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:
•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
•
•
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.
http://i1220.photobucket.com/albums/dd4 ... ult3_1.png
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:
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:
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:
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:
oNovember 2010 Cooney Report - Mortgage Arrears and Personal Debt Group -
http://www.finance.gov.ie/sites/default ... repfin.pdf
oSeptember 2011 Inter-Departmental Mortgage Arrears Working Group
http://www.finance.gov.ie/sites/default ... arr2_0.pdf
oDecember 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
Statistics: Posted by ChickenParmentier — Tue Jan 03, 2017 7:54 pm