The last two weeks have seen an immense public hue and cry about mortgage debt forgiveness. The spark seems to have been some relatively innocuous statements by Morgan Kelly at the Irish Society of New Economists conference, where he estimated that – excluding those with more than €500,000 in mortgage debt – the cost of a substantial debt forgiveness scheme would be of the order of €6bn. He didn’t say how it would or could be done or even make a strong case that it should be done, just that this was his estimate of the cost.
This tallies with numbers I presented two years ago, which suggested that if the Live Register hit 500,000 and if house prices fell by 50%, we could have 50,000-60,000 households suffering both negative equity and unemployment. My own estimate was that total negative equity would be about €23bn, part of which would be owed by households with no income.
Last week, economists’ musings were overtaken by a pseudonymous letter in the Irish Times, by someone from Kerry claiming to be starving his children to pay his mortgage. Unsurprisingly, his letter has provoked a strong response, not least by charities and government services, offering him advice and assistance. To the best of my knowledge he remains unfound but the impact of his letter and Morgan’s musings continues and can be seen on today’s front-pages. All three broadsheets lead with mortgage debt arrears and forgiveness.
Arm yourself with the facts
Given the emotional charge to this debate, I thought I would take a step back and look at the facts. Here are ten facts about Ireland’s mortgage debt:
- As of June this year, Ireland has 777,000 residential mortgages worth €115bn. Of these, 40,000 (or just over 1 in 20) are in arrears of greater than six months. This figure has doubled in 18 months, as it was 19,000 in late 2009.
- These 40,000 mortgages in arrears of more than six months are worth €8bn in total, but the arrears on them is worth less than €1bn. Court proceedings have been issued on 3,000 mortgages, a smaller number now than two years ago.
- There have been a total of 500 repossessions in the last twelve months. The majority (two thirds) of these have been “voluntary surrenders”, i.e. abandoned properties. There were 56 Court-ordered repossessions in the second half of 2010 and 103 in the first half of 2011.
- During 2010 in the UK, there were 36,300 repossessions, according to the Council of Mortgage Lenders. If the same rate of repossessions had applied in Ireland over the last 12 months, we would have seen 2,300 repossessions – i.e. about fifteen times the rate of Court-ordered repossessions that we have seen in the last 12 months.
- Irish banks gave out 673,000 mortgages between the start of 2005 and the end of 2008, the period most likely to contain the bulk of those in arrears. About 225,000 of these were either people switching lender or top-up mortgages. Of the remaining 450,000, 88,000 were investment mortgages, 145,000 were mover-purchaser, while 125,000 were first-time buyer mortgages.
- Ireland’s banks have given out 35,000 mortgages in the last eighteen months. At the same time, the number of mortgages has fallen by almost 16,000. This means that over 50,000 people have paid off their mortgage since the end of 2009, compared to the 20,000 who have slipped into arrears of six months of more during the same period.
- Between 2005 and 2008, one in six first-time buyers had a deposit of more than 30%, while one in five borrowed at 100%. Looking at the market as a whole, just under 40% of all mortgages taken out were at less than 70% loan-to-value.
- Someone who borrowed a mortgage of €300,000 in early 2006 and who has not missed a payment will, by the end of this year, have typically paid off about 13% of their principal, meaning their loan outstanding is about €260,000. A deposit of more than 30% means the home would have been valued at €450,000 or more. Such a home would now command an asking price of about €225,000. By the end of 2015, the principal outstanding would be about €220,000.
- Two million people were employed in Ireland in late 2006. 1.77 million were employed in early 2011, which means that about seven of every eight people who were at work in the boom are still at work.
- The 1.43 million households in the State in the 2006 Census were estimated to be worth €526bn collectively in early 2007. This had fallen to €289bn by mid-2011. Housing stock built since 2006 is worth approximately €42bn. To calculate net housing wealth in Ireland, mortgage liabilities of €115bn must be subtracted from the €330bn of residential housing assets, giving a figure of about €215bn. In other words, Ireland’s current “loan-to-value” is about 35%.
My own two cents
Dramatic public clamour is often a recipe for bad policymaking. To butcher a phrase, “beware of Trojan horses bearing starving children.” 40,000 mortgages in arrears of six months or more is a serious problem but it does not mean even that 40,000 households are in arrears (some investors had many mortgages), let alone that 40,000 families are starving their children to cling to their home. Hopefully the facts above show that there is enough variety in Ireland’s mortgage debt to rule out any “get less indebted quick” blanket debt forgiveness schemes. Any write-downs of debt that do occur should be on a case-by-case basis and with significant strings attached (like not owning all your own home by the end).
The vast bulk of people in Ireland are still paying off their mortgage and are still in employment. For those who are struggling and who believe that business-as-usual means they will not be able to pay off the mortgage as it stands, abandoning the property (and presumably emigrating) has proven an attractive option. However, there are less dramatic options.
Central Bank figures show that lenders have restructured 10% of all mortgages. They have also put money aside – taxpayer money, the €5bn that Morgan Kelly was talking about and more – to provide for mortgage write-downs where families are struggling. Not only that, a recent High Court decision makes it much more difficult for lenders to repossess properties. The fact that there are fewer Court proceedings for repossession now than two years ago indicates that banks are not interested in pushing people on to the street, anyway. In short, no-one should be sacrificing their children’s health for their own financial wealth.