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Posts tagged ‘Irish economy’

Ronan Lyons spin on Housing stats

Nobody knows at this juncture the scale of the losses for bank balance sheets from mortgage write-downs. But the EU-IMF deal had to set aside a certain amount for contingencies relating to future losses – including those from mortgages – and chose €25bn. This post attempts to shed some light on the potential scale of mortgage write-downs. Given that purpose, it almost completely sidesteps the broader economic and social impact of negative equity, arrears and repossession, not because these are not important topics, but because they are worth their own research, not as sidepoints in a discussion about bank balance sheets.

The Morgan Kelly question: three types of bank assets

Morgan Kelly has been the most vociferous on the apparent “time bomb” for banks in Ireland’s mortgage arrears. His estimates stem from his “realistic loss” scenario, published on the Irish Economy website in May, where he estimated that of €370bn in all lending by Irish banks, a figure that includes loans abroad, €106bn would be lost. In truth, his estimate is driven almost entirely by Irish bank lending within Ireland, so he is predicting bank losses of €100bn off a loan book of €235bn.

Based on these figures, he then wrote an article in early November, entitled “If you thought the bank bailout was bad, wait until the mortgage defaults hit home“. One could legitimately assume from this that if losses from loans that went to NAMA were bad, those from mortgage foreclosures would be worse. Indeed, this was the general conclusion: this is an article that spooked markets around the world. I know, as I was out of the country at the time and saw the immediate reaction from a non-Irish perspective.

Given that Morgan has been right on so much over the last five years, including his prediction in that very article that Ireland would need an EU-led loan, is there nothing to do now but brace ourselves for the mortgage arrears time bomb that will surely make the bank bailout look like peanuts? To shed some light, it’s worth thinking about three main types of bank asset and therefore three main types of potential losses: NAMA, arrears and SMEs.

  • NAMA losses are losses from big property speculation. Irish banks lent out about €100bn in large chunks (i.e. typically more than €5m) for land and development which is now falling under NAMA’s remit.
  • Arrears losses will stem from residential properties that the banks have to foreclose and sell for less than the mortgage outstanding. Total residential mortgage lending in Ireland stands at about €115bn.
  • SME losses are where small businesses go under and banks have to take their place in the queue to get money out of the assets that are being liquidated. Corporate lending in Ireland stands at about another €100bn.

On the face of it then, it seems reasonable to say that if we’ve been focusing almost exclusively on the €100bn or so in NAMA-related lending, then the €100bn or so in mortgage lending is indeed an elephant in the room. (I will have to leave for the moment the issue of SME losses, both because I’m not an expert on that issue and because that was not the focus of Morgan’s article.) On NAMA losses, banks face somewhere in the region of €40bn of losses on NAMA-bound properties, in round numbers and allowing for past efforts at external recapitalisation.

Estimating the number of borrowers at risk

Is this €40bn in bank losses from land and development going to be small compared to the losses from bank balance sheets due to mortgage arrears? Suppose there are three types of people with mortgages: (1) new borrowers, with large debt which more than likely swamps their equity, (2) old borrowers, with small amounts of debt and (relatively) large amounts of equity in their homes, and (3) topper-uppers, who are probably in the main similar in profile to old borrowers. The risk category for banks is almost exclusively new borrowers, because it is unlikely that they will have to repossess the homes of old borrowers or of topper-uppers, and if they do, the equity in the house will very likely cover the debt.

So how many new borrowers are there? To be safe, we should assume that anyone who has borrowed since 2003 is at risk, whether they are first-time buyers or not, apart from topper-uppers. Why since 2003? If prices fall 55% by 2012 – which may just be enough to bring the rent-price ratio back to normality – prices will be back at levels seen in 2000, broadly speaking. This is about 20% below 2002 levels, so if someone who bought in 2002 had to sell in 2012, they could, as on average they will have paid off about 25% of the principal by then. By looking at quarterly IBF data, which go from 2005, and a similar Dept of the Environment series, it is possible to estimate there have been about 435,000 borrowers since 2003 who are either first-time buyers or mover-purchasers. This is out of a total of 800,000 mortgages.

In truth, given the loan-to-values and outstanding debt involved, it’s reasonable to think that 2003 and 2009 borrowers are of different types to their 2006 and 2007 counterparts. Using a combination of IBF, Dept of Environment and county-level Daft.ie data, it’s possible to estimate the number of households in negative equity. If house prices fall 55% from the peak, about 330,000 households would be in negative equity, compared to about 200,000 households now, including two thirds of all 2006-2007 borrowers and more than half of 2004, 2007 and 2008 borrowers.

But even then, we can’t just multiply 330,000 by, say, an average mortgage of €200,000 and assume that €65bn of the mortgage loan book is at risk. Many of those borrowers will remain employed and – perhaps grudgingly but consistently – pay off their mortgage each month. They may represent a threat to economic growth, as people feel less wealthy when their homes are worth less, but such households are not a threat to bank balance sheets.

Estimating how much of the loan book is at risk

Instead, we need to look at the proportion of negative equity households at risk of foreclosure, i.e. where circumstances such as unemployment lead not just to arrears and Court proceedings but ultimately foreclosure. The first step is to look at mortgages in arrears: there are currently 40,000, a figure that may rise to 100,000 in a pessimistic scenario. With an average mortgages of €200,000, this suggests that a maximum of €20bn of the mortgage loanbook is at risk.

(sorry Mr.Lyons even Brian Cowen acknowledges that 70,000 are currently in arrears and the average amount is more like 260,000 not 200,000)

Even then, the underlying asset, the house, will not have lost all its value. Very few properties would have only get half their loan-value back, the back of the envelope figure that Morgan uses. For this to be the case, the average borrower would have to have bought at the peak with a 100% interest-only mortgages. This is not the average – this is the upper bound. A more reasonable rule of thumb is that banks will recover two-thirds of loan value on average. So the upper bound in mortgage-related write-downs is now perhaps €7bn.

This figure still needs to be scaled down again, not just to reflect the fact that not everyone in arrears of less than 180 days progresses to deeper arrears, but also to reflect that not everyone  in six months or more of arrears has their home repossessed. At the moment, about one in four mortgages in arrears goes from the 90-180 days category to the 180-days-plus category. This may rise to one half over time, as people run out of outside options, but I’m not sure anyone is actually going to predict anything like 50,000 mortgages having Court Proceedings issued.

Currently, repossessions are running at a rate of about 300 a year. This will almost certainly rise as some of those currently scraping by fall victim to the ongoing recession and as the moratorium on repossession passes. But are we seriously expecting an average of 5,000 repossessions every year from 2011 to 2020? Suppose repossessions instead jump from 300 this year, to 1,500 next year, 5,000 in 2012 and 2013, and then falls back gradually to about 500 by 2020. That would be a calamitous scenario for all those affected. But what would it mean for the bank balance sheets? The graph below recaps the figures discussed in this post. The punchline is that repossession of 20,000 homes and their resale by banks for two-thirds of their loan value would mean balance sheet losses in the order of €1.3bn.

sorry again Mr.lyons but even the banks themselves expect multiples of this figure and we all know that the figures they themselves have given have always turned out the be to low ! 

stop trying to flog more overpriced houses !

Totals associated with mortgage lending and a scenario for mortgages Totals associated with mortgage lending and a scenario for mortgages

This is a far cry from claims that mortgage arrears will cast losses on banks that will make NAMA look like a sideshow. You could be three times as pessimistic about the number of repossessions and more cautious about final values and still struggle to get above €5bn in bank losses. You might even somehow be able to construct a case that I’m out by a factor of 10. But I struggle to see how someone could make the case that the figures above are out by a factor of 50, let alone 100.

