Solving Ireland's Mortgage Arrears Crisis

Solving Ireland’s Mortgage Arrears Crisis Dr Michelle Norris School of Applied Social Science University College Dublin.

House Price Trends in Ireland, 1996-2009

Causes

Causes Trends in Residential Mortgage Lending in Ireland, 1996-2008 1996

2000

2004

2008

new

7.10

6.17

3.47

5.33

capita

3.83

8.62

19.12

33.75

Mortgages paid (000s)

56.0

74.3

98.7

63.6

Loans > â‚Ź250,000 (%)

Nav

2.3

18.0

41.0

100% loans (%)

Nav

Nav

4.0

12.0

Loan term > 30 years (%)

Nav

Nav

10.0

39.0

Representative interest mortgage loans (%) Residential (000s)

mortgage

rates

debt

on

per

Problems Mortgage Repayment Difficulties:  Current Scale:

 4 per cent of mortgages currently in arrears of more than 90 days  Has risen by 13% in the first three months of this year

 Potential Scale

 49% of home owners in Ireland have mortgages  Most over 50s are outright home owners  Most pre 2000 mortgages are small  Post 2004 –  Size, term and duration of mortgages grew  Particularly in Dublin and the Mid East

Problems Households, Mortgages and Employment by Employment Sector, Region and Age Group, 2007, 2009 Employment Sector Agriculture, forestry, fishing Other production industries Construction Wholesale and retail Hotels and restaurants Transport, storage and communication Financial and business administration Public administration and defence Education Health and social work Other services Region Mid East Rest of Age Group 15-24 years 25-44 years 45-65 years 64 years +

Employment

Households % 2007

Mortgages % 2007

Nav 16.5 19.9 11.6 4.4 6.8

Nav 13.9 6.7 9.5 4.1 5.3

-5.4 -11.4 -31.3 -3.2 -11.1 -0.2

12.6

21.1

2.1

4.3 4.5 5.6 5.3

12.5 10.7 11.4 4.2

5.2 3.9 6.5 -0.3

27.9 10.7 61.4

35.0 14.6 50.4

-7.0 -3.7 -5.8

2.8 47.3* 29.2** 20.6

1.1 80.1* 17.2** 1.6

-28.5 -4.0 1.4 5.5

% +/-Q1 2007 to Q1 2009

Problems  Negative Equity – Current and Potential Scale:    

9.1% of mortgage holders in 2008 18% in 2009 29.6% in 2010 Probably higher

– Implications:  Increases risk of repossession  Makes moving difficult

Solutions 1. Do nothing 

moral hazard   

 

No such concerns about the banks Why should home owners take full responsibility?

Role of government in causing the problem – eg. affordable housing scheme

Negative social implications Problem too large  

mortgage affordability problem is manageable and ignoring it may be more expensive Negative equity may rectify itself in time and its scale is such it would be difficult to comprehensively resolve by other measures.

2. Rely on existing supports: 

Mortgage Protection Insurance 



Expensive, unreliable, not widely used

Bank guarantee   



Solutions

Makes refinancing easier Allows the ‘rolling up’ of interest payments But only short term solution – no repossession proceedings for 12 months after arrears

Mortgage Interest Supplement  

Also short term support Terms too restrictive:    

House can’t be for sale No partner can be working for 26 hours+ Mortgage must have been affordable originally Cost must be ‘reasonable ‘

Solutions 2. Reform Existing Supports 

Liberalise Mortgage Interest Relief  



Decrease waiting times Increase maximum mortgage covered

Cost effective:  

Relief cost €3,610 per household in 2008 Rent Supplement cost €5,935

3. Reform Bankruptcy Laws     

Penalties last for 12 years in Ireland Average of 5 years in the EU, 12 months in the UK Non recourse loans – bank can only pursue collateral May encourage more conservative lending May drive up the cost of borrowing

Solutions 4. Mortgage Rescue Scheme  Mortgage to rent - local authority/ housing association takes possession of the dwelling and the former owner rents its out  downward staircasing – part of the equity

5. Sustainable Home Ownership Partnership (SHOP)  



Long term solution devised in the UK Government, lenders and home owners pay into a fund to purchase block instance to pay mortgages in cases of unemployment, illness etc Much cheaper and more comprehensive than commercial insurance