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 Post subject: What Is The Extent Of Strategic Default In Ireland?
PostPosted: Tue Jan 03, 2017 8:54 pm 
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What Is The Extent Of Strategic Default In Residential Mortgages In Ireland?

Introduction

Strategic default occurs when a borrower decides to stop making repayments on a loan even though the borrower has the financial ability and resources to make the payments.

One example of strategic default is what is called “jinglemail” in some US states where the lender has no recourse on the mortgage loan other than the property. The borrower simply decides to continue not paying the mortgage and returns the property to the lender.

However, in Ireland, strategic default takes the form of borrowers simply not paying their mortgage or any arrears while continuing to occupy the property for long periods, ignoring any attempts by lenders to engage.

Strategic default tends to occur where the lender has no recourse on the loan other than the product for which the loan was issued or where recourse is difficult to enforce.

Strategic default is the natural outcome of the absence of any consequences associated with defaulting on a loan or where the consequences of default are less than the benefits.

Strategic default in residential mortgages tends to be associated with negative equity. The borrower is reluctant to continue to make repayments on a loan for a property when the value of the loan is greater than the perceived value of the property.

As such it is a form of moral hazard as the risks of the decision to default are separated from the decision. It is the same moral hazard that causes reckless investment decisions in business and elsewhere.

Strategic default exists. The issue for Ireland is not whether it exists or not but the rate at which it occurs and the primary and secondary effects it has on the residential property market across its spectrum.

Central Bank Mortgage Arrears Statistics

The Central Bank publishes some limited summary information on mortgage arrears:

https://www.centralbank.ie/polstats/sta ... 0data.xlsx

These contain summaries of the numbers of mortgages in various states of arrears and restructuring.

I have some issues with this accuracy of this data.

From this, it is possible to derive a value for Number Mortgages In Arrears Not Restructured.

In this diagram:

Image

• Number Mortgages In Arrears Restructured = B (Total Outstanding Mortgages Restructured) – C (Number Mortgages Restructured Not In Arrears)

• Number Mortgages In Arrears Not Restructured = A (Total Mortgage In Arrears) - Number Mortgages In Arrears Restructured

This gives you the number of mortgages where there are arrears but where there is no settlement or agreement regarding some form of restructuring such as:

• Interest Only
• Reduced Payment
• Term Extension
• Arrears Capitalisation
• Payment Moratorium
• Deferred Interest Scheme
• Split Mortgage
• Permanent Interest Rate Reduction
• Temporary Interest Rate Reduction
• Trade Down Mortgages

This chart shows the number of mortgages that are:

• Total Mortgage Arrears
• Total Outstanding Restructured
• Restructured Not In Arrears
• In Arrears Restructured
• In Arrears Not Restructured

Image

The highlighted areas shows two related trends: from the start of 2013 to close to the end of 2015 a large number of mortgages that were not in arrears were restructured – the increase was around 45,000. As a result of this, the total number of mortgages restructured increased in parallel - the increase was around 40,000. These two upward trends ended at the end of 2015. Since then the number of new restructuring agreements has tapered off almost completely.

So lots of people not in arrears looked for and were granted restructuring agreements. But the increase in mortgages not in arrears is greater than the increase in all mortgages restructured. Some restructured mortgages will move back to their unstructured state. But other mortgages should be restructured to take their place. This does not appear to be happening.

This chart shows both the numbers of mortgages (on the scale on the right) and the associated amounts in billions (on the scale on the left). The numbers and amounts track each other closely except for mortgages that were not in arrears that were restructured and all mortgages restructured.as shown in the highlighted areas. The average amount of mortgages that were not in arrears that were restructured has decreased.

Image

Unfortunately, the Central Bank do not produce details on restructuring arrangements classified by numbers of days in arrears.

So lots of people not in arrears looked for and were granted restructuring agreements for increasingly smaller mortgages. But when the increase in mortgages not in arrears is greater than the increase in all mortgages restructured.

This chart shows the average value of all mortgages in arrears that are restructured and not restructured:

Image

As mortgages are restructured, the average arrears drops. This leaves the value of unstructured mortgages and their arrears to accumulate,

This chart shows the number of private mortgages in arrears:

Image

The highlighted area shows the number of mortgages more than 2 years consistently increased since first measured and then reaching a plateau and only slowly reducing thereafter.

All other arrears durations have dropped. This indicates that people in arrears do make a decision to address those arrears and normalise their residential mortgages.

This might indicate that some people in arrears simply decide to let the arrears accumulate and do nothing.

The same trend is evident in BTL mortgages:

Image

Other Research Into Strategic Default

There is research into the issue of strategic default

http://www.financialtrustindex.org/imag ... efault.pdf

http://www.nytimes.com/2010/07/09/busin ... d=all&_r=0

https://www.experian.com/assets/decisio ... t-2011.pdf

https://www.experian.com/assets/decisio ... 1-2009.pdf

http://www.experian.com/newsletters/pdf ... Ifinal.pdf

https://www.experianplc.com/media/news/ ... -in-sight/

https://www.richmondfed.org/~/media/ric ... 09-10r.pdf

This last paper is titled Recourse and Residential Mortgage Default: Theory and Evidence from U.S. States from the Federal Reserve Bank of Richmond Working Paper No. 09-10R June 10, 2010

Some quotes relevant to Ireland:

Quote:
Empirically, we find that recourse decreases the probability of default when there is a substantial likelihood that a borrower has negative home equity.


Quote:
Second, the magnitude of the deterrent effect of recourse on default varies with the appraised value of the mortgaged property at origination. The effect is significant only for higher-appraised properties. In particular, we find that, for properties appraised at less than $200,000 (at origination, in real 2005 terms), there is no difference in the probability of default across recourse and non-recourse states. At the mean value of the default option at the time of default and for homes appraised at $500,000 to $750,000, borrowers in non-recourse states are more than twice as likely to default as borrowers in recourse states.


Quote:
Lenders have less recourse in practice in states that require lenders to go through a lengthy judicial foreclosure process …


Quote:
… borrowers in non-recourse states are more than twice as likely to default as borrowers in recourse states.


Quote:
Our finding that recourse deters some borrowers from defaulting indicates that a non-negligible portion of U.S. mortgage default is in fact strategic rather than involuntary …


It would be relatively easy for the Central Bank to repeat this analysis for Irish mortgages to determine if the correlations between a lengthy judicial foreclosure process and default, between negative equity and default and between higher value mortgages and default exist in Ireland.

These indicate that an active decision is being made to default not based on inability to pay.

The information above indicates that some of same trends in Ireland, derived from the limited data publically available.

How Have We Got To This Stage?

This has been caused by a toxic combination of:

• Poorly drafted legislation (Land and Conveyancing Law Reform Act 2009 and Land and Conveyancing Law Reform Act 2013)

• Poor judgements (Start Mortgages & Ors v Gunn & Ors – the Dunne Judgment http://www.courts.ie/judgments.nsf/6681 ... ght=0,Gunn) creating massive uncertainty in the repossessions process

• Endless tyre-kicking in the form of one so-called export report after another that remain largely unactioned:

o November 2010 Cooney Report - Mortgage Arrears and Personal Debt Group - http://www.finance.gov.ie/sites/default ... repfin.pdf

o September 2011 Inter-Departmental Mortgage Arrears Working Group http://www.finance.gov.ie/sites/default ... arr2_0.pdf

o December 2013 Report of the Expert Group on Repossessions - http://www.justice.ie/en/JELR/ExpGroupR ... tFinal.pdf

• Stupid statements by the former Central Bank Governor denying the existence of a well-established trend - see https://www.centralbank.ie/press-area/s ... gages.aspx

Quote:
But I suspect that most such households are not simply refusing to pay on a “won’t pay: come-and-get-me-if-you-can” strategic default basis.

Indeed, I have a gripe about the term “strategic defaulter” being increasingly thrown around in Ireland to characterise the mortgage arrears problem. This term, ill-defined in the Irish context, is a transplant from the United States (where it is used mainly to refer to people who have decided to walk-away from their non-recourse mortgage loans, but are living on in the property for a last few cost-free months). The context being so different here, I find much of the Irish use of this value-loaded term inauthentic; a rhetorical use, which obscures the diversity and complexity of arrears circumstances.


• Reluctance by largely state-owned banks to engage in repossessions to avoid poor publicity while in receipt of state aid

• Lack of political willingness to address the issue

So What Next?

