Scale of Irish mortgage default is unprecedented

The revelation that five years into the downturn three-quarters of the people behind on their mortgage payments actually have jobs comes as a surprise. It shouldn’t, but it does.

It is also quite scary as most of us soldier on under the assumption that if we can hang on to our jobs we will keep a roof over our heads.

It is a further reminder of a fact we have perhaps lost sight of: the scale of the Irish mortgage default is unprecedented. Nothing really like it has happened anywhere before.

There have been property crashes aplenty and the dynamics of default are pretty well understood. The main drivers are negative equity and unemployment. But something else seems to have been at play in the Irish context. The pay cuts and tax rises of the past five years seem to have produced a very large cohort of people who still have jobs but can no longer afford their boom-time mortgages.

According to the study by Yvonne McCarthy – which relied on a survey of borrowers and data collected as part of the Central Bank’s stress testing of the bank’s mortgage books – this is the situation that three out of every four people who are currently in arrears now find themselves in.

It is a lot of people. Roughly speaking, about one in five of the 800,000 residential mortgages in the Irish market is in default. That is 160,000 mortgages and even when you allow for buy-to-let mortgages and multiple mortgages it's still hard to avoid the conclusion that there are about 100,000 people in Ireland today who have a job but can't afford their mortgage. There must be thousands of others who are just one more pay cut or tax rise away from default.

The critical question is whether they will be able to afford their mortgage tomorrow. The answer to this question is the key to deciding what sort of approach should be adopted in arriving at a “sustainable solution” for them, to use the jargon for restructuring.

Every case is different, but on balance you would have say most of them will probably not be able to afford their mortgage tomorrow. Unemployment remains very high so there is little upward pressure on wages. Business may be recovering but its ability to pay higher wages is constrained. Thus, if you are lucky enough to be in a job you are unlikely to get a substantial pay rise any time soon to reverse the pay cut that left you struggling to pay your mortgage.

'Fragile employment'
The problem is compounded by the fact that according to McCarthy many of them are in what she calls "fragile employment". They are more likely to have been recently unemployed or on a short-term contract. Their bargaining power is not great.

The only other possibility that might see their take-home pay boosted is if some of the tax hikes of the last five years are reversed. Again it is hard to see anything significant happening on that front in the short term despite various nods in that direction from the Government. The economic outlook may be getting better by the day but the constraints imposed by Brussels and the size of the national debt mean that options are limited.

On the basis of this rather pessimistic analysis, the banks should really be pushing people who have jobs but can’t afford their mortgages to sell up and trade down. But when you have 100,000 people in that situation – many of whom are in negative equity – that is not really a runner either.

So we are left with the various forms of extended forbearance and limited debt forgiveness – such as split mortgages – which the banks are in the process of rolling out to customers in arrears, under the watchful eye of the Central Bank.

McCarthy’s research would seem to confirm that the current strategy is the right one – or more accurately the only possible one – under the unique circumstances of the Irish crash.

But her findings give no cause for complacency either. The unpleasant truth that 100,000 people in jobs can't afford their mortgages – and won't be able to afford them for quite some time – has been hiding in plain sight. It is now out in the open and must inform the way the
mortgage arrears strategy is
implemented.

It might require greater realism on the part of the lenders about the size of the write off they will have to take to put people back on a sustainable path.