Thursday, August 18, 2011

Household Borrowings, Repayments and Debt Forgiveness

There is no doubt that the credit market has slowed to a virtual standstill in Ireland.  This was further emphasised by the mortgage data that was released by the Irish Bankers Federation during the week.  Here are the amounts of mortgages issued since 2005.

Mortgage Lending

In the the second quarter of 2011 just €624 million of mortgage lending took place.  This is gown over 90% from the peaks since in 2006.  This pattern is reflected if we look at the monthly mortgage transactions of the banks’ balance sheets from the Money, Credit and Banking Statistics produced by the Central Bank.

Household Loans for House Purchase (Transactions)

The huge monthly increases up to 2007 are evident.  For more recent times it should be noted that the monthly transactions for mortgages on the banks’ balance sheets are negative.  For the second quarter of 2011 these summed to around €600 million.

Given the new mortgage lending that was issued it is probable that the balance of loans that existed at the start of Q2 2011 fell by around €1 billion during the quarter.  It is also likely that most of this is due to repayments rather than write-downs.  Irish households might have huge amounts of debt but in most cases it is being repaid.

Although we only have figures to the end-of March, the mortgage arrears data from the Financial Regulator show that entering Q2 2011, nearly 90% of all mortgages were being paid according to the terms of the original contract.  Some of these may actually be being repaid quicker than the agreed schedule.

This level of repayment is being reflected in the Quarterly Household Sector Accounts also produced by the Central Bank.  Here are the loans of the Household Sector in those accounts.

Household Loans

Again, the rapid rise in indebtedness is evident, but it is clear than since peaking in 2008 household debt liabilities have been decreasing.  This is because repayments on existing loans is greater than the amount of new loans issued. 

Long-term loans make up 95% of the total with about two-thirds of that again being mortgages for owner-occupied houses.  The same mortgage arrears data linked above show that there were €116 billion of owner-occupied mortgages in Ireland.

Household loans peaked at €203.3 billion in the 4th quarter of 2008.  By the first quarter of 2011 this had fallen to €184.9 billion.  The figures above suggest that this fall continued into the second quarter. Even still the level of household debt in Ireland is significantly above international norms, but it is falling.

There are massive debt problems, private and public, in Ireland.  Most of household debt can be repaid.  Some of it will never be repaid, and this could run to many billions – but maybe the problem is “not enormous ”.

A DEBT forgiveness scheme to relieve homeowners in mortgage distress would cost “in the region of €5-€6 billion”, UCD professor of economics Morgan Kelly has said.

While I am not a fan of widespread debt-forgiveness it is useful to note that the stress tests from last March allowed for about €6 billion of losses over the next three years in the covered banks on owner-occupied mortgages.   Although the precise details are not provided the scheme could be funded with the money already provided to the banks.

Maybe we should keep Prof. Kelly in this relatively good mood but I wonder what will happen when he learns that there is €116 billion of owner-occupied mortgages in Ireland rather than “about €55 billion”.  About two-third of this €116 billion are in the covered banks.

UPDATE: Here are more details of the scheme proposed by Prof Kelly.

“The good news is that if you leave investment mortgages out [of total mortgages owed], which are largely the banks’ problem, and look at mortgages people have on their own houses, there are about €55 billion of these out there,” he said.

“A lot of people can’t repay these mortgages and this is causing people terrible agony,” he said.

Prof Kelly made his estimations based on 20 per cent of people having difficulty paying their mortgages. This was the default figure in Florida where there was a similar housing bubble, he said. He estimated that mortgages would need to be halved on average.

“I would reckon that the ultimate cost of this very useful social programme is something in the region of €5 billion to €6 billion.”

I don’t know where the €55 billion figure came from.  The mortgage arrears data from the Financial Regulator show that there was almost €116 billion outstanding across the 782,00 of owner-occupied mortgages in Ireland at the end of March 2011.

If it is expected that 20% of people will get into difficulty, than that is around 150,000 mortgages.  If these people have have an average mortgage of €200,000 then the forecast is there will be €30 billion of mortgages in difficulty.  Reducing these mortgages by half would cost €15 billion.  This is two-and-a-half times greater than the suggested cost of €6 billion.

There is a bit more on mortgage debt forgiveness in this post.

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