Updated: Wednesday, 10th March, 2010 4:40pm

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Regulator's figures understate households' real mortgage debt problems

Eamon Quinn.

Putting it mildly, banks are not being very upfront about reporting the looming problems on their loan books. But when it is also in the interests of Government politicians to obscure the true picture, then there is little chance of anyone solving the problem.

Something of this game is being played out between the banks and the Government in under-reporting the figures of the numbers of people facing hardship in meeting their monthly mortgage payments. The Government, at a minimum, can expect the banks to do all they can to help people whose income, having collapsed because of unemployment or lost wages, can no longer pay the full amount of their mortgage payments.

The banks have trumpeted their so-called policy of forbearance. Debt counselors such as the Money Advice and Budgeting Service (MABS) from their network of over 50 offices and mortgage brokers advise stressed borrowers, with their help, at an early stage to negotiate with their lenders. Typically, renegotiation leads to the distressed mortgage-payer being switched onto interest-only payments or to the lengthening of the mortgage terms.

Last week, the Financial Regulator published the latest figures it collects from the banks on the numbers facing arrears. The mortgage banks told the regulator that, at the end of last year, 28,603 mortgage-holders, or 3.6 per cent of all the 793,000 private home mortgages in the Republic, had skipped three or more monthly payments. The outstanding arrears of these home loans amounted to €5.3bn, or 4.5 per cent of just over €118bn loaned out to all home-owners.

The arrears figures show that the numbers have increased only slightly from the 26,271 accounts, amounting to €4.8bn of mortgage debt, the banks said were in arrears at the end of last September. Everyone knows that the figures understate the real mortgage debt problems facing Irish households. Many more than 28,603 households face difficulty with their mortgages because the figures fail to include the estimated 35,000 struggling households who have been switched to interest-only payments or have had to renegotiate their mortgage terms with the banks in other ways.

Combining the numbers of those in arrears and the accounts under active management, the mortgage brokers estimate that over 60,000 households are facing difficulty paying down their mortgage loans. The figures suggest that as many as 200,000 adults and children are facing mortgage debt stress. Now, that is a big number, which would more accurately reflect the fallout from previous housing busts in other countries.

The Irish Bankers' Federation, which represents the lenders, would have you believe that, but for the goodness of the lenders and their selfless policy of forbearance, that many more people would be facing mortgage debt stress. Forbearance also suits the Government because it gives the illusion that it is being tough with the banks. It also keeps the true hardship of mortgage debt out of the headlines.

For the banks, there are many reasons to follow forbearance, not least because it defers having to deal with the bad home loan debts on their loan books. Forbearance, therefore, suits both Government and the banks. Switching to easier terms and interest-only payments, however, does not extinguish the debt facing households. It only helps the banks not to have to realise the losses on their loan books until some time into the future.

Not recognising the losses means they do not have to write off and raise precious capital to fill the holes in their mortgage books, at least not immediately. It suits the Government, too, because pushing the mortgage debt problem into the future helps it to firefight the problems of having to pump more taxpayers' cash to fill the commercial property loans on the banks' balance sheets.

It may not be recognised on any official tally, but the hardship of 200,000 people living in households facing some sort of mortgage debt stress does not go away. Mortgages are aptly named because the debts follow the borrower to the grave, even though the value of the home plummets. Unlike several states in the United States, home loan borrowers here have no access to non-recourse loans and cannot return the keys to the lender and extinguish their debt.

Brokers and debt counselors dealing with the banks on behalf of stressed borrowers tell of the strain that continues to face home borrowers. Even meeting interest-only payments remains a huge burden. Paying interest-only means the debt is never extinguished. Combined with negative equity, it also prevents people from selling and moving on, even though their family circumstances may have changed.

Householder debts will likely drag on the economy. It makes it less likely that a recovery in consumer spending will occur. It would be a start if the banks had to publish all the arrears figures, together with the number of people who have switched to interest-only payments and renegotiated their loans in other ways. It should never again be left to the banks themselves to decide the level of figures they wish to publish.