Mortgage losses may well push banks over the edge

independent.ie/opinion/analy … 43598.html

Wow. This will be an interesting Sunday for people who were still in denial about everything or for those who didn’t realise how bad the situation was.

The banks refusal to deal with defaulted morgage debt is probably representative of how they’re dealing with all their problem loans. Even with nama and recaps, they may still be very insolvent and the cost to the state to date is dead money.

First time I seen the view committed to print (in a national daily) that house prices may fall 50% from where there are now.

Its good for that realism, but I think they’re a little overblown in their estimates of writedowns. They leap from 4.6% in default to applying a 40% writedown to 100% of the mortgage book. I’ve no doubt banks need to be realistic about what they can actually recover in cases where people have lost their jobs and the outstanding mortgage greatly exceeds the value of the property.

Admittedly, there’s an unknown number of folk in between, not in default just because they’ve already received some special consideration. But I take it that’s less than 100%. 14% unemployment still means 86% employed.

Playing with those figures, the average outstanding mortgage is €125,000. That doesn’t strike me as an amount obviously beyond the ability of a typical Irish household to repay; of course, for some, the annual pilgrimage to Orlando might have to go.

Its still a problem; a 50% writedown of 10% of the mortgage book would be €5 billion. But lets always be alert to stories that want to leap from support for people who can’t pay to giveaways for people who don’t want to pay.

schuhart - I would have agreed with you but for the forthcoming interest rate hikes, property tax, water charges, etc. I see these having the cumulative effect of tipping many households over the edge.

You could well be right, and I do agree there’s a problem. Even if losses were only (only?) €5 billion, that must surely be too much for our ‘well-capitalised’ banks to swallow without assistance.

I’m not at all dogmatic about the figures in my post - they came out pretty much as you see them. I read the article, said ‘hang on a minute’, and Excel did the rest in a couple of moments. So I am absolutelly open to an alternative view.

As I see it, the issue is what proportion of that €99 billion rests in households close to the margin, where mortgage repayments account for an appreciable amount of household income. According to CSO in 2004/5 expenditure on ‘housing’ accounted for 12% of average household income. But that will likely have changed in the last 5 years.

Is it fair to say that we’d have an image of an overborrowed household, where income has fallen as a result of job loss or pay cut, where we can expect all of those things you mention will push them over the edge. Its really all about how large that group is. If its, say, 20% of the mortgage book then, to an extent, each success hit will only be prodding an already defaulted mortgage. I can’t draw a graph but, if I could, I’d be trying to draw one that sweeps up. Because a household with a ten year old mortgage is probably immune to all of those extra hits; households between ten to five years will presumably be somewhere in between.

Anyway, all I’m really saying is I’m absolutely open to any reasonable case to suggest my reading is too benign.

Yep, I thought that was very interesting too. The reality of how fucked the country is will hopefully now start to emerge.

As far as I remember when seeing the figures in a relevant report about 12 months. It only takes about 5% default on the banks mortgage books to fall below their capitalization/liquidity requirements. Chances of < 5% default is ZERO.

So the property crash hasn’t really got going yet ? :open_mouth:

Schuhart, you are assuming bell curves in both mortgage and mortgage expense/income. There are two classes of mortgages in Ireland - those taken out before, say, 2003 and not topped up and those taken out after. The ones before 2003 were low salary multiples and had a reasonable deposit. They were repayment, in general and short in term. After that, stuff goes bonkers. I know other pinsters got the “underborrowed” line from their banks, the cold calls with borrowing opportunities “is there anything we can help you with”.

I don’t think it is ridiculous to say that 40% of mortgage value could be in trouble, as it could only be 15% of mortgages. The top end is being whacked a lot more since more of it was scooby-snack derived.

Some Central Bank economists did some quite useful research on this earlier this year.

They find that even when higher interest rates prevailed in 2007 90% of households with mortgages had repayments below 30% of their net disposable income. And half of them had repayments of below 10%. To me that looks quite resilient in the medium term.

The Sindo called it wrong on the way up. They couldn’t possibly do the same on the way down now, could they? A cumulative fall in house prices of 75% would give rental yields of 10% in many areas, which seems too high.

Schuhart is right. The Sindo are missing the point that not all negative equity has to be written down. Many, if not most mortgage holders will continue to suck it up and pay cos that’s what do in Ireland, and the personal bankruptcy process is far from a fun one.

That’s a good point ym. Does the same point apply to the profile of borrowers as well as mortgages themselves? In other words, are the post 2003 borrowers morelikely to be younger, more precarious in their jobs, more exposed to losing an income due to parenthood, etc? Also , if the post 2003 crowd are younger does that mean that they’re more likely to post back the keys and emigrate?

I don’t know.

I suspect there are a few risky classes of borrower:

  1. Eh, solicitors…
  2. Accountants (the solcitors had a lot of money to manage)
  3. The rest of the property yokey.
  4. Anyone in the higher end of retail (as in management/owner).
  5. Anyone with the word “grooming” or “pamper” in their business description.
  6. And on and on and on.

I don’t think they are necessarily younger. Some of the most foolish things done were middle-aged people remortgaging their near paid off house to ‘invest’ in a get-rich-quick scheme.

But the way Ireland works, the younger are more likely to be in trouble if they are in indigenous companies. Seniority rules as does last in, first out. It wouldn’t be fair otherwise…

The 4.6% figure excludes:

  1. Landlords currently supported by tenants receiving generous social welfare supports.
  2. Mortgagees in receipt of generous social welfare supports.
  3. Mortgagees who have reached a repayment plan with their lender.

14% unemployed does not equal 86% employed. That would ignore:

  1. Participation rate is nowhere near 100% (early retired, students, ill, disabled).
  2. Those who are underemployed (reduced hours) are not unemployed.

The average wage touted regularly for Ireland is about EUR 33,000. In reality it’s a fraction of that with the number out of work or on reduced hours/pay since the bubble. EUR 125,000 is not that far off four times the quoted average wage, given that the average wage in reality is probably substantially lower it’s a problem.

That paints a suspiciously rosy picture. Will have to look at their methodology when I have some time.

i bought my house in 2000 with a mortgage from BOI of 6 times salary. The crazy lending was going on long before then. I remember a current FF TD telling me how to lie to buy your house back in 98 by just typing up your own P60. I think 1995/96 is the cutoff point that should be used instead of 2003

The pay side of the equation appears to have been down-played. The central bank research quoted looked at the situation in 2007, before private sector paycuts/reduced working hours kicked in. A major problem as I see it is the fact that the government, at some stage, is going to have to address public sector pay. Because of the Croke park agreement, they have kicked this into the long grass until 2014. Between now and then, they will cut other areas of public spending. In 2014, the situation will be so obvious to all (assuming we’re still in the euro), that not reducing public sector pay will be impossible.

The point of all of this is that many public sector workers will have large/multiple mortgages and be unable to service them leading to further losses for the banks.

Here is an interesting quote from the Independent article:

Not interesting in any sense that it is pessimistic, nor that it would not have been the consensus on this forum in the last few years. Rather it is interesting that this is now a broader consensus and the media mention it in passing.

So, the people telling you it is a good time to buy can stick that in their pipes for a puff.

Should the Pinsters revise the forecast down now? :confused: