Ronan Lyons | Personal Website
Ronan Lyons | Personal Website

Mortgage arrears and the banks: a €100bn problem or a €1bn problem?


    Would you actually go so far as to say that “Professor Kelly is Wrong” Or am I to be forever burdened with the copyright on that ? 🙂


    • Ronan Lyons ,

      Hi Fergus,
      I’ll leave you with that one if I can copyright the comparison with the egghead in the Simpsons!

      I’ve been discussing this with a few other economists, and I think it’s fair to outline here some of the factors that for reasons of brevity didn’t make it into what was already a very long blog post. There are very few answers for these points, but they do have to enter the calculus:

      First, are banks only at risk from recent non-top-up borrowers?

      • What about SMEs and sole traders appearing as top-ups but in fact who have their house on the line?
      • What about renegotiated loans, where banks agree to cut the mortgage from, say, €200,000 to €150,000 to avoid having to repossess? How prevalent will this be?
      • What about buy-to-let and investment properties? IBF figures suggest there are at least 100,000 buy-to-lets bought since 2003 about the country, having to survive at 2000 rents.

      Secondly, I more or less just picked a number for mortgages in arrears out of nowhere, 100,000 compared to 40,000 now. What will affect the number of mortgages going from negative equity to formal arrears?

      • It may be three years away but at some point, the interest rate on tracker mortgages will increase. This could push some households on trackers into arrears.

      Thirdly, how will mortgages in arrears convert into foreclosures and at what price?

      • A significant revision of bankruptcy laws may convince some people in severe negative equity (mostly in Dublin, where negative equity is worst) to ditch their properties, wait the x years and start anew.
      • I have assumed here that repossessed homes sell for the market rate, despite evidence that they often sell for less than equivalent homes that are not foreclosed everything else being equal. I did this for two reasons: (a) the price I picked for the banks to sell at is well below current market averages and in fact reflects fundamentals, and (b) one upside to a financial system on hold (and to significant contingent funding) is that if banks foreclose, they don’t necessarily have to sell in three months. I’ll leave it up to readers to judge the importance of these factors.

      Feel free to add to these factors below.

      • Joseph ,

        Surely there is a real threat that interest rates will rise sooner and faster than you are suggesting Ronan? There must be a ‘tipping point’ where those going into arrears accelerates. This added on to increasing outlays over the next couple of years and I still don’t believe the cost of living in Ireland is getting any lower despite what official figures may say.

        It’s hard to believe that countries like Germany won’t need a hike in rates next year and a bit of inflation to boot.

        • Ronan Lyons ,

          Hi Joseph,
          Thanks for the comment. In truth, it’s difficult to say what will happen interest rates. As soon as one or two countries start demanding an increase to cool their economies, while others need low rates, the days of a relatively harmonious ECB will presumably be gone. Given the incredibly precarious state of the markets, though, it’s difficult to see interest rates going up before 2012.

          It’s difficult to even say how much of the market this affects. It seems from some newspaper reports that there are about 150,000 tracker mortgages. A 92% 35-year mortgage on a property bought for €200,000 currently on 2.5% pays €1,060 a month. If ECB rates went as high as 4%, meaning a tracker rate of 5.5%, this would mean a mortgage repayment of €1,625. It is indeed difficult to see how the typical household could afford €600 more a month on their mortgage.


          • Arthur Doohan ,

            Greetings Ronan.

            With an economist’s hat on, I think your assumptions are on the ‘fair to optimistic’ end of the spectrum and the medium term analysis is reasonable, logical and measured.


            With my trader’s hat on, I have to say that your major assumption is that of ‘normal medium term’ outcomes applied to a crisis.

            Globally, we have already had one complete market liquidity lockout. Globally, we are all on emergency liquidity assistance and are still only moments away from another market ‘seizure’.

            At such moments, medium term averages become meaningless and current cash flow determines everything.

            And the cashflow of the Irish mortgage holder is very weak, indeed.

            • Ronan Lyons ,

              Hi Arthur,

              Thanks for that very fair comment and reminder about the importance of cashflow. Both your comment and Joseph’s refer to the non-linearities involved, which is a very important point. 300 repossessions from 30,000 arrears almost certainly doesn’t scale up neatly to become 3,000 repossessions from 300,000 arrears. What does it scale up to, though? My attempt here is to say, even with 30,000 repossessions (so 10% repossession, not 1%), this is still not NAMA all over again for the banks.

              The social costs are, of course, another issue entirely.

              • Anonymous ,

                […] […]

                • Clive ,

                  Hi Ronan,

                  A very interesting analysis. Could i ask you if you were to guess how much further a fall in % terms do you see the Dublin properry market dropping. And what would be the likely timescale for such adjustments. I ask this because we are considering stepping into the market.



                  • Paul Mara ,

                    • Phil Doyle ,

                      I think the analysis is very thorough but optimistic. There is a real risk of shorter term rate rises as banks are funded at increasingly higher rates of interest. We’ve already been a 0.5% rise in rates charged to retail mortgage customers.

                      A significant rate rise to home owners would place many more people in arrears and could lead to far greater bank problems.

                      Property values have declined hugely and therefore realisable housing asset values are low so repossessed properties would not yield more than 50% of purchase price if bought in the last 6-7 years.

                      Finally, Lenihan believes that unemployment has stabilised. Employment is not rising therefore a static unemployment figure is being achieved either by emigration or fudging of stats or both.

                      • Arthur Doohan ,

                        Greetings Ronan.

                        I have a side-question for you.

                        Is there a property index time-series available in the public domain for download / modelling anywhere?

                        For the RoI – nationally would do, regional/sectoral would be great….



                        • John O'Dea ,


                          As someone who lent about €1B in the height of the boom to various types of borrowers, I can assure you, you are way out. The loss provisions the banks are likely to put away are in the order of 15-20% of the book. Kelly may be painting an apocalyptic scenario but you are definately painting a rosie one. Anything from €10B to €20B will go down the pan on this one….. With the moratorium on reposessions (from both a legal and a pragmatic point of view) the current figures are only the thin end of the wedge. It’s somewhere between what you have predicted and he has. Not the end of the world as we know it, but very very ugly nonetheless.


                          • The Irish Economy » Blog Archive » Hump-Shaped Dynamics ,

                            […] for who can come up with the biggest number for the banks losses, it is worth taking a look at Ronan Lyons’ analysis of potential mortgage-related […]

                            • Al ,

                              Hi Ronan
                              Should wage levels, etc, settle down to y2000 levels along with house prices, people who got into mortgage difficulty will be still compromised.
                              Further should Croke park be looked at again, how many people will be closer to the danger zone.
                              There may be enough room in the eye of the needle for the country to get through all this, but is it going to screw mortgage holders along the way?
                              I think Morgans thoughts on this referred to those in the danger zone getting organised politically, with the whole situation getting ugly etc.

                              • ivor belkin ,

                                Might not your fair to optimistic view might earn you a McLoughlinesque reputation – calling a soft landing for mortgage defaults? Why leave the BTL elephant outside the room with its 28bn in debt much of which was financed throuugh “equity” release loans off PDH? Consider the bankig capital requirement on 145bn in mortgage debt much of which is carrying +100% LTV’s – reckon this LGD exposure is c€80bn.


                                • TC ,

                                  If you look at the formulae in the spreadsheet at the Irish Economy posting in May, you will see that Morgan Kelly’s “optimistic” estimate of the loss on mortgages across all lenders is 5% of the €82 billion domestic mortgages book, or €4 billion. He puts his “realistic” estimate at 10% or €8 billion.

                                  • Jake Watts ,

                                    How does it look from the bridge of the Titanic? The ten year bond is back up to 8.5% and Moody’s just downgraded five nothces. And, you talk about 2.5% money for 35 years? Also, who is going to buy the houses when they come on the market? With every emigrant, you surely just lost a home buyer. Why not factor in a sovereign default on the return to the mean senario?

                                    • Jake Watts ,

                                      Why does Ireland not take the cash from the IMF and the ECB at 5.6% and buy its own ten year bonds at 8.4% and live off the spread like US banks?

                                      • Jake Watts ,

                                        My comments have been awaiting “moderation” for a day. Either accept them or come out as a censor.

                                        • Daniel ,

                                          I really appreciated reading your analysis and opinion. I have no professional expertise in this field, but from a basic point of view, how likely is it that prices would stabilise at 2000 levels (as you said “broadly speaking”)? In 2000, was there not inward investment?, was employment not rising? was there not a shortage of housing? were we not just joining into the single currency? was money not becoming more accessible for everyone? I’m not one for nostalgia, but it certainly felt like the future was much brighter for Ireland and the Irish in 2000 as opposed to 2010. I would have thought this prognosis was also supported by national balance sheets as well as sentiment. Are we not facing into large scale contraction (the effects of the recent budget have yet to be felt) over the next few years with less and less spending money and borrowing power on an individual and national lever? I know this is probably oversimplified demand supply economics, but what is the probability of prices stabilising at 2000 levels? There would appear to be an abundance of empty and unfinished housing and even rented housing in most main towns around the country with receivers and others still deciding what to do with it. I hope for all our sakes that my pessimism is misplaced. You comments would be appreciated. Thanks again for all your work and analysis. Daniel

                                          • John ,

                                            thanks for your insights. good blog. Much change is needed, and drastic changes too. Hopefully sooner than later.

                                            • Billy O'Mahony ,

                                              Hi Ronan,

                                              Given the current talk about trackers I remembered this thread and thought I’d get some info on the size of the tracker losses here.

                                              But your figures do not (I think) address the on-going losses that the banks are suffering on their tracker mortgages. If there are 150k tracker with on average 200k outstanding and the spread between what the banks are sourcing funds at versus what they are charging the mortgage holder is 4%, that equates to 1.2bn losses p.a. on the back of my envelope.

                                              Not too bad relative to the entire bank bailout but significant in terms of the 10bn on mortgage losses you talk about here.

                                              Can you enlighten us any further on this issue?


                                              • Ronan Lyons ,

                                                Hi Billy,
                                                As noted in my first comments above, you are right and this does not specifically estimate losses from trackers mortgages. The Sunday Times had an estimate of the cost of trackers to PTSB, which came to €400m a year (IIRC), although this will fall slightly when the gap between Irish bank financing rates and the ECB rate declines over coming years.
                                                The reason I focused purely on repossessions and losses therefrom was that this article was in response to Morgan Kelly’s predictions purely about that topic – I hope that makes sense.
                                                Thanks for the comment,

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