Financial Stability Notes: NPL resolution (McCann & McGeever) and long term mortgage arrears (O’ Malley)

The Central Bank of Ireland today publishes two Financial Stability Notes. The notes focus on  the resolution of non-performing loans (NPLs) and on long term mortgage arrears in Ireland.

Cures and Exits: the drivers of NPL resolution in Ireland from 2012 to 2017 , by Fergal McCann and Niall McGeever, examines the balance of NPLs in the Irish retail banking system, which stood at around €25bn in 2017, down from €85bn in 2013. The research considers the main driver of NPL reductions in different lending segments from 2012 to 2017. 

The key findings of the Financial Stability Note are:

• Loan cure – the return of previously defaulted loan balances to performing loan status – is the key driver of NPL reduction in the residential mortgage market. This is particularly true for principal dwelling home (PDