If Government’s bank restructuring plan is to work, we could be facing home *possessions of somewhere between 10,000 and 20,000 homes a year.
Clearing the decks to get banking working again means the inevitability of wholesale possessions and sales will have to be faced up to.
The section in the Central Bank’s “Financial Measures Programme Report” dealing with mortgage loan loss assessment to 2013 starkly points to the sheer number of home possessions and sales required to make banking work again.
Between €3.5bn and €5.7bn of losses were assessed of four banks which have €74bn or 64% of outstanding mortgages. In addition to mortgage losses, the Central Bank assessed non-mortgage consumer loan losses of upwards of €2.6bn.
Curiously unexplained, Bank of Ireland’s figures were considerably lower than AIB, PTSB and the EBS. Either it was a more cautious lender or its figures are being flexed for other reasons.
As total mortgage loans are €116bn, losses could come to between €5.5bn and €8.7bn. Tellingly, last year Professor Morgan Kelly’s predictions indicated losses of €5.8bn.
Since the Central Bank did not translate its euro losses into the number of loans, the full story remains hidden from view. No detail was provided on the model it used to estimate loan losses which probably also estimated the number of expected possessions and losses per loan.
Throughout last year the numbers of troubled mortgages increased every quarter. By December close to 45,000 loans totalling €8.6bn were over three months in arrears. With arrears levels roughly equal to 2.5% of loan balances, it’s a critical stress threshold beyond which possessions become inevitable.
The Central Bank mentions that Britain’s possession experience was considered in assessing loan loss. If British experience applies then we could expect about 9,600 possessions or 3,200 a year. But any comparison is tentative as the numbers of loans in arrears were 3.8 times higher than in Britain at the end of 2010. And while British arrears were declining, ours were increasing throughout last year.
While stress test experts, Blackrock used a loss assessment model driven by negative equity, the Central Bank’s assessment was directed by household income predictions. Declining affordability drives the numbers of troubled loans and underlying property values will drive loan losses on these troubled loans. Worsening affordability and loan to property values means larger losses. By stalling possessing and selling today, forbearance increases losses.
What does this mean? The Central Bank’s three year loan loss assessment hints at how many homes will need to be possessed and sold off. In a forced sale and credit crunch environment, realised prices will be lower than current market values. Elsewhere “forced sale” discounts are between 20% and 40% of current market values. It’s not clear if the bank factored in the discounts needed to offload large numbers of possessed homes.
Using Central Bank arrears data and loss estimates, it’s possible to form a view of what the numbers of possessions will be. Estimating the loss per loan using both arrears data and loan loss assessments, under its base case economic scenario the possible number of possessions required to clear the decks comes to 59,000 from now until 2013 which is 19,600 a year for three years. It’s clear that as the number of houses in possession last year was only 585, forbearance has built up a mountainous volume of possessions that must now occur.
Putting it all together, at the very least 10,000 possessions a year would be needed to clear banks loan books on British experience. Factoring in anticipated Irish experience, possessions jump to 19,600 a year.
Inevitably property bubbles and bank crisis can only be solved by possessing and selling off houses people can no longer afford. If Government’s bank restructuring programme is to work, the current mortgage forbearance policy which was designed to hide the true scale of bank losses will have to end.
But the state has no mechanism to work out the scale of possessions required. In most cases the residual loan left after a house is possessed and sold will simply have to be written off as uncollectable. Any possession scheme must deal with the reality that as banks crystallise their losses, people will have to be given the chance to earn debt forgiveness.
Until now previous government policy was to forestall the inevitability of wholesale possessions. That policy will now have to change. Government’s plans to introduce a meaningful personal debt forgiveness regime and fairer bankruptcy laws will also have to provide for an effective and fair mechanism to deal with the scale of possessions needed if its bank restructuring programme is to work.
*possessions is the technical term for repossessed homes
A version of this article appeared in the Irish Examiner, Business Section, Monday 4th April 2011.
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