Morgan’s article is full of depressing vistas: a “torrent of defaults”, a “social conflict on the scale of the Land War” and the rise of a “hard right, anti-Europe, anti-Traveller party”. Perhaps I am young and naive, or excessively fond of the Simpsons, but this reminds me of an exchange in the Simpsons, where TV host Kent Brockman asks his expert guest: “Hordes of panicky people seem to be evacuating the town for some unknown reason. Professor, without knowing precisely what the danger is, would you say it’s time for our viewers to crack each other’s heads open and feast on the goo inside?” To which the Professor responds: “Mmm, yes I would, Kent.”

That is perhaps the point. By basing his predictions for losses on the idea of 200,000 mortgages hitting the wall, Morgan is making a social prediction – i.e. that people will lose faith in society and all hell will break loose – not an economic one. He may yet be right, but if all social fabric is rent asunder, then probably most economic bets are off.


But wait a minute Finfacts don’t agree with your figures

Irish non-financial sector credit including residential mortgage lending outstanding continued to fall in April
By Finfacts Team
Source: Central Bank

Irish non-financial sector credit (NFC) credit, excluding valuation effects and the impact of transfers to the State toxic property loans agency NAMA, fell again in April, but at a slower pace than previous months so far in 2010. Residential mortgage lending outstanding (including securitised mortgages) declined by €348 million during April, bringing the annual rate of change in residential mortgage lending to minus 1.6 per cent.

The Central Bank said today that net flow of credit transactions during the month was just minus €109m (0.1 per cent), compared with minus €1.3bn (0.9 per cent) in March and minus €842mn (0.6 per cent) in February, implying repayments continue to exceed new lending. NFC credit outstanding on the aggregate balance sheet of Irish resident credit institutions was €134.2bn at end-April 2010, down from €139.5bn at end-March, with the transfer of loans to NAMA and an increase in impairment provisions accounting for almost the entire decline in outstanding amounts. The annual rate of change in NFC credit was minus 4.5 per cent in April, following a 4.6 per cent annual decline in March and a 3.6 per cent fall for the twelve months ending February 2010.

Residential mortgages (including securitised mortgages) declined by €348m during the month, and stood at €146.1bn at end-April 2010. The annual rate of change in mortgage lending fell to minus 1.6 per cent.

Then today we have this in the  Irish independent

By Emmet Oliver Deputy Business Editor

Tuesday December 14 2010

Ireland‘s economy will shrink again next year and unemployment will head toward 16pc, a gloomy report on the country’s prospects from Ernst & Young has said. Further austerity measures may be needed, it says.

While the Department of Finance expects growth of 1.75pc next year, the global accountancy company is forecasting a contraction of 2.3pc in terms of GDP.

The Government’s projections were “overly optimistic” and further austerity measures would be needed to rein in the deficit, the company claimed.

While the Government is expecting average growth of 2.75pc between 2011 and 2014, Ernst & Young estimated growth of just 0.8pc was more likely.

The company said it would be a challenge for the Government to fix the banks once and for all and to also control what it called “civil unrest”.

Early elections may delay the latest cuts and tax increases and a new government “may even back away from some of the announced measures”, claimed Ernst & Young.

“These factors increase the likelihood of some form of debt restructuring by the Government and banks,” claimed the company in an analysis included in its eurozone outlook.

It said the recent €85bn IMF/EU package does end uncertainty for Ireland, but final tests were needed to see what the banks required in terms of extra capital.


Eventually Ireland should bounce back and become one of the fast-growing economies, but Ernst & Young sees major challenges before this happens.

“This seems a long way off and the Government and economy will have to overcome numerous hurdles,” it said.

The key plank of the company’s outlook is that consumer spending will not recover in the way the Government expects.

“The main drag on Irish GDP growth in the next two years will come from domestic demand,” it said.

Ernst & Young said this demand would be hit by a range of factors, including the austere budgets, but also by the scale of migration from the country and a likely rise in interest rates. The company pointed out that those leaving would be bringing with them skills and purchasing power.

“As such we do not expect the domestic economy to recover until a number of years into the fiscal adjustment cycle and until after the banking system is restored to health,” it said.

Ernst & Young wondered whether the €35bn of funding earmarked for the banks would be enough. “This will depend on the results of banking tests and stress analysis,” it said.

Extra austerity measures may be needed if the deficit reduction plan goes off track.

now look at figures from the USA

Cascading home values after an era when lenders let borrowers buy homes or refinance old loans with little or no downpayment has created a large class of property  powners with “negative equity” — a polite phrase for having a mortgage bigger than the home’s worth. (Less polite? “Under water” or “upside down” mortgages!)

According to number-crunching CoreLogic, 17.5% of Orange County homes with a mortgages — or 98,518 residences — were in a negative equity position in the third quarter. Yes, that means roughly 1-in-6 O.C. mortgages are bigger than the value of the real estate collateral behond the loan. Another 4.1% of homes with mortgages, or 22,942 residences, were “near” negative equity. (That’s within 5% of negative equity.)

So, all told, 21.6% are underwater or nearly upside-down locally. As bad as that sounds — and it’s not pretty — we offer some comparisons:

  • 22.5% of all U.S. homes with mortgages were in negative equity territory with an extra 5% of residences near negative equity. That’s 27.5% combined!
  • 32.8% of California residences are in negative equity; another 4.1% are near negative equity. Combined: 36.9%.

And the local trend itself is a tad encouraging:

  • In 2010’s second quarter, 18.1% of homes with mortgages were underwater; 4.1% were near negative equity. Combined: 22.2% — slight higher that Q3.
  • In Q1, negative equity rate was 19.2%; near negative equity was 4.1%. Combined: 23.3%.
  • In 2009’s fourth quarter, negative equity rate was 20%; near negative equity was 4.1%. Combined: 24.1%.

Mark Fleming, chief economist with CoreLogic, on the national scene: “Negative equity is a primary factor holding back the housing market and broader economy. The good news is that negative equity is slowly declining, but the bad news is that price declines are accelerating, which may put a stop to or reverse the recent improvement in negative equity.”

Last lets take a look at the UK

Home owners face repossession amid struggle to sell properties

Home owners are falling behind with their monthly mortgage payments at an alarming rate, charities warn, as estate agents reveal the struggle to sell properties.

Home owners face reposession amid struggle to sell properties
Home owners face reposession amid struggle to sell properties 
Myra Butterworth

By Myra Butterworth, Personal Finance Correspondent 7:00AM GMT 14 Dec 20101 Comment

Almost a million households are in arrears with their rent or mortgage, twice as many as a year ago, according to homeless charity Shelter.

Charities warned numbers would rise in the New Year and that those with children are most at risk of falling behind with their basic housing costs.

Campbell Robb, chief executive of Shelter, said: “Every two minutes someone faces the nightmare of losing their home and this research paint a disturbing picture of sharply rising numbers of people who face a daily struggle just to keep a roof over their head.


So what does this all mean well I would be of the opinion that 4.5% impairment provisions by the banks are woefully inadequate and a provision of 12% would be more like what is needed?

In every other country the average impairment on mortgages is in the area of 10 – 15% why would Ireland be different?? I’m sticking with Morgan Kelly he has a better track record that you Mr.Lyons  


If you lie down with dogs…………………

A little Latin lesson : pari passu and primus inter pares. What’s the Latin for “taking candy from a baby”?
namawinelake | October 3, 2010 at 9:19 am | Categories: Irish economy, NAMA | URL: http://wp.me/pNlCf-El

