Two-thirds of mortgages by value now in negative equity

Tentative signs emerge that banks are finally waking up to the country’s debt catastrophe, writes Daniel Mcconnell

‘IT’S a pain, to be straight with you,” a good friend of mine said as he explained his negative equity hell to me over a pint in a well-known Dublin pub last week. He and his wife bought an apartment together in Dublin's inner city in late 2006 for nearly €450,000. Now with a small child, they need a bigger place but can't afford to move given that their apartment is now worth less than half of what they paid for it.

“We feel like we are trapped, our only option it seems would be to rent this place out and rent a bigger place, which is not ideal,” he said.

While they are able to make the repayments on the apartment, they are unable to move upwards because they would be realising a huge loss on their existing 30-year mortgage.

Such a trap is typical of that in which many couples in their late twenties or early thirties are caught. They bought into the mass hysteria of the property boom, but now, almost four years after the crash, they are still unable to end their nightmare.

The fallout of the property crash has been immense for so many people in Ireland. Just a simple look at the numbers reveals the devastating impact of the crash.

Approximately 145,400 mortgages, or 31 per cent of the 773,420 mortgages with an estimated worth of €41bn, were in negative equity at the end of 2010.

Alarmingly, as a result of the deepening European crisis and the stagnant Irish economy, by the end of 2011, that percentage had risen to 47.5 per cent — almost half of all mortgages.

However, one leading economist has suggested by calculating the percentage by cash values rather than volume (as done in the Central Bank figures) the picture is far more disturbing.

Dermot O'leary, chief economist with Goodbody Stockbrokers has said by using this method and the Central Bank figures the percentage of mortgages in negative equity is between 60 and 65 per cent — almost two-thirds.

According to the Central Bank report, there are now 42,000 properties in Dublin which are in negative equity; 19,000 in Kildare and Wicklow; 18,300 in Cork and Kerry; 15,855 in border counties such as Donegal, Cavan Louth and Monaghan and 12,300 in Galway, Mayo and Roscommon.

But it is not just the curse of negative equity. The levels of actual distress in Ireland have reached record levels. For example, the number of mortgages in arrears for more than 90 days has soared since the 2008 crash and now stands at almost 63,000. Then there are mortgages which are less than 90 days in arrears. In its most recent figures, the Central Bank said there were almost 47,000 mortgages less than 90 days in arrears.

The Central Bank also identified 12,400 properties in positive equity that have accumulated at least three months' worth of arrears. These borrowers account for €150m of the total arrears in the data.

In another 70,000 cases, lenders have adjusted the mortgage terms to make them more manageable for borrowers. Despite these efforts, 34,000 have fallen into arrears for a second time.

As a result, more than 146,000 mortgages are now either in arrears or have been restructured. That's almost one in five of the 773,000 private residential mortgages in the country.

Add to these worrying numbers, the fact that mortgage lending has fallen by over 90 per cent since 2006 with banks putting every conceivable obstacle in the way for prospective buyers.

As an example of the change in lending practices, in December State-owned bank AIB reduced the amount of mortgage funding it will give for one-bed apartments in a move that is likely to see the value of these properties fall further. Up to now anyone buying a one-bed apartment could have received mortgage approval with a deposit of eight per cent of purchase price. The bank now wants a deposit of at least 25 per cent of the total value of the property.

So, two weeks after the Government's insolvency laws were revealed, what does the fact that one in five mortgages are in the red and up to two thirds are in negative equity mean for the Irish taxpayer?

Well, at the time of last year's bank stress tests, the Central Bank said Irish-owned banks would have to set aside €5.8bn to cover bad mortgages under a moderate or non-stressed scenario.

Leading UCD economist Karl Whelan said that the sharp falls in house prices during 2011 mean the market is now closer to the distressed scenario predicted by Blackrock in their stress tests this time last year.

“During 2011, house prices fell much closer to the stress scenario, which raises the possibility of impacting on their capital positions, which could lead them to needing more money,” Mr Whelan said.

Mr O'leary agrees. Irish-owned banks could be nursing losses of between €8bn and €9.5bn, which could force the Irish taxpayer to inject even more capital into the Irish-owned banks, he said.

Leading Trinity College Dublin economist Philip Lane concurs, saying the reduction in prices was caused by the increased uncertainty over the European debt crisis.

“It is clear house prices came down a lot due to the uncertainty. Now we are seeing a calming down of European matters somewhat, things will calm down here I think,” he said.

Even in the event of the “stress” scenario being realised, the Irish banks would still be extremely well capitalised by international standards and any extra capital they received would be merely to fulfil the Government's pledge that the Irish-owned banks would remain the best-capitalised in the world.

In the wake of the Government's new insolvency laws, Moody's last Thursday said a quarter of Irish mortgages are “susceptible” to debt writedowns.

Moody’s say the insolvency laws would “discourage” people in negative equity from paying their mortgages and could lead to “widespread debt forgiveness”.

Given such comments, is last Thursday's admission by National Irish Bank boss Andrew Healy that his bank will write off debt as a result of the Government's insolvency laws a sign that the banks who ruined this country are finally waking up to the country's debt catastrophe?

Mr Healy insisted NIB was not expecting a significant deterioration in its mortgage book once the rules kick in but said the bank would be prepared to write off some home loan debt.

“It could make sense in certain situations,” he said. “Banks have to be realistic and this may help, but we'll have to wait and see. What's important is that everything is looked at on a case-by-case basis.”

Mr Healy stressed that “ability to pay” had more influence on mortgage arrears than negative equity. “It's very difficult to see how the rules will work until we have more detail but it may help to crystallise things with borrowers,” he said.

Philip Lane said that we must distinguish between those who are in negative equity and those who are simply unable or unwilling to pay off their mortgages.

“You can be in extreme negative equity and still be paying off your mortgage,” he said. “We do need to get more detail on what the Government is planning. It is such a hotly contested topic. The Moody's report highlights the importance of getting the solution to this crisis right,” he added.