Irish Mortgage Arrears and Strategic Defaulters

In July, Permanent tsb sold a portfolio of around 10,700 residential mortgages. According to the bank 2,500  of these borowers were not co-operating and a further 3,850 had failed or refused treatment, which raisies the issue of strategic defaulters or debtors who won’t pay as opposed to being unable to pay. How big is this cohort and how significant are they in the context of Irish arrears?

Mortgage arrears in Ireland  are extraordinarily high by international standards but have been falling steadily for some time now. The number of PDH loans in arrears for over 90 days peaked at just shy of 100,000 five years ago, equivalent to 12.9% of outstanding  PDH mortgages, and according to the Central Bank the latest figure, for q2 2018, was  46,000 or 6.3%.

What determines arrears? We have developed a model in which PDH arrears are positively related to unemployment (affecting the borrowers income) and  the mortgage rate (over 80% of Irish mortgages are on a variable rate)  and negatively affected by the trend in house prices, which presumably is picking up an equity affect.

The chart illustrates the model results and the actual level of arrears. Rising unemployment and falling house prices combined to drive arrears higher from 2009 onwards before reversing course as the labour market improved and house prices began to recover. Those factors are still in place and so the model is continuing to predict lower arrears, although it is also clear that over the past few years there is a systematic error , in that arrears are running consistently higher than the above fundamentals imply.

Of course mortgage loans are secured and the level of arrears will be affected by the number of repossessions , which are also extremely low in Ireland relative to the level of non-performing loans. In fact PDH repossessions are falling and those stemming from a court order (as opposed to a voluntray surrender) peaked three years ago, declining to an annual 439 in q2 from well over 700 in 2015.

Our model predicts an arrears  figure of 32,000 for q2 this year, which is 14,000 below the actual outurn. The implication is that arrears should be falling faster given what is an extremely favourable  economic backdrop, implying a more intractable problem and also picking up some degree of strategic defaulters.