Modifying Mortgages

The latest mortgage arrears statistics from the Financial Regulator show that 84,941 of mortgage accounts have had their terms modified in some way.  Of these, 40,221 of these are recorded as not being in arrears and 44,720 are listed as being in arrears.  The numbers here are taken from slide 9 from Fiona Muldoon’s recent presentation to the Irish Banking Federation.

It is commonly stated that this means that the almost 45,000 mortgages recorded as being in arrears after a restructuring "have fallen back into arrears" post the restructuring.  There  are many examples of reports like the following:

Furthermore, 84,941 mortgages have been classified as restructured at the end of June, which was a 6.6% increase on the 79,712 restructured at the end of March. Of the total restructured mortgages, 44,720 had fallen back into arrears of more and less than 90 days. The remaining 40,221 were sticking to the restructured terms.

This is not true.  In reality the splitting of modified mortgages in those in arrears and not in arrears tells us very little.  The 45,000 will include mortgages which have fallen back into arrears after a restructuring, but it also includes mortgages that had arrears on them before the restructuring which was not cleared.

If an account is in arrears and the amount of these arrears are not cleared when the account is restructured then the account continues to be counted as being in arrears.  This will be the case even if the borrower fully meets the adjusted payment obligation.  The borrower has not fallen back into arrears; they just have not made good on the arrears they accumulated before the restructure.  This is confirmed in the notes accompanying the release from the Financial Regulator:

Restructured accounts in arrears include accounts that were in arrears prior to restructuring where the arrears balance has not yet been eliminated, as well as accounts that are in arrears on the current restructuring arrangement.

Recent statements from the banks at the Oireachtas Finance Committee indicate that for AIB/EBS and BOI something around 75% of modified loans are performing in line with the revised terms. From AIB:

“Between 69% and 70% of our 33,700 customers who are in forbearance are affording the new restructured loans we have put them into.”

And BOI:

“We have more than 16,000 customers who are currently subject to mortgage forbearance or who have had their mortgages restructured. Our mortgage forbearance and mortgage restructures are based on customers who can meet, in our estimation and theirs, at least the full interest on their mortgages. Some 86% of those customers who are subject to forbearance or restructuring are fully meeting the revised arrangements.”

Between them they account for 50,000 of the modified loans and 37,500 are satisfying the terms of the modification.  All other banks have 35,000 modified loans and 95% of these would have to be underperforming the new conditions if the “fallen back into arrears” description of the Financial Regulator’s statistics is to be true.  It is not and it is likely that 60,000 or so of the 85,000 modified mortgages are performing in line with the revised terms.

That is not to suggest that these modifications will be successful.  Around half of the modifications involve a payment moratorium (4%), a payment less than the monthly interest charge (15%) or a move to an interest-only repayment (35%).  The majority of these borrowers may be performing in line with the adjusted terms but these changes can only be a short-term stop-gap solution. 

These modifications can offer relief to a borrower in temporary difficulty but unless the borrower can resume paying the full interest and at least some capital they will not be effective in the long run.

For borrowers with longer-term problems the forbearance modifications that have to be considered are (in increasing order of effectiveness):

1. term extensions (for those with remaining terms of less than 20 years),
2. interest forbearance (lower interest rates for non-tracker rate borrowers) and
3. principal forbearance (split mortgages with no interest on the shelved portion).

It is noteworthy that the latter two are not in the current list of modifications reported by the Financial Regulator.  The final one has been proposed on here since at least November 2010.  These will cost money but the cost of default would be even greater.  Unless borrowers are put on a manageable path in the medium term of making interest and some capital repayments the mortgage will not be sustainable.

The objective of the restructuring has to be to establish a capital and interest repayment that is below a certain income threshold.  This doesn’t have to happen immediately but there has to be a reasonable probability that this can be achieved. 

There is of course a fourth modification that could be used to reduce the monthly repayment: principal forgiveness.  There has been plenty of other discussion about that one.

If the mortgage cannot be modified to create the reasonable expectation of full interest payments and at least some regular capital repayments in the medium term then the mortgage is likely to be unsustainable.  Such mortgages should be ended via formal repossession or schemes such as Mortgage-to-Rent.  If the banks are left with a shortfall after setting the value of the surrendered house against the mortgage, this balance should be written off after a short period.