Keeping the vultures at bay
Posted on June 23, 2017 by Tom Healy
The loss of a home and homelessness must be among the most stressful events in a person’s life. The stories of evictions from cottages and land in the 19 th century still evoke feelings of intense shock and outrage. How could this have happened in a colony of a ‘civilised empire’? Vast improvement in economic and social well-being have characterised Ireland in recent decades. A limited degree of economic sovereignty was achieved and then pooled (some might say lost) again.
The high-tide of global financialisation in 2007 left the Republic of Ireland (and the United Kingdom) exposed to huge levels of private indebtedness. Banking bad indebtedness was largely socialised while an economic meltdown triggered public deficits and rising public debt. We, all, know what followed. Some institutional and individual investors were bailed out; others were burnt; the responsible persons and officials largely walked away with no penalty and many thousands of families and businesses picked up the tabs in terms of lost income, lost work and in a relatively small but devastatingly horrendous loss of homes. In any culture and at any time there will be those who play the system by means of strategic default. However, it is likely in the absence of contrary evidence that a large majority of mortgage defaulters especially those with mortgages on a principal dwelling home(PDH) are not strategic defaulters but people who unknowingly took on a lot of debt at the worst possible time when most economists were predicting a ‘soft landing’ in terms of asset and house prices.
To date, repossessions have been small relative to the total number of mortgages in arrears. However, the trend has been upwards to a point where, on average, 30 repossessions on PDH’s were made per week in the final quarter of 2016 compared to 9 per week in late 2012.
On 31 st March this year, there was a total of €8.8 billion is outstanding balances on mortgages in arrears for more than a year on PDH’s covering 41,000 accounts in total (Central Bank of Ireland data). The total in arrears on PDH’s came to €2.6 billion. In March of this year, PDH accounts in arrears for more than a year made up 5.6% of all PDH residential mortgage accounts.
Chart 1 shows the growth in repossessions since 2009. There has been a slow, steady growth in the rate of repossessions even tough, thankfully, the rate is modest relative to the total number of mortgage accounts in arrears more than a year which is shown in Chart 2. The data indicate a modest decline both in the absolute numbers as well as in the proportions of arrear accounts of more than one year. Still, the absolute number and proportion of such arrears is very high and not dramatically lower than was the case in 2012.
It should be noted that there were 121,000 restructured mortgages in March 2017 (or 16.5% of all PDH accounts).
With the impending sale of AIB shares and the entry of various financial interests including various ‘Vulture Funds’ with an interest in buying and selling debt including mortgage debt we may be looking at a different scale of repossessions in the not too distant future. This is not to suggest that Vulture Funds will necessarily capture AIB shares and drive AIB lending policy. The Troika, when they were more at large in 2010-2014 often pointed to the unsatisfactory scale of effort, as they saw it, on the part of banks to deal with ‘non-performing loans’ (code for getting tougher with debtors and repossessing where necessary). Matters have moved on as house prices are now rising at a fast rate (but levels are still below 2007 peak values) and as AIB is about to be partially sold to private investors. We can expect a more aggressive stance on the part of AIB and other lenders as they seek to enhance their attractiveness to large investors. Part of this long-term goal is to demonstrate a greater toughness (ruthlessness?) in addressing bad debt. As matters stand, vulture funds have already entered the mortgage market in Ireland and this presence is growing significantly.
A sensible solution to the crisis facing distressed mortgage holders seems to be signalled in the cross-party National Housing Co-op Bill (2017 ). The Bill provides for the establishment of a provident society to acquire, from the banks, mortgages in arrears for a long period of time. The idea is to enable distressed mortgage holders to move to a situation of renting while remaining in their homes. The idea would also be compatible with a ‘split-mortgage’ arrangement where part of the mortgage is parked while repayments are made on the other part. One way of looking at this is to say that Vulture Funds moving into the Irish mortgage market are replaced by a Co-operative which seeks to work out bad loans in a way that ensures people can stay in their homes while most or all of the original loan is paid back over a longer period. It would not necessarily follow that the new entity would cost the Exchequer anything since it could be self-financing over time. A good case could be made that the alternative of having people evicted and made homeless would cost the State much more in terms of rent support and other measures arising from the crisis in housing.
A report of a recent Oireachtas hearing on the Co-op Bill is available here .
Start-up funding for the proposed Co-Op could be in the form of long-term loans at low fixed interest rates via EIB or ECB and with the NTMA acting as an intermediary. The Society could work with a new Housing Company of Ireland if such were established as suggested in a recent NERI Working Paper ( Ireland’s Housing Emergency: Time for a game-changer )
The inter-linked topics of vulture funds, public bank sales and risks of homelessness is timely as we approach another National Economic Dialogue on 28-29 June.
The taxpayer contributed large sums of money to the National Pension Reserve Fund in the years leading up to 2009. Part of that money was used to rescue AIB (with over €20 billion going to this bank, alone). Now that part of AIB is to be sold (it would be better not to sell any part of AIB but to have turned it into two new entities for public retail banking and non-speculative investment banking) we might wonder what could be done to tackle the root cause of the crisis in housing (supply)?
An editorial in the Sunday Business Post on 18 June 2017 expressed matters very eloquently:
The money will not be used to build houses, schools or hospitals. It will not go towards rural broadband or transport infrastructure. It will not go towards any capital infrastructure. Instead, at the behest of Europe, it will go towards reducing our national debt.
The editorial goes on to state:
It remains unclear if the government even asked for a derogation from the AIB share sale proceeds.
This is unwise.
The proceeds of the AIB sale should go into cost-saving and productivity enhancing measures such as housing, transport and services. Wisely invested, the money could make a difference to the quality of life of hundreds of thousands. If, as it is argued, use of the proceeds would run counter to EU fiscal rules then these rules have to be questioned. Ireland has a number of choices:
- It could break the rules and seek forgiveness afterwards just as France is doing and Germany has done more than once in the last two decades (however it is doubtful that a small country would get away with this given the suppression of the principle of ‘each for all and all for each’ underlying the EU project and its replacement by inter-governmentalism by a few large Member States).
- It could join with other EU member states and/or the European Commission to seek greater flexibility in the application of the rules in regards to capital investment.
- It can play 'the best pupil in the class' and self-immolate.
To use the proceeds to write-down debt (effectively to borrow a bit less than would otherwise be the case) makes no sense. To not borrow through means of 25- or even 50-year bonds at current exceptionally low rates of interest on international markets in order to invest in vital infrastructure makes no economic sense. To seek a 45% debt to GDP ratio in the 2020s makes no sense either. This is self-immolation which goes beyond the strict requirements of the EU debt brake rules. During his campaign for leadership of Fine Gael, Taoiseach Leo Varadkar stated that he would prefer a 55% target in the mid-2020s. This is to be welcome as it, potentially, opens up an additional €40 billion in public investment (or current spending on front-line services) over a period of 10 years. Perhaps we can look forward to a programme of investment in community health care and step-down care centres for our ageing population? This could save a lot of money on our health system in the next ten years.
Memo to the Taoiseach:
- Fix housing and you fix a lot of problems – this will take 10 years at least.
- Keep people in their homes and you avoid a lot of extra spending later on.
- Think again about allowing public spending to decline to one of the lowest % of GDP in the OECD.
Ireland needs a reformed and more accountable public service. It does not need a smaller public service.