Drop in mortgage arrears is worse than reports claim

By October 31, 2017Articles
Recently, the Central Bank released a report on the drop in mortgage arrears for the first quarter of 2017. Stating that the number of mortgages in arrears had again dropped, for the fifteenth consecutive quarter, this gave the impression of a positive momentum in the downward trend of mortgages in arrears. The bigger picture of the situation is disquieting, though. 

Report masks the potential for mortgage disaster

However, while the report appears to prove that the mortgage economy is improving, the figures behind the report tell a very different story. The previous downward trend of mortgage arrears has reached a point where it is starting to slow, and while the number of mortgages in arrears is less, the drop is much lower than in all the previous quarters, leaving an impression that, at this new rate of decrease, it could take decades before the Irish mortgage market returns to normal.

Possible dysfunction in the Irish mortgage market

With thousands of mortgages still in long-term arrears, only 494 were actually resolved in the first quarter, which is a very small number in comparison with the last quarter of 2016, and all the preceding quarters. And the rate of decrease is likely to slow even more as those left over after the massive drop is normally the ones that have more difficult resolutions and intractable cases. In previous similar backlogs of mortgage arrears, the harder mortgages are normally the ones left until last to deal with. What is more concerning about this slow decrease is that the number of arrears in short-term arrears has actually grown in the first quarter, for the second time in a row. With typically low-interest rates and Ireland being one of the fastest growing economies in Europe, this slowdown is an early indicator of possible dysfunction in the Irish mortgage industry.

Previously restructured loans drop into arrears again

The report also noted that there was an increase in the number of previously restructured loans that have once again fallen into serious arrears. According to the Central Bank, more than 120,000 mortgages were restructured to help with long-term arrears, which is a promising figure. However, the whole restructuring process appears to be less durable than first thought, with many of the restructuring being only short-term solutions. The majority are merely term extensions, arrears capitalization, and interest rate reductions, which will have no major effect on the long-term downslide of mortgage arrears. The band-aid solution has been widely used, instead of more sustainable options, such as write-downs, mortgage to rent, or even split mortgages.

Future of mortgages is uncertain

This gives reason to the 13 percent of failed mortgage resolutions, questions how many other restructured mortgages will drop back into arrears. It is an established fact that high numbers of mortgage arrears can negatively affect economic growth with an increase in the cost of credit, and a reduction in supply. A recent report on the Irish reform programme made recommendations to encourage resolutions that are more lasting. However, the lighter touch of the Central Bank has not followed that recommendation, and if it continues, the future of many mortgages is uncertain.

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