We tend to compare issues in the housing market, nervously, with what happened during the Celtic Tiger peak – this week when the latest house price figures came out it was noted the average was now more than 13 per cent above 2007 levels. But a group of borrowers remain trapped in the past, caught in the never-never land of Irish mortgage arrears.
There are very few markets in the world which have to keep statistics for loans that are more than 10 years in arrears but Ireland does and they number close to 5,000 out of a total close to 46,000 in the total number in arrears on residential properties. The long shadow of the financial crash lives on, with some loans going into arrears around that time and many struggling on for a few years in negative equity before doing likewise.
Mortgage arrears have fallen significantly since just after the crash when they peaked at close to 150,000. But the relatively small overall decline in recent years and the increase in those in arrears of more than a decade is nonetheless striking. “There are very few places which have mortgages in arrears for more than 10 years,” said mortgage broker Michael Dowling, leaving the Irish market as an outlier.
In most markets legal processes conclude more speedily and houses are eventually repossessed. But in Ireland repossession levels remain low and even when matters come to court after the financial institution goes through its procedures, judges have often been slow to order forced repossessions.
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This is, at least in part, a result of political and administrative decisions – as well as the attitude of the courts. The trade-off is that it means mortgage rates here are a bit higher than they would otherwise be, as this increases costs for the banks. The historically high level of arrears have led European regulators to insist Irish banks have higher capital levels than would otherwise be the case, as a buffer in case things go wrong.
The slow working out of mortgage arrears means the number of borrowers in this category remains “at a significant level”, according to Dowling, who says it is “extraordinary that they are running at such a high level 15 years after the crash”. While the Central Bank headlines the top-line drop in arrears, Dowling feels the continued high level requires attention. Financial institutions seem loath to take cases to court, the figures suggest. Of the close to 5,000 legal proceedings in progress, some 30 per cent have been in progress for more than five years since the first court hearing.
A significant number of cases have been through various types of restructuring – almost 55,000 – and about 43,500 are now not in arrears. The three most common types of restructuring are a term extension, a capitalisation of arrears and a split mortgage. None of these is a “free lunch” for the borrower. However, the continuation of significant numbers in arrears of more than 10 years suggests some have not been meeting the terms of the loans for many years but remain in their property. And that the new personal insolvency rules and arrangements, which are designed to allow people to restart in an orderly way, are not being availed of in many cases.
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As Dowling says, the arrears problem “hasn’t gone away”. And much of it is now dealt with by non-bank lenders and by specialist firms such as Pepper and Cabot who manage loans on behalf of funds who bought them from Irish banks. The funds did so after the financial crash, with many loans already non-performing. Non-banks account for 16.5 per cent of all mortgages but have 61 per cent of total loans in arrears on their books, including more than nine out of 10 of those more than 10 years in arrears.
These companies are overseen by the Central Bank mortgage procedures and are thus obliged to deal with those in arrears through a certain process and offer options. Many of their customers have gone through restructurings similar to those offered by mainstream banks. It is important to note that the vast majority of customers of the non-banks are not in arrears, though some of the loans will have been restructured in the past.
Many borrowers whose loans were sold have suffered from significant interest rate increases over the past couple of years. While politicians and the Central Bank promised that these borrowers would not be at any disadvantage because their loan was sold, and consumer law and Central Bank regulation would continue, in this respect they have lost out.
As European Central Bank interest rates rose after mid-2022, the main banks passed the increases on to their tracker customers, under the terms of their contract, and so did the non-banks in the case of the trackers they had taken on. The main banks increased their main variable rates only slightly – or in some cases not at all – as they were already at high levels, with banks using fixed-term offers to win new business.
However, many of the non-bank lenders also passed the ECB increases on to their variable-rate base. As many of the variable-rate loans they had bought were already at about 4.5 per cent and ECB rates rose by 4.25 per cent, this has left a group of borrowers stuck paying rates of more than 6.5 per cent, and in some cases as high as 8 to 9 per cent. Some of these were previously restructured loans and the risk is that they would again end up in arrears.
As interest rates peaked last year, Central Bank figures showed the average interest rates charged by the so-called “non-bank non-lenders“ – the loan management firms – to customers with variable (non-tracker) rates was a hefty 6.36 per cent. Many will have been paying 7 per cent plus. An earlier Central Bank study last March showed 20 per cent of customers of these companies paying rates of 6 per cent or higher and this will have risen through 2023 as interest rates rose further. By December about 28,400 borrowers who had loans with credit management companies were on variable (non-tracker) rates and a further group who were on fixed-rate mortgages whose term was due to expire were also exposed.
Financial campaigner Brendan Burgess told an Oireachtas committee last year that the Central Bank should be acting to protect these customers of the non-banks – and not just those who fell into arrears. His proposal was that the funds be obliged to charge the same rate as the institution from which they bought the loan.
Just this week Pepper announced it was cutting the interest rate charged on some of its loans, with reductions generally of between 0.35 and 0.5 per cent applying to more than 9,000 residential mortgage customers, including, it said, those worst affected by recent increases. Pepper manages about 120,000 loans and says the majority of its residential ones are trackers which see automatic changes with ECB rates. The last reported average rate on Pepper loans was 7 per cent and this will have edged down a bit in recent months. Some will still be on significantly higher interest rates.
As much of the market now moves with ECB interest rates falling, the legacy of the crash lives on for those stuck paying rates well above the norm, as well as those in arrears, many now running on for years.
