Moral hazard comes home to roost

ANALYSIS:A YEAR ago Irish Life and Permanent said mortgage arrears would peak in 2010. Yesterday the company expressed surprise that mortgage arrears had risen so sharply – by almost 30 per cent – in the first half of the year.

The economy had not bounced back as expected. Unemployment kept rising and house prices kept falling. The second quarter of the year was particularly severe for rising arrears, the company said.

It was surprised there had not been a significant spike in unemployment like in previous years which had affected customers’ ability to repay loans.

Irish Life and Permanent has reversed its position sharply.

Asked when the company now believed arrears would peak, chief executive Kevin Murphy said he was nervous with predicting that, given past performance. “It is difficult to see them peaking before the middle of next year,” he said.

The company’s results give a good snapshot of the state of the mortgage market as Permanent TSB was the biggest mortgage lender during the property boom.

Dave Guinane, chief executive of Permanent TSB, said the European Central Bank interest rate increases in April and July had “undoubtedly” been a factor in the arrears surging ahead.

The company’s provisions for bad loans more than doubled in the first half of the year – a result of rising unemployment and further house price declines, reaching a total fall of 47 per cent from peak. Guinane said that 9,500 of Permanent TSB’s 175,000 mortgages – 6 per cent of €26 billion in mortgages – had been “restructured” where the borrowers were only paying interest or where the loan term was extended (ultimately meaning more repayments).

These were people who had to cover short-term unsecured debt – for example, a car loan so they could continue driving to work and hold on to their jobs.

They were individuals whose incomes had declined but where the loans were still classified as performing.

A further 8.8 per cent – or 14,771 loans – were in arrears of 90 days or more. These include 1,200 mortgages that had been restructured.

These borrowers included people who lost jobs and “are going to find it difficult or ever get to a stage to repay their mortgage”, said Guinane.

The Government-appointed expert group assessing possible debt relief for borrowers at risk of losing their homes, which will report next month, is looking at measures for these customers.

Permanent TSB warned against the threat of moral hazard where speculators or risk investors were rewarded.

The criteria for eligibility in any scheme would have to be “very strict”, said Guinane. “People who fall into the situation of ‘can’t pay’ will have to be defined as that and there can’t be any margin of error here where we will allow people who just decide to be in that space.”