Research on Non-Performing Loans in the Irish Mortgage Market

Two Economic Letters and one Research Technical Paper by Fergal McCann, published today, consider the ongoing resolution of the non-performing loan (NPL) crisis in the Irish Primary Dwelling House (PDH) mortgage market. Having experienced such an extremely sharp and systemically-important increase in mortgage arrears, the Irish mortgage market has been notable in an international context for the speed with which NPL ratios have been reducing since 2014. The research published today presents a wide range of new statistics and considers a number of factors underlying the aggregate NPL reduction, as well highlighting a number of remaining vulnerabilities.

An Economic Letter entitled Mortgage modification in Ireland: a recent history considers the central role played by mortgage modifications. The key findings are:

• The scale of mortgage modification in the Irish market is larger than previously measured. At the five banks studied, close to 100,000 modifications of a temporary or short-term nature were issued between 2009 and 2016, while an additional 100,000 modifications of a long-term, more sustainable arrangement were also issued (with it being possible for an individual mortgage to be counted in both categories).
• 90 per cent of all loans that defaulted between 2009 and 2016 and had exited default by the end of 2016, did so following modification.
• There was a rapid switch from modifications of a short-term nature to those of a more long-term, sustainable nature post 2013.This is important when we consider that permanent (or longer-term, more sustainable) modifications are associated with higher repayment probabilities than modifications of a temporary nature.

An Economic Letter entitled Borrower-lender engagement during the Irish mortgage arrears crisis looks at the issue of borrower-lender engagement in considering why, despite some progress, mortgage arrears rates, particularly among those in arrears of more than two years, remain stubbornly high in 2017. The key findings are:

• New estimates show that 61 per cent of borrowers in deep-arrears had engaged with their lender by the end of 2016. This figure rose to more than 70 per cent for those with arrears of less than 720 days.
• Unlike engaged borrowers with lower arrears balances, those in deep arrears in the majority received temporary modifications in the past that have since elapsed. This pattern points to the important role of permanent, sustainable restructuring arrangements in the resolution of the mortgage arrears crisis.
• Engaged borrowers are likely to have larger loans than non-engaged borrowers. In general, however, the explanations for non-engagement are likely to be more idiosyncratic and borrower-specific than anything identifiable in the data.

The themes explored in the Economic Letters feature in a wider Research Technical Paper entitled Resolving a Non-Performing Loan crisis: The ongoing case of the Irish mortgage market. The paper identifies a number of vulnerabilities that remain beneath the aggregate picture of falling levels of arrears. The key findings are:

• The entry rate to mortgage arrears in Q4 2016 is at its lowest level since data collection began in 2010. Those entering arrears in late 2016 were predominantly borrowers with a history of previous default experience or mortgage modification.
• 5 per cent of loans that are currently not in arrears and are making full repayments will face an increase in the future due to a move from interest-only to capital and interest repayments. For those loans in arrears that are currently fully paying, around one third will face such an increase in the future.
• Over 260,000 tracker mortgages in the research sample are vulnerable to potential interest rate rises from the European Central Bank in future. For the majority of loans in the data, monthly mortgage payments would increase by between 100 and 200 euro if ECB policy rates were to rise by 200 basis points.

The views presented in Economic Letters and Research Technical Papers are those of the authors and do not necessarily represent the official views of the Central Bank of Ireland.

Library of Economic Letters.

Library of Research Technical Papers.

Explanatory note

Mortgage arrears statistics published by the Central Bank of Ireland measure, on a quarterly basis, the number of mortgages which are currently part of a restructure arrangement. This research diverges from those statistics by capturing not only the loans that are restructured at a fixed point in time, but by also measuring in a cumulative way all loans that have ever received a modification of any form. This means that loans that received a temporary modification that has since elapsed will be included in the measure of “ever modified loans” used in this research.