Cantillon: Even in arrears, mortgage debt is unequal

For the past seven years, Irish banks have been grappling with a mortgage arrears crisis precipitated by the economic crash in 2008.

In terms of private dwelling homes, it peaked at 12.9 per cent of loans in 2013 but has reduced to a current level of 8.3 per cent due to an improving economy and actions taken by regulators and banks.

Yesterday, the Central Bank of Ireland published a research paper by Christian Dunne and Anne McGuinness that examined some of the data on mortgages arrears up to December 2012.

Their conclusion was that borrower characteristics rather than loan characteristics are more significant in terms of a customer receiving a permanent solution and subsequently returning to making full payments.

In other words, the likelihood of receiving a permanent modification increases when borrowers are in a job, have a lower mortgage repayment relative to their income, and lower household consumption.

Those who are unemployed, divorced, have higher loan-to-value ratios and arrears balances have a lower chance of getting a permanent modification to the terms of their loan.

This seems logical on one level, yet you might have thought that those in most difficulty with their home loans would be the ones most deserving of this so-called permanent modification.

Of those loans that were permanently modified, some 70 per cent were meeting their new contracted repayment amount 12 months afterwards, according to the paper. This, of course, suggests that 30 per cent were not, a level of re-default that highlights just how big an issue this is for the banks.

“Our findings suggest that permanent modifications are typically applied to less distressed borrowers,” the authors stated. “These borrowers are deemed by banks to be more viable in the long-term, especially given that most are granted arrears capitalisations, which is the more expensive permanent modification.

“Further, loans classified as successful in our methodology will not necessarily result in full repayment of the interest and capital due on the mortgage.

“Therefore these loans continue to pose a risk to the health of the Irish banking sector and require continuous monitoring.”

The report drew a sharp response from PIBA, the State’s largest group of financial brokers, which said it “gives little hope” that the most severe mortgage arrears cases will be dealt with “anytime soon”.

All in all, the Central Bank’s research indicates that the mortgage arrears problem hasn’t gone away.