I referred elsewhere to the implementation of IFRS 9 and the impact of mortgages in arrears on Bank’s profit and loss accounts and CET1 capital requirements - viewtopic.php?f=4&t=66569.

The anti-repossession propaganda continues elsewhere:

http://www.irishtimes.com/news/politics ... -1.2923380

Quote:
Enda Kenny rebuts claim that 25,000 families will lose homes

Taoiseach responds to homeless campaigner McVerry’s warning about repossessions

Enda Kenny has played down concerns that up to 25,000 people could lose their homes in the ongoing housing crisis.

Homelessness campaigner Fr Peter McVerry has warned that half of the 50,000 homes in mortgage arrears of more than two years could be repossessed by the banks.

But the Taoiseach said he did not expect the number to be so high. “Fr McVerry speaks from his heart at all times,” Mr Kenny said, during a briefing at Government Buildings. “I don’t expect that number of people to be removed from their houses. I wouldn’t want to see that.”

However, Mr Kenny said that many distressed mortgages taken over by vulture funds were subject to agreements. “Clearly some cases have never responded in respect of the agreements that were made originally,” he said.

Vulture funds

“The Government brought in a whole suite of measures to allow for people who have difficulties, if they’re in mortgage arrears or serious mortgage arrears, to move on with their lives and make arrangements in respect of their accommodation.

“There’s been a 15 per cent fall in people coming out of difficulties with mortgage arrears this year and we intend to continue to work on that.”

Fr McVerry has blamed vulture funds and foreign landlords for evicting Irish tenants.

Comparing the crisis to Famine-era Ireland, he said something had gone “seriously wrong” and banks were not interested in making deals with individual householders but wanted to sell loans off to vulture funds.

The prospect of 25,000 more families losing their homes was a “real scenario over the next few years”, he said.


Strategic default is effectively a €10 billion fraud.

Wikipedia have stated it so eloquently:

https://en.wikipedia.org/wiki/An_Irish_ ... sh_problem

Quote:
… any official response to a controversial issue which is timid, half-baked, or expedient, which is an unsatisfactory compromise, or sidesteps the fundamental issue


Last edited by ChickenParmentier on Wed Jan 04, 2017 7:51 pm, edited 1 time in total.

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 Post subject: Re: What Is The Extent Of Strategic Default In Ireland?
PostPosted: Tue Jan 03, 2017 9:51 pm 
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Great post and a great read ChickenP. Public institutions in Ireland rarely do any meaningful analysis of data, especially if said analysis is going to produce inconvenient facts


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 Post subject: Re: What Is The Extent Of Strategic Default In Ireland?
PostPosted: Tue Jan 03, 2017 11:18 pm 
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Fair play CP, quality analysis as usual


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 Post subject: Re: What Is The Extent Of Strategic Default In Ireland?
PostPosted: Wed Jan 04, 2017 7:26 am 
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Complementary analysis (shorter, and with less gridlines) here: viewtopic.php?p=871732#p871732


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 Post subject: Re: What Is The Extent Of Strategic Default In Ireland?
PostPosted: Wed Jan 04, 2017 11:04 am 
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Unfortunately we only have Central Bank stats from 2011 onwards but we can see that no avalanche of repossessions is forthcoming.

Just 2,061 Resi Repos in 6 years to Q3 2016 with a further 4,002 voluntarily surrendered/abandoned

So 6,063 actioned with 79,562 currently in arrears of some kind (inc. 34,551 in arrears >2 years)


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 Post subject: Re: What Is The Extent Of Strategic Default In Ireland?
PostPosted: Wed Jan 04, 2017 1:36 pm 
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Good analysis. Why is it that the media and most pundits skirt the issue though?
The only mention of it is to poo-poo the notion that it exists, before the person resumes playing the care bear card about arrears.


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 Post subject: Re: What Is The Extent Of Strategic Default In Ireland?
PostPosted: Wed Jan 04, 2017 2:12 pm 
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Bogman wrote:
Good analysis. Why is it that the media and most pundits skirt the issue though?
The only mention of it is to poo-poo the notion that it exists, before the person resumes playing the care bear card about arrears.


That's something I have always wondered too, why is it taboo to ask if strategic default exists and if so to what extent?

The CEO of Ulster said it existed a few years ago to the banking committee pointing out that in other countries arrears numbers are much lower and they tend to track unemeployment figures fairly closely. In Ireland as unemployment decreased arrears increased. He also pointed out they had a number of cases where customers in arrears had deposits higher than the total arrears! Neither point was picked up by pundits.

I suspect (based largely on anecdotal evidence and discussion) that the bulk of the strategic defaulters are in jumbo mortgage territory and it is simply a rational decision. i.e if the risk of repossession is low and the chance of write off is high, then not paying your mortgage is a rational decision. I think people with larger mortgages are more likely to come to that conclusion.


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 Post subject: Re: What Is The Extent Of Strategic Default In Ireland?
PostPosted: Wed Jan 04, 2017 2:30 pm 
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Barmiest Loon wrote:
That's something I have always wondered too, why is it taboo to ask if strategic default exists and if so to what extent?

I don't think it matters; the debate is a distraction. The mortgage terms aren't "sure, pay us back as long as you can afford it".

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 Post subject: Re: What Is The Extent Of Strategic Default In Ireland?
PostPosted: Wed Jan 04, 2017 3:16 pm 
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Employment up, house prices and rent flying up...and yet BoI need to allow for further losses on their loan books!

http://www.irishtimes.com/opinion/the-s ... -1.2924625
Quote:
The run-up to Christmas is always a good time for burying bad news and this year was no different.
On the Friday before Christmas, Bank of Ireland announced it was going to have to put more money aside to absorb possible losses on Irish residential mortgages.
Just how much more money was not very clear but it would appear to run into several hundred million euro.
The statement was extremely technical and did not actually talk about losses or defaults.
But the point is clear. The bank had already put aside some money to absorb losses that might occur as a result of people not being able to pay their mortgages. It now seems that more people than expected are going to default and the bank has had to put some extra money aside.


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 Post subject: Re: What Is The Extent Of Strategic Default In Ireland?
PostPosted: Wed Jan 04, 2017 7:55 pm 
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Skippy 3 wrote:
Complementary analysis (shorter, and with less gridlines) here: viewtopic.php?p=871732#p871732


Fewer rather than less.

The difference between this and the analysis above is the derived value of Number Mortgages In Arrears Not Restructured which is an attempt to quantify the extent of non-engagement by those in arrears as a possible measure of strategic default.

I wrote this elsewhere but it is worth repeating here.

Introductory statement by Ed Sibley, Director of Credit Institutions Supervision, before the Joint Committee on Finance, Public Expenditure and Reform, and Taoiseach

Quote:
Thank you for the opportunity to appear before you today to discuss the Central Bank (Variable Rate Mortgages) Bill (‘the Bill’). The Governor of the Central Bank is at the Governing Council of the European Central Bank (ECB) today and sends his apologies in advance of his attendance before you on the 20 December.

As the potential effects of the Bill are relevant from consumer protection, financial stability and prudential supervision perspectives, I am joined today by the Central Bank’s Director of Consumer Protection and the Head of Financial Stability.

The Central Bank’s Mission of ‘Safeguarding Stability, Protecting Consumers’ is at the heart of all that we do. It encapsulates the dual and interdependent priorities for the Bank in delivering on its mandate.

Effective regulation and supervision driving well governed and well managed firms, which support economic growth and employment in Ireland, are outcomes which are in consumers’ long term interests. Similarly, the fair and equitable treatment of consumers is obviously fundamentally important in its own right but also in supporting the long-term viability of regulated firms and financial stability more generally.

The public debate surrounding Irish mortgage rates is understandable, as are the objectives of the Bill. A cursory comparison shows that some variable interest rates in Ireland remain amongst the highest in the euro area, despite recent reductions. However, the root causes of this are complex.

In my opening remarks today I will:

1. discuss some of the main features of the Irish private dwelling home (PDH) mortgage market;
2. outline how some of the associated issues are impacting mortgage pricing in Ireland and show that there has been significant progress in addressing these issues; and
3. summarise why the Bill may not achieve its stated aims and may have negative unintended consequences.

I. The Irish Mortgage Market

Mortgage Arrears

The mortgage market in Ireland, like the wider housing market, is recovering, but it is still suffering the effects of the crisis that beset Ireland, and from the mortgage lending that took place in the period leading up to 2008.

