in the buy-to-lets. These have festered, and have been let fester.

These are investments. They are assets, purchased in good faith and hope by people, in the expectation that they will provide a return. The returns lie in both the income from letting the property and a capital gain from sale on the culmination of the mortgage.

As of the end of the quarter we have an arrears rate of 27%. This represents just under €11bn of mortgages, and a total of €1.6b in arrears. Some 37,000 mortgages are in this pot; 13,000 are in arrears for over two years. And yet, of these assets, less than 600 are in repossession. This is crackers.

If 14,000 people had car loans they had not repaid for more than two years, 13,999 would be on the bus. The question has to be asked: Why are we not seeing vast repossessions of these investment assets which have not performed and which the borrowers are not able to repay?

It cannot be down to the hit the banks will take if they enforce. A Central Bank paper presented earlier this year gives some granularity on the losses. In general we can see buy-to-let mortgages as of end 2013, as having a loan-to-value ratio of 120%-130%. Let’s say it is 125% for illustrative purposes.

Thus on the face of it, the €11bn in mortgages are worth only some €8.8bn. Across the sector therefore a first cut of the losses from enforcement might be some €2.2bn. This is a pittance.

There is no reason why we cannot create some form of a Nama to take these and drip them out, manage them and so forth. The great thing is that the banks have already been paid for these losses through rounds of state-led recapitalisation. We need not repeat the issues around the monies Nama paid for the large developers.

There is another benefit to this. A very large percentage, 70%-75% plus by balance, of buy-to-lets in arrears are on tracker mortgages. These are enormous loss makers at present and even with an upswing in the interest rate cycle, we will still see the banks losing money on an ongoing basis. Removing them from the banks, even in part, can only assist them to do that which we need them to do, act as credit intermediaries in a mild recovery.

The only other rational reason why we might not be seeing proper commercial control being enforced is that of intramarket contagion. We do not know the amount of cross collateralisation. What percentage of the buy-to-let mortgage market, and of the part of it in arrears, are collateralised on private residential dwellings, or worse, on each other.

This is crucial for understanding what is to be done. The Central Bank or the Department of Finance should have this information. It is not commercially sensitive, but it may be commercially embarrassing. That is not enough of a reason for not making it public.

Two things therefore are required — enforcement and transparency. To ensure both of these will require political will and political strength. And that is the problem…

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