The controversy in Roscommon has again highlighted the huge debate around home repossession in Ireland.
While some details of the Roscommon case remain unclear, the bank involved – KBC – clearly had security on the property on foot of money extended to its owner.
Exercising security by seizing a property – usually due to mortgage arrears – remains hugely controversial in Ireland and is less common than in many other countries. The Government is also now promising that new legislation in 2019 will increase the protection on the family home by widening the factors which the courts must take into account in repossession orders. The impact of this on cases remains to be seen.
But does this all contribute to the fact that mortgage borrowing rates in Ireland are still almost double the euro area average?
Let’s look at the facts first and then try to answer the question. We will focus here on people buying houses to live in, rather than the buy-to-let sector.
1. The facts
The level of non-performing mortgage loans in Ireland is high following the economic crash. It has been reducing, but remains well above the European average.
The latest ECB figures show non-performing loans in Ireland represent 8.7 per cent of the total of outstanding loans, compared to a euro area average of 4.4 per cent.
The Irish mortgage market is unusual in having a high number of borrowers - around 28,000 - in very long-term arrears – classified as two years or more.
Figures published this week show these account for 43 per cent of all the cases in arrears. But the amount these borrowers owe – some €2.4 billion – accounts for no less than 90 per cent of all the arrears owed by borrowers who took out a mortgage to buy a home.
In other words, there is a group of people in long-term default with outstanding loans of over €6.5 billion and in arrears for more than two years who owe most of the outstanding mortgage debt.
This number is shrinking, though recent Central Bank research shows the rate at which it is falling is slowing and the latest figures show only a tiny reduction in the last quarter.
This is a clear sign of the low level of repossessions in Ireland. The presence of such a high level of very long-term arrears is highly unusual in an international context.
As well as the relatively low number of repossessions, this, of course, also reflects the large scale of mortgage distress in the wake of the economic crash and just how slow the banks have been in dealing with it.
So far repossession levels have moved along at a steady, but relatively low rate and the much-talked about “tsunami of repossessions” has failed to appear.
Whether it will, as the banks remain under pressure to deal with non-performing loans – and more loans are taken on by so-called vulture funds – remains to be seen.
Looking at cases in which legal proceedings were issued to enforce security on a mortgage loan, the quarterly average of newly issued such actions fell from 1,200 last year to around 600 in the first three-quarters of this year – and 500 in the most recent quarter.
Likewise, the number of actual repossessions fell from an average of just under 350 a quarter from the start of 2017 to the middle of this year, to 161 in the most recent quarter to September.
However, complacency would be unwise, or any expectation that these cases will work themselves out easily, or quickly.
Central Bank figures show the banks expect two-thirds of the long-term arrears cases – or not far off 20,000 cases – to eventually be resolved by the borrower losing ownership of the house.
In some cases they are now selling on the “distressed” loans to vulture funds, who will decide what to do with them.
2. The arguments
The Roscommon case has raised questions about how repossessions are carried out by banks operating in Ireland.
However, the wider issue is whether the time it takes banks to go through the courts to repossess a property that is heavily in arrears and the safeguards to mortgage borrowers are a factor in keeping mortgage rates higher that the euro zone average.
Mortgage interest rates in Ireland are still far higher than else where in the euro zone.
The average interest rate on new mortgages agreed here was 3.06 per cent in October, versus the euro zone average of 1.77 per cent.
There are a range of factors responsible for this, according to analysis done by the Central Bank and others.
Difficulty, expense and length of time in exercising security on a loan is one – but so is the lack of competitiveness in the market and new rules obliging banks to hold more capital.
To some extent these factors are all connected.
The sharp reduction in competition as overseas banks withdrew from the Irish market after the crisis is a key factor.
It has allowed the remaining banks to compensate for unprofitable tracker mortgage loans on their books, and the stock of non-performing loans, by charging more for standard variable mortgage rates.
The Central Bank said in May 2015 banks were unlikely to be able to continue to cross-subsidise their mortgage books in this way.
However, more than three years later, new competition is limited, even if a few new entrants, including An Post, are now assessing their options.
Interest rates have edged down, but remain well above the euro norm.
The difficulty in enforcing security on a mortgage loan here plays in to a number of the reasons why mortgage rates are higher.
First, it has probably been one of the factors slowing the arrival of new competition in the market– because it makes lending here less profitable and a bit uncertain.
Second, the wider issue of non-performing loans remaining on bank books has pushed up their need to have higher levels of capital in relation to the loans they make.
Holding capital means a bank having assets which can absorb losses if something goes wrong – for example cash, or shareholder equity.
A lack of capital in relation to risk was a key reason banks got in trouble during the crash. Regulators now try to ensure that capital levels are high enough to absorb any likely level of losses – to avoid having to engage in future bank bail-outs.
Irish banks now hold higher capital levels, first as a result of tighter international rules policed by the ECB, but also because of the higher level of non-performing loans here.
Difficulty in enforcement on an mortgage that has fallen into severe arrears causes greater losses on non-performing loans.
Greater losses on non-performing loans cause greater provisioning and capital requirements – and on it goes. Central Bank research has estimated that the amount of equity required to support a new mortgage here is around four times higher now than it was before the crisis.
As equity holders need to be remunerated with profits – and dividends – this puts pressure on banks to have higher mortgage rates and a greater margin, which is the gap between what they raise funds at and what they lend at.
Banking analysts estimate that the banking model in many of the bigger continental EU markets and somewhat lower capital requirements ( due to a lower level of non-performing loans) can create a much higher return on mortgage loans than is possible in Ireland.
This may well be a factor limiting the attraction of Ireland to new entrants – thus keeping mortgage rates higher.
3. The bottom line
The bottom line is that non-performing loans are one of the key factors in keeping mortgage rates here high by international standards. But they are not the only one.
The banks have nudged rates lower, but should have moved more rapidly now that they are generally back in profits, even if historic parts of their mortgage books remain problematic.
But the lack of new entrants and the persistence of long-term arrears are clear pointers to ongoing problems in our mortgage market. This, too, is a factor in keeping interest rates in Ireland higher, through the various channels we saw above – higher capital, higher costs and less competition.
Rather than looking at right and wrong here, the important thing for policy is that the trade-off is recognised.
Our politics, our regulations, and our legal system and courts has made it more difficult for banks to repossess than is the case in many international markets, or even north of the Border or in the UK, a jurisdiction which is legally quite similar to Ireland.
This probably reflects a wider societal sympathy for those in trouble with their mortgages, particularly given the extent of the crisis. Our housing crisis, and the lack of social housing in particular, has reinforced this view.
If we want to continue this approach then mortgage rates are always going to be a bit higher in Ireland. Meanwhile, there are two other policy implications. One is to push the banks to provide, where possible, other solutions short of repossession, including mortgage-to-rent schemes.
They have been remarkably slow to do this since the crisis. And to recognise that some of these solutions require some level of public subsidy.
The other is to decide where to draw the line on repossessions. Mortgages are cheaper than other loans precisely because they are secured lending.
If relatively large numbers of people can decide not to pay and yet not face repossession then the whole mortgage system breaks down. Yet it is clearly right that in the case of the family home, everything possible is done to avoid a repossession.
The sobering fact is 10 years after the crisis, we still have a large group of households in very long-term arrears and it is far from clear how these cases will be resolved.
Smart Money is a a subscriber-only column appearing each Thursday, which looks at the big economic issues and what they mean.