Since the onset of the financial crisis, many mortgage holders have struggled to keep up with repayments. While the situation is improving, it is still acute, both at system level and also for individual borrowers in distress. The Central Bank has worked to ensure that the appropriate protections are in place for these borrowers who are in difficulty, and ensure that the banks have the financial and operational
resources with which to resolve the problems.

At the end of June 2016, there were 740,834 PDH mortgage accounts in Ireland. Of these, 57,571 are in default (in other words, greater than 90 days past due on their payments) – of which 34,980 are greater than two years past due. 120,614[1] PDH mortgage loans have been restructured due to repayment difficulties.

The Central Bank has utilised its legislative powers to protect consumers by imposing a number of codes of conduct and requirements on regulated firms, including the Consumer Protection Code, the Code of Conduct on Mortgage Arrears (CCMA) and the Minimum Competency Code. While the Central Bank does not have a statutory function to regulate mortgage rates, we continue to prioritise the protection of mortgage holders.

A central element of the CCMA is that arrangements to solve mortgage arrears must be sustainable and based on a full assessment of the individual circumstances of the borrower, and that repossession should be used only as a last resort. Under the CCMA, a regulated entity may only commence legal proceedings for repossession of a PDH where it has made ‘every reasonable effort’ to agree on an alternative repayment arrangement with the borrower and where other clear requirements are adhered to. The introduction of Mortgage Arrears Resolution Targets (MART) in 2013 drove a material change in the mix of restructures agreed, with a shift away from interest-only type arrangements to more sustainable solutions.

As a direct consequence of these actions, together with improvements in the Irish economy, mortgage arrears are reducing, while every effort is being made to keep mortgage holders who are struggling to meet their payment obligations in their homes. Mortgage arrears have fallen for 12 successive quarters and by 43 per cent from peak, with more than 120,000 mortgage holders having their loans restructured (although I would note that this is not necessarily a cheaper option).

Nonetheless, mortgage lending is evidently riskier in Ireland than other Eurozone countries. Furthermore, due to the economic and social policy choices that have been made, being able to effect the security that underpins the loan is more challenging in Ireland in the event of a default than in many other Eurozone countries.

To illustrate this point, between 2009 and June 2016, 6,214 PDH properties have been repossessed in Ireland, 66 per cent of which were either voluntarily surrendered or abandoned by the borrower. Approximately one in five mortgages are or have been in default; fewer than one in three hundred have lost possession of their houses through the courts.

Interest Rates

The stock of mortgages in Ireland can be broadly divided into fixed rate mortgages and floating rate mortgages, and the latter category can in turn be divided into standard variable rate mortgages (SVRs) and tracker rates. More and more variable rate mortgages are priced according to loan to value, but for the moment I will stick with using SVR as a catch-all for non-tracker variable rate mortgages.

Currently, around 90 per cent of outstanding mortgage loans for primary dwellings are on floating rates – 50 per cent are SVRs[2] with the remainder being trackers. Consequently, 90 per cent of PDH mortgage borrowers are exposed to interest rate risk, and vulnerable to interest rate rises.

Turning to mortgage interest rates themselves - the average interest rate across mortgage products in Ireland has fallen over recent years, and currently stands at 2.64 per cent. This is quite close to that of the weighted average in Eurozone countries at 2.55[3] per cent and is an exceptionally low level in historical terms for Irish borrowers, albeit that the average interest rate excluding tracker mortgages is 3.78 per cent, despite having declined in recent years.

But in the same way, as it is an oversimplification to refer only to one average interest rate for Irish mortgages, there are perils in oversimplifying our comparison with other Eurozone mortgage rates given the different characteristics of housing and mortgage markets in different Member States, including home ownership, the history of default and the balance between fixed and variable rate mortgages.

II. Factors Impacting on Variable Rate Mortgage Pricing

In May 2015 the Central Bank published a paper on Influences on Standard Variable Mortgage Pricing in Ireland[4]. This Paper set out the range of factors which affect the margin that banks charge on variable rate mortgages, including the cost of funds, the credit risk associated with the lending, operational costs of running a bank, the cost of capital and the market structure and the competitive environment faced by each bank.

