Wednesday, 16 June 2010

Mortgage lending in Ireland has fallen off a cliff

This is a guest post written by Simon Moynihan, Communications Director at

"A bank is a place that will lend you money if you can prove that you don't need it."

Bob Hope could have written that line about lending in Ireland today. With high deposit rates, it’s a great time for savers, but borrowing has become more and more difficult each year since the bust. Customers have known for some time that the game has changed, but many banks still insist that they are open for business and approving large numbers of home loans every day.

A few weeks ago the Irish Banking Federation and PWC gave us numbers that tell a very different story. In their latest quarterly report on the Irish mortgage industry, they showed that mortgage lending is still very much on the slide. In the first quarter of this year, there was less money approved and funded for mortgages than at any other time since the beginning of 2005 (which is as far back as the IBF/PWC numbers go).

In fact, total residential mortgage lending in Ireland was just €1.22bln in the first quarter of this year. That’s a drop of 39% on the same quarter last year, and a drop of 85% on the first quarter of 2006. By anyone’s measure, mortgage lending has fallen off a cliff.

What’s really telling is that only 6,954 mortgages were actually funded in the first quarter of 2010; that’s just 77 per day.

Of the small number of people actually getting loans, most of them fall into Bob Hope’s category of people that don’t need the money. 61% of those who walked out of the bank with a cheque were topping-up, re-mortgaging or moving. Basically people that already had homes – and obviously enough equity to prove that they were worthy of the loans.

Although 35% of those loans were given to first time buyers, it was the lowest number of first time buyers given mortgages since the (IBF/PWC) records began, but still… good to know that there’s some hope for people trying to get their first home.

So what’s going on? Why, when there’s (supposedly) good value in the property market and the banks have been re-capitalised by the taxpayer, are we seeing the lowest number of home loans funded in over six years?

Well, the banks know that lending money for depreciating assets is bad business so they are requiring deposits of at least 8% and as much as 20% from first time buyers. Even in a collapsing property market these are very high ratios, and eliminates a heck of a lot of potential borrowers, most notably first-timers of whom just 29 a day are getting the money they need to get into their fist homes. Then there’s the new and rigorous vetting criteria that potential borrowers have to stand up to including financial inspections, job security checks, proof of savings habits, credit checks and so on.

Next, there’s the arrears issue. Thousands and thousands of Irish households are simply unable to make payments on their existing loans. The Financial Regulator announced a couple of weeks ago that more than 32,000 residential mortgage holders are over three months in arrears and of that number, 22,000 are more than six months behind. That’s a frightening figure because it accounts for more than 1 in every 25 mortgages held in Ireland. It is so much of a concern that Matthew Elderfield, the new head of the Financial Regulator reckoned that mortgage arrears may be “the biggest legacy issue” of the bust.

The arrears story got strong coverage in the press, as it should have. Then Charlie Weston of the Independent did some digging and in a captivating article published on June 2nd he pointed out that that figure for mortgages in trouble is in all likelihood much higher… here’s why:

• There’s another 15,500 householders getting mortgage support from the state.
• Thousands more have had the mortgages re-structured to interest only or the terms have been lengthened to reduce the payments.
• Householders who have lost their jobs are working through their savings to meet their payments.
• More cash-strapped householders have negotiated payments that are a fraction of their standard mortgage payments.

These loans are obviously in trouble but they are not included in the official arrears figures compiled by the Financial Regulator because they are still considered to be performing. When Charlie Weston was researching his article he spoke to Aoife Walsh, a representative of the housing charity Respond, and she reckoned that 70,000 householders could be in, or in danger of default. That’s more like 9% of all residential mortgages in the state, or 1 in every 11.

Next, there’s the government-authorized delay on legal repossessions for all lenders regulated by the Financial Regulator – better known as the Moratorium. Introduced back in 2009, a bank could not begin proceedings to repossess a home unless there was at least six months worth of arrears. This was good news for struggling homeowners of whom we now know there are many, but certainly a time-bomb waiting to go off.

Then in February 2010, Brian Lenihan announced that the Moratorium had been extended to 12 months. It looks like the potential shock of 22,000 repossessions kicking off was just too much for an ailing government to stomach. But doesn’t this reprieve have to come to an end sometime? Or, if the numbers in arrears keep escalating, should we expect to see Moratorium extended again next February?

Throwing even more fuel on the fire, the Irish Times reported that banks like Anglo Irish have begun selling off mothballed apartment schemes at knockdown prices. The first of the schemes to be sold off are in decent locations and serviced by decent amenities, so they should sell – but most likely to investors rather than the first time buyers who could really use them.

Sadly, it’s unlikely that first time buyers would get approval to buy these apartments; after all it’s the banks themselves that are now flogging them off. In addition, selling entire apartment schemes at hugely discounted prices will affect sale prices elsewhere, further depressing the market and making it harder to borrow to buy homes!

So how much have things really changed? Well, in the last quarter of 2005, just as the Irish property market began to boil, Irish banks gave out 8 times as many mortgages to 8 times as many people as they did in the first quarter of this year. Back then, 55,618 residential mortgages were funded in Ireland, which is 605 per day. Their total value was a staggering €10.34 billion. You guessed it – that’s more than 8 times as much money as Irish borrowers received in 2010.

It’s difficult to know when this will turn around, but the signs say no time soon. There’s simply too much pressure on the banks and very little incentive to for them to lend despite catchy claims and ad campaigns. Although we’ll never know the exact circumstances of the 77 people per day that are actually getting mortgages, one could make an informed guess they are seriously financially stable and as Bob Hope says, are able to prove they don’t really need the money.