The banking system is desperately trying to hold back an ever-rising tide of overdue mortgages as high unemployment and increasing mortgage rates play havoc with family finances. Lenders have been ordered by the Financial Regulator to help people stay in their homes, even when they've stopped paying their loans, but how much forbearance can our weak financial system take before buckling?
More than one in 10 borrowers is now in distress, according to the latest quarterly figures on residential mortgage arrears from the Financial Regulator and unofficial estimates by the Irish Banking Federation (IBF).
Around 36,000 households are now more than 90 days in arrears, with two-thirds of that total more than six months behind on their mortgages, according to the regulator.
The IBF is preparing new data on restructured mortgages – loans switched to easier repayment arrangements – showing about 35,000 homeowners in distress but not picked up in the regulator's figures.
Banking sources also estimate another 30,000 or so have missed payments, but haven't yet crossed the 90-day threshold. That puts about 100,000 borrowers out of 790,000 in the troubled category.
The trend is ominous, too. In the last year, 90-day-plus arrears counted in the regulator's surveys have gone from 3.3% to 4.6% of the total. In value terms, mortgages in arrears account for 5.9% of the total outstanding debt compared with 4.5% at the start of the year. Arrears balances stand at €559m, or 8% of those mortgages which are in arrears, according to calculations by Davy.
Yet the banks are doing very little to recoup the money they are losing on souring home loans because the Code for Conduct on Mortgage Arrears prevents them from moving on homeowners who cannot afford to pay. Repossessions have actually fallen in each of the last three quarters.
And the code is set to get tougher if proposals put forward by the regulator over the summer are fully implemented.
"The latest figures from the Financial Regulator confirm that the focus of mainstream lenders remains firmly on forbearance and this is helping homeowners to manage their arrears and to stay in their homes" said Pat Farrell, chief executive of the Irish Banking Federation, in a statement last week.
"IBF mainstream lenders remain committed to doing everything possible to help people with genuine repayment problems."
But the banks' commitment could cost them dearly in terms of bad-debt charges and shrinking margins in the coming years, as arrears are unlikely to peak until after unemployment starts coming down. With the jobless figure holding steady at nearly 14%, according to live register figures published last week, that peak could be a long way off.
"Arrears levels are likely to rise further from here," said Emer Lang, banking analyst with Davy. "[Irish Life & Permanent] reports that early arrears are rising 'more slowly' and is signalling a peak in its arrears at the end of the current year. From a provisioning perspective, the Irish policy of forbearance will elongate the tail of mortgage losses this time around."
While losses for the banks will keep mounting in a 'long tail' scenario, the market is already showing signs that borrowers are building big mountains of debt as a result of forebearance – the balances grow as missed payments pile up and get added to the principal.
"While those in arrears between three and six months grew by 10%, their average level of arrears grew by a massive 44%, from €50m to €72m," said Ronan O'Driscoll, director with Savills Ireland, the real estate services firm.
"This indicates that long-term arrears are a growing problem, with few appearing to recover or escape from the debt once they fall into arrears."
With just 387 repossessions completed in the last year – or slightly more than 1% of distress loans recovered through asset forfeiture – the banks are mopping up very little of the problem, raising concerns that forbearance is only delaying the recovery as the lenders preserve their balance sheets and try to restore their public image.
"How is it that arrears are going up 11% per quarter but we are repossessing fewer houses?" said Karl Deeter, operations manager with Irish Mortgage Brokers. "This isn't a public service. It's political pressure and the realisation by the banks that they don't want to do repossessions for their own good."
A bank does not take a full writedown on a restructured loan or a loan in forbearance, but will take a haircut based on probable loan recovery. With a repossession, however, the bank has to account for the value of the underlying property, which could be worth much less than even a discounted loan.
"This has a number of knock-on effects," he said. "We are not actually dealing with the situation, which kills the property market because we're not finding a clearing price [on houses]. The quicker you reach the bottom, the better it ends."
The regulator's code, however, militates against finding this bottom, as the procedures it puts in place for banks to deal with arrears extends the moratorium on legal action potentially to several years. Each bank now has to have a 'mortgage arrears resolution process' (Marp) for dealing with distressed borrowers. As long as a borrower is engaged in the process, their property cannot be touched. But nobody yet know what to do when forbearance simply doesn't work.
"Forbearance is manageable at the moment," said a senior banking source. "But some people will still be unable to deal with the problem. We still need a process to work that out."
There is a concern that forbearance, then, just stores up more serious problems for borrowers and banks alike, ultimately forcing larger writedowns and defaults in the future.
"Borrowers in arrears will get to a point where they just can't pay what they owe," said one senior bank analyst at a Dublin securities firm. "At some stage you have to make a decision. We're not there yet, but in one or two years you could be looking at 'my Nama' for mortgages."