Looking at credit risk, despite considerable recent progress, European Banking Authority (EBA) stress test data shows that Ireland’s mortgage default rate is more than 10 times higher than many other Eurozone and European Union countries. In other words, as I touched on earlier, mortgages are higher risk in Ireland than in the majority of those countries with which mortgage rates are compared.

Image

Table 1: Euro area comparison of mortgage risk and interest rates

The EBA stress test data also shows banks operating in Ireland need to hold significantly more capital for Irish mortgages on average per euro of mortgage lending than other European banks, with associated higher costs, and hence mortgage rates.

The low level of repossessions I referred to earlier, creates uncertainty on the recoverability of collateral. Cross-country comparative research shows that increased recovery time is associated with lower availability of credit, and higher interest rates.[5]

A further determinant of bank lending margins, and hence pricing, is the degree of competition in the market. The crisis resulted in considerable structural changes to the Irish banking sector including increased concentration. We have seen some nascent signs of restoration in competition, with the reductions in variable rates, some increasing product differentiation, and potentially some small new entrants – but this is not of significant scale at this stage.

The ability and willingness of consumers to switch mortgage products is vital to ensure a well-functioning market. The level of switching of mortgages in Ireland is low. In this context, the additional transparency measures announced by the Central Bank in July, and which will come into effect from 1 February 2017, are aimed at increasing transparency and facilitating consumer choice. This has become more important as we have started to see greater differentiation in product offerings and mortgage pricing.

The vast majority of SVR borrowers in positive and negative equity could benefit from either switching to another provider or to another product with the same provider. Switching offers the dual benefits of potentially reducing monthly costs and/or the length of the mortgage, with potential savings of tens of thousands of euros. The more people who start to switch, the less the ability the banks will have to differentiate between new borrowers and existing.

The Central Bank is also examining what additional measures it can take to address any impediments to switching, notwithstanding that there is a material difference between switching current accounts or utility provider and entering into an arrangement involving lending a customer sizeable sums on a 20-plus year basis.

III. The Central Bank Assessment of the Proposed Bill

Turning to our assessment of the Bill, it is far from certain that the Bill will be successful in delivering its aims. We are concerned that the Bill focuses on the symptoms of a complex problem and may, therefore, not only be unsuccessful but runs the risk of being counter-productive, as it may have damaging side effects on the functioning of the market.

From both a financial stability and a consumer protection perspective, it is essential that banks have sustainable business models that take into account the risks that are inherent in their lending practices. There is a risk that capping interest rates will result in an under-pricing of credit risk, as was experienced in Ireland and internationally to such dangerous effect in the past.

Alternatively, were this legislation to be introduced, lenders may adapt their credit standards and offer variable mortgage loans only to new customers with a low risk profile – ultimately reducing credit availability. Lenders could also raise interest rates on other loans, and increase fees and commissions, in order to maintain or achieve sustainable capital generation.

It is important that banks have the ability to generate capital to transition towards full implementation of new regulatory capital requirements. Adequate capitalisation is essential for a properly functioning banking system and to ensure sufficient availability of credit for businesses and households, as well as to strengthen the resilience of banks to future shocks.

Additionally, the proposed legislation may have the entirely unintended effects of stifling competition and innovation and dissuade entry of new participants to the Irish market. International evidence indicates that competitive financing markets are important for the choice, quality and pricing of financial products, which are all in the interests of the consumer.

Furthermore, with regard to the interest rates charged on existing SVR mortgage loans, they are subject to existing contracts and contract law, which only a judge could override, not a public body like the Central Bank.

We are also concerned about the extension of the Bank’s statutory functions to encompass the regulation of competition, which is a function already carried out by the Competition and Consumer Protection Commission (CPCC).

Finally, we also note the ECB’s concerns raised in its opinion[6] on the Bill, and the European Commission’s view, as articulated in the summary of the post-programme surveillance statement issued last week.

Concluding Remarks

I appreciate that the positions I have outlined today are arguments against what might be perceived as a quick action to reduce SVR mortgage rates, which are low by historical standards, albeit higher than in countries with much lower default histories.

Material improvements have been recorded in many of the factors underlying mortgage rates in recent years, most notably lower household indebtedness, lower numbers in negative equity, lower numbers in arrears or default, improved resilience of the banking sector, and ultimately a gradual progression from impaired functioning to a banking system that can support economic growth, employment, and incomes. These improvements have coincided with some reductions in SVR rates. Further progress is expected in the coming years as the impact of the measures taken continue to feed through to the mortgage market and financial system and as the economic recovery continues.

The issues in the mortgage market are complex and rooted in the crisis, and clear economic and social policy choices have been made in managing the crisis and navigating a path out of it. Short term fixes may have long term negative consequences for consumers. Decisions to intervene legislatively in the mortgage market, as with any market, should be taken with due cognisance of the market, the factors that are leading to the perception of market failure, the underlying causes, and risks associated with the action and the likely outcomes.

Notwithstanding these concerns, as the Governor has previously stated, if these powers are conferred upon the Bank, we will do as we always do, and strive to deliver to the best of our abilities the duties and mandate that are given to us.

The Central Bank remains focused on delivery of its full mandate and is committed to working with all stakeholders to support the continued normalisation of the Irish mortgage market.


Footnotes

[1] The Central Bank has prepared a detailed analysis of the latest position of mortgage arrears which is with the Minister for Finance and we expect it to be released imminently. This shows that there continues to be significant progress in addressing mortgage arrears, albeit that the level still remains too high.

[2] Includes up to 1 year fixed


[3] The weighted average of all Euro area mortgage loans is 2.55%. The average of Euro area countries is 2.29%

[4] http://www.centralbank.ie/press-area/pr ... Influences on SVR Pricing in Ireland (5).pdf

[5] http://www.centralbank.ie/publications/ ... 04RT14.pdf

[6] https://www.ecb.europa.eu/ecb/legal/pdf ... signed.pdf

Notes to Table 1

Columns 1-3 are based on December 2015 European Banking Authority stress test & ECB statistics

Columns 3- 6 are ECB statistical data

*Loss rate = credit provision to total mortgages.

**ECB data on new business mortgage rates are for euro area countries only.

1 Rate excluding tracker mortgages, Q3 2016.

2 Rate excluding renegotiations, Oct 2016.


And who says there is no such thing as strategic default?

The word is that the ECB are insisting that the banks in countries with large numbers of Non Performing Loans such as Ireland, Italy, Greece and Spain are being told to get rid of their loans. So 2017 is rumoured to be the year of repossessions.

The Looney Left however want to:

- Restrict interest rates to sub-economic levels

- Not address the issue of the high cost base of Irish banks due to high levels of non-performing loans and continue the ongoing moral hazard

- Discourage competition from new entrants to the mortgage market


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 Post subject: Re: What Is The Extent Of Strategic Default In Ireland?
PostPosted: Wed Jan 04, 2017 11:54 pm 
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FreeFallin wrote:
Employment up, house prices and rent flying up...and yet BoI need to allow for further losses on their loan books!

http://www.irishtimes.com/opinion/the-s ... -1.2924625
Quote:
The run-up to Christmas is always a good time for burying bad news and this year was no different.
On the Friday before Christmas, Bank of Ireland announced it was going to have to put more money aside to absorb possible losses on Irish residential mortgages.
Just how much more money was not very clear but it would appear to run into several hundred million euro.
The statement was extremely technical and did not actually talk about losses or defaults.
But the point is clear. The bank had already put aside some money to absorb losses that might occur as a result of people not being able to pay their mortgages. It now seems that more people than expected are going to default and the bank has had to put some extra money aside.


I went to the Bank of Ireland Investor Relations site.

There is indeed one statement buried on the 23rd of December: https://investorrelations.bankofireland.com//wp-content/assets/BOI-Capital-Developments-23.12.2016.pdf

Here is what it says:

Quote:
Revision of calculation of capital requirements on the Group’s ROI mortgage portfolio
The Group is revising its calculation of capital requirements under the IRB approach on its ROI mortgage nondefaulted loan portfolio. The revision is in advance of the ECB’s targeted review of internal models (TRIM) due to commence early next year and increases the pro-forma average credit risk weighting on ROI mortgages to 34%.
On a pro-forma basis, the revision is expected to reduce the Group’s transitional CET1 ratio by c.65bps, the Group’s fully loaded CET1 ratio by c.60bps and the Group’s transitional Total Capital ratio by c.85bps.


What it says is that the risk treatment of the good part of the loan book will be more conservative in future because of a change in reporting guidelines (and presumably because of the near non-recourse nature of mortgage lending in Ireland).

It specifically does not say that BoI is expecting more loans to go sour than heretofore, simply that it has to hold more capital against its performing mortgages due to a change in reporting standards.


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 Post subject: Re: What Is The Extent Of Strategic Default In Ireland?
PostPosted: Thu Jan 05, 2017 11:01 am 
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Good digging Skippy. Would be worrying if they genuinely expected more losses


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 Post subject: Re: What Is The Extent Of Strategic Default In Ireland?
PostPosted: Fri Jan 06, 2017 5:17 pm 
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Excellent analysis guys. I would add the Family Home Protection Act 1976 to this list.

How Have We Got To This Stage?

Quote:
This has been caused by a toxic combination of:

• Poorly drafted legislation (Land and Conveyancing Law Reform Act 2009 and Land and Conveyancing Law Reform Act 2013)

• Poor judgements (Start Mortgages & Ors v Gunn & Ors – the Dunne Judgment http://www.courts.ie/judgments.nsf/6681 ... ght=0,Gunn) creating massive uncertainty in the repossessions process

• Endless tyre-kicking in the form of one so-called export report after another that remain largely unactioned:

o November 2010 Cooney Report - Mortgage Arrears and Personal Debt Group - http://www.finance.gov.ie/sites/default ... repfin.pdf

o September 2011 Inter-Departmental Mortgage Arrears Working Group http://www.finance.gov.ie/sites/default ... arr2_0.pdf

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 Post subject: Re: What Is The Extent Of Strategic Default In Ireland?
PostPosted: Fri Jan 06, 2017 6:14 pm 
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There is one big problem with restructuring.

1. Where there was no restructuring but an agreement to pay something every month.
2. Where there was restructuring but the restructuring agreement ITSELF subsequently went into arrears itself.

http://www.centralbank.ie/press-area/pr ... 22016.aspx

Quote:
A total of 9,663 new restructure arrangements[3] were agreed during the second quarter of 2016. The data on arrears and restructures indicate that of the total stock of 82,092 PDH accounts that were in arrears at end-June, 26,704 (33 per cent) were classified as restructured at that time. Of the total stock of 57,571 PDH accounts that were in arrears of more than 90 days, 24 per cent were classified as restructured; largely unchanged from the previous quarter.

Some 78 per cent of restructured accounts were not in arrears at end-June 2016. Restructured accounts in arrears include accounts that were in arrears prior to restructuring where the arrears balance has not yet been eliminated, as well as accounts that are in arrears on the current restructuring arrangement. At end-June, 88 per cent of restructured PDH accounts were deemed to be meeting the terms of their arrangement. This means that the borrower is, at a minimum, meeting the agreed monthly repayments according to the current restructure arrangement.


And these are only a few of the caveats. :(

BTL

Quote:
A total stock of 26,930 BTL mortgage accounts were categorised as restructured at end-June 2016, reflecting a decrease of 292 accounts from the stock of restructured accounts reported at end-March 2016. Of the total stock of restructured accounts recorded at end-June, 76 per cent were not in arrears,


So resolution of deadbeat landlord issues is frozen to my mind and only repossession will 'clean up' the books with resale and full loss recognition occurring at that point.

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 Post subject: Re: What Is The Extent Of Strategic Default In Ireland?
PostPosted: Wed Jan 11, 2017 7:58 am 
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ChickenParmentier wrote:
It would be relatively easy for the Central Bank to repeat this analysis for Irish mortgages to determine if the correlations between a lengthy judicial foreclosure process and default, between negative equity and default and between higher value mortgages and default exist in Ireland.

After getting reamed by all and sundry for doing a study that mapped US default behaviours onto the Irish situation Professor Gregory Connor of Maynooth got access to one bank's (PTSB?) mortgage books to do a direct study of Irish default patterns sometime around 2012 I think. The biggest predictor for mortgage default turned out not to be unemployment or other income diminution but rather the extent of negative equity. So it seems clear that strategic default was a significant factor in the Irish situation.

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