Banks can handle bad loans, says Honohan

CENTRAL BANK governor Patrick Honohan yesterday reiterated the bank’s view Irish banks have enough capital to deal with non-performing mortgages.

Speaking at a day-long conference hosted by the bank, Mr Honohan said banks need to accelerate their efforts to deal with unsustainable mortgages.

The governor spoke briefly at the beginning of the conference at which the bank’s economists and a number of property market experts delivered detailed papers on multiple aspects of the mortgage market.

Stress tests conducted on the Irish banks under the terms of the EU-International Monetary Fund bailout provided an “unprecedented” level of detail on Irish banks’ mortgage books, the conference was told.

The research finds 31 per cent of properties, covering 47 per cent of outstanding mortgage debt, are in negative equity.

Proportionately, Dublin is among the regions least affected by negative equity, with the midlands the worst affected.

Although the proportion of mortgages in arrears is much smaller than the proportion in negative equity, the numbers of mortgage holders falling behind with repayments is high, and rising.

The research shows the probability of being in arrears rises with loan-to-value ratios.

By region, arrears in the midlands are the highest.

Even with a more favourable economic environment, it will take some time for the mortgage arrears rate to come down, Central Bank economists told the conference. But a more favourable future economic environment, for which some evidence is emerging, will help to slow down or stall the growth in arrears, they said.

For those borrowers who do go into arrears, a sizable proportion (44 per cent) resume repayments over time.

Arrears rates in the buy-to-let segment are higher than those in the owner-occupier segment, in some cases double the rate, the economists said.

The research showed at the end of 2010 just over one fifth of all outstanding mortgages had been issued for the purpose of buying investment properties. First-time buyers accounted for almost one-third of total mortgages, while those moving to new properties accounted for 35 per cent.

The research found 54 per cent of outstanding mortgages at the end of the year were trackers, and 30 per cent were on variable interest repayment terms. Only 15 per cent were on fixed rates.

Those who took out loans in the middle of the last decade have the highest default rates. It was also noted that buy-to-let mortgages were far more likely to be defaulted on than those taken out by people on their own homes.

In terms of geography, mortgage-holders most likely to default are in the Border region, followed by the Dublin commuter belt. The best performing mortgages are in the southwest.

Prof John Muellbauer of Balliol College Oxford described the extent of forbearance in the Irish banking system as “drastic”. In Britain, banks are far more likely to repossess homes of those who have fallen behind on repayments.

His view was that the “UK remains in a vulnerable state despite huge policy interventions”. These interventions included a mortgage rescue scheme and a stamp duty holiday.

At peak, the level of new home-building in Ireland stood proportionately at seven times higher than in Britain, he said.

Kris Gerardi of the Federal Reserve Bank of Atlanta, speaking in a personal capacity, attributed the US housing crash to “bubble fever”, and rejected the theory it was caused by “insiders” issuing mortgages that they knew were not viable and then selling them on. “It is hard to stop consenting adults,” he concluded.