Our problem of mortgage arrears is far from resolved

An interesting paper on the repayment of mortgage arrears was published yesterday by the Central Bank of Ireland. It analysed the performance of 38,086 permanently modified mortgage loans at the end of last year. It looked at owner- occupied homes that had experienced a default since 2010. As such, it is not comparable with the Central Bank's Mortgage Arrears Resolution Targets (Mart), which deals with the current stock of defaults that are 90 days past due.

It dealt with data from AIB, Bank of Ireland and Permanent TSB only and there were four key findings from its author, Anne McGuinness.

Modified loans

Firstly, the stock of permanently modified loans is growing faster than the stock of loans in default. This suggests lenders are making progress in addressing the arrears problem, which is to be expected given the passage of time and the targets set for them by the Central Bank in March 2013.

Secondly, the percentage of permanently modified defaulted loans making full repayments on their modified mortgage amount has increased. The number of borrowers making full repayment of the modified terms increased to 55 per cent in the fourth quarter of 2013 from 28 per cent in the first quarter of 2011. This is to be welcomed although it suggests that 45 per cent re-defaulted in that period.

Thirdly, the persistence of full repayment over time has improved, according to the author.

Finally, the analysis indicates that about 11 per cent of permanently modified defaulted loans consistently make no repayment after modification. In the language of the Central Bank, this means borrowers making payments of less than 5 per cent of the amount due in any quarter.

The Central Bank has also determined that, at the end of last year, 13 per cent of the stock of mortgages on private dwelling houses that were in arrears of 90 days or more but had been “permanently modified” by the lender were making no repayment.

Not paying

In other words, almost one in eight of those who were in default on their mortgage payments and had agreed a solution with AIB, Bank of Ireland or Permanent TSB to get back on track, were paying less than 5 per cent on the newly-agreed terms. While this figure was down from 29 per cent in the first quarter of 2011, it is still quite startling.

How are these modified terms agreed between the bank and the borrower when so many of them fall back into some form of default so quickly?

Does the borrower simply accept modified terms, no matter how unrealistic, for fear of losing their home? Are the banks simply kicking the can down the road for a cohort of borrowers to avoid having to repossess properties or write off loans?

Or is there some disconnect between the information being provided to or sought by the institutions and the reality of the mortgage holders finances? Chief executive of the Irish Mortgage Holders' Organisation David Hall has argued for some time that the Mart process is seriously flawed and is nothing more than a box-ticking exercise by the banks to meet the targets set by the regulator.

He argues that there are no penalties imposed on lenders from having a large cohort of their mortgage arrears customers re-defaulting.

Agreed arrangements

Last week, a slide presentation from Bank of Ireland stated that more than eight out of 10 restructured owner- occupied mortgages are “meeting their agreed arrangements”. This suggests that up to 20 per cent have re-defaulted.

Bank of Ireland’s arrears profile is significantly better than those of its domestic rivals so you would expect it to be ahead of the pack, but 20 per cent is still a high level of re-default.

At the end of June, Bank of Ireland’s owner-occupier defaulted loans amounted to €1.9 billion or 9 per cent of its Irish mortgage book. This was down from more than €2 billion or 10 per cent at the end of December.

The figures at AIB are even more stark. The total of impaired loans on its Irish mortgage book amounted to €5.2 billion. This was €153 million higher than at the end of December. Roughly half of the impairment relates to mortgages that are more than two years in arrears with their payments.

You have to wonder if these borrowers can ever get back on track with their mortgages. AIB’s level of re-default is not clear.

McGuinness concluded in her letter that, while the findings suggest the process to address mortgage arrears had “improved over time”, “more needs to be done before the arrears issue is resolved”.

This is something of an understatement even for a conservative organisation such as the Central Bank.

The re-default rate highlighted by yesterday’s report might be artificially high due to timing and other factors. This arrears process has been slowly evolving over the past couple of years and there’s no doubt the banks are more efficient at working through the process than they were in 2010 or even last year.

But whether the re-default rate is 45 per cent, as per McGuinness’s findings, or up to 20 per cent as per the Bank of Ireland interim results, the problem of mortgage arrears is far short of being resolved. Or even well in hand, as the banks might want us to believe. A day of reckoning can’t be too far away.