Yesterday saw the unedifying spectacle of Russian privatisation oligarch, owner of Chelsea football club and yacht-cruising, model-dating Roman Abramovich’s investment vehicle Millhouse LLC fire a shot across the bows of Ireland’s Department of Finance in respect of their holding in troubled Irish banks’ bonds – “we are fully prepared to vigorously defend our position using all possible legal means” acording to Reuters and Bloomberg. Roman Abramovich is of course no idiot despite the financial burden of supporting loss-making Chelsea. He is by all accounts a financially astute operator who learned the ropes of economic life the hard way on the streets of Moscow in the 1980s and during his campaign for control of Russian oil giant Sibneft. His managers at Millhouse are no doubt as astute. The fact that the funding of subordinated bondholder debt will come out of the pockets of Irish citizens does not and should not affect their judgement.
The disputed hullabaloo on Thursday when Minister for Finance Brian Lenihan was reportedly heckled by a bunch of balubas (no disrespect intended to the good people of central Africa, it’s just a known expression here after a politician used it in the 1960s) seemed to show that subordinated debt holders in troubled Irish banks were distinctly unhappy with the prospect of ceding value in their investments.
As for the Latin, you’re likely to hear a lot of the first term, pari passu, in the coming weeks and it means literally “equal footing” but is commonly seen in the expression “X ranks pari passu with Y”. In the case of Ireland, the expression will be seen in the context of our troubled banks’ creditors – depositors, subordinated (or tier 2 or junior) debt holders, senior bond holders and central banks’ funding. All four classes of creditors it is argued by the bondholders rank pari passu or equally with each other, so you can’t “burn” one without “burning” the other. So if the holders of subordinated debt (€3bn worth at face value in Anglo and INBS) don’t get their investment back then depositors should also be “burned”, so Granny O’Reilly should lose his life savings. Separately if the senior bondholders (not identified but supposedly includes your credit unions and pension funds as well as “foreign” investors) get burned, then Ireland must accept the ignominy of being labelled dead beat sovereign debt defaulters and consequently the government won’t be able to borrow.
Another Latin term is primus inter pares or “first amongst equals”. I don’t know of a country that does not, to some extent, guarantee deposits in its banks – the figuring is that the special guarantee of deposits avoids runs on the banks which is good for society.
And on this Sunday, there is an increasing clamour for the Minister for Finance to justify his position that subordinated debt bondholders will get paid anything and why he does just tell them to go sell their certificates on ebay (they might have value in the historical sense of being tied to the one of the world’s worst financial crises) because that’s the only way they’re going to get any return. On Friday last, our friends in Brussels gave the green light to Denmark for the orderly winding up of several failed banks and the approval distinctly stated “burden-sharing is ensured by excluding shareholders and subordinated debt holders of the failed bank from any benefit from the aid”. Now €3bn in subordinated debt may not be a great sum in the context of our bailout but now more than ever when such huge relative sums are being kicked about, must we be most alert to value for money. In a couple of months we will be risking civil unrest with a €3-4bn cut to our budgets – €3bn is a very significant sum.
And as for taking candy from a baby and tying the entry into NAMA : remember the Irish Glass Bottle factory site in Ringsend, the one we (through the Dublin Docklands Development Authority) together with a consortium of developers bought for €412m in 2006? The freeholder was also the State (Dublin Port Company) and yet the State has received €15m in net terms. And the lease? The lease was worth €20m in 2002 and yet the leaseholder walked away from the deal in 2006 with €274m. Why? The leaseholder controlled by Paul Coulson apparently recognized a deficiency in our leasehold law that allowed him to force the freeholder to sell the freehold to him for a relative pittance. Taking candy from a baby indeed

Comment .

If you lie down with dogs…………………

If you lie down with dogs you cannot complain about the flees
These guys are well used to having their “Investments go sour and that is why they get such extordrandry high interest rates.
Take a look at what the banks are paying you for any funds you are holding in your account, a big fat nothing.
in fact it is costing you to keep your money in the Irish banks at the moment and this group of bondholders are getting 6.8 % ,A sum I would love to be getting and without any risk ,there is nowhere else in the world you will get this sort of return believe me.
As someone that has been in the markets you must be prepared to lose on some investments and that is why the interest rate is so high on risky investments. But it is also standard practice to insure yourself against default, in the market it is known as “Hedging” and no serious player would in to-days market be in the bond markets without using such tools.
In this particular case the (“Reference entity” in financial jargon) is in fact the subordinate debt holders of Anglo Irish ,they have done extordrandry well, in fact I would go further they hit the jackpot, as investors they would have had there investments insured with financial instruments called Derivates and in this particular case they would have used CDS (Credit Default Swaps) not only are they getting paid interest on practically worthless paper ,that they would have sold on and would now be netting huge windfall profits as a result of the negative direction they have gone
In a nutshell they would be betting that this stuff will at some time in the future default.
In the US most of these kinds of financial instruments were devised by the world’s largest financial institutions such as Goldman Sacks Citi Group Morgan Stanely etc and they have gotten into huge trouble by selling one position to some investors and then proceeded to take up opposite positions against these same investors.
My point is that bondholders like this Roman Abramovich and his investment vehicle Millhouse LLC would more than likely have themselves “Hedged” and if they did not avail of this financial Insurance then it’s like someone not insuring their house against fire
So Mr. Roman Abramovich where is your fire insurance, you are not going to tell me you were too poor to take out insurance?
If you are in the kitchen don’t complain about the heat!
Please also note that this side of the market (trading in CDS is not regulated and you could be buying anything and only people with vast amounts of money trade in such instruments. This kind of trading is not for the ordinary Joe soap and is full of sharks that will eat you up and spit you out.

Have a nice Sunday

Unelected Taoiseach Cowen

Unelected Taoiseach Cowen  

 has criticised what he called the pervasive negativity in the media about the Irish economy.

Commenting on the downgrading of the economy by Moody’s, Brian Cowen said the National Treasury Management Agency had made clear we are a very stable economy.

The international ratings agency, that helps investors assess investment risk, downgraded Ireland for a second time since the financial crisis began.

However, the agency has moderated its outlook for Ireland from negative to stable.

Moody’s downgraded Ireland’s sovereign bond rating to Aa2 from Aa1.

Moody’s Senior Credit Officer and lead analyst for Ireland Dietmar Hornung said the ‘downgrade is primarily driven by the Irish government’s gradual but significant loss of financial strength, as reflected by its deteriorating debt affordability.’

Rival agency Standard & Poor’s, which downgraded for a second time in April, has maintained a negative outlook for the country.

The NTMA, which manages the national debt, has said the downgrading of Ireland’s credit should not have an impact on the country’s debt.

The agency, which is having its monthly auction of Irish bonds tomorrow, said the rating decision was not based on any new information.

The NTMA’s Oliver Whelan said there were positive elements in the Moodys’ announcement.


Mr.Cowen the National Treasury Management Agency’s assurances are worth nothing to the Irish public in light of the assurances from your predecessor Ahern on Irish house prices two years ago or the assurances the financial regulator gave on Anglo Irish Bank or on your own assurance on the cost of bailing out the big banks of this state

You have absolutely no credibility; neither does any state body that includes the central bank  

You have lied to the Irish people and brought us down on our knees to the altar of the foreign vultures

Thus ensuring that future generations will continue to be slaves in their own country

You and your cabinet swatters will have to face the people’s justice sooner or later
We need action on jobs and a general election now

The Irish National Debt

Mildly encouraging signs have emerged that the Minister for Finance and Government has initiated early action amongst spending departments to obtain spending cuts from budgets in 2010.

However, the National debt shows no sign of abating its ruinous growth, based on the latest update of the national debt from the NTMA, which necessitated only a small adjustment in the Finance Dublin debt clock for this month.

It remains the case that there are just two alternative engines of recovery available to the Irish economy – the private sector, or the public sector. The Government, and an alternative Government, has to choose which horse it will back to restore the economy. The private sector horse has the form, because it has the experience, the talent, the production, engineering, marketing, and exporting expertise that will bring the Irish economy back to growth.

This is an excellent article and well worth reading !Full article link http://www.financedublin.com/debtclock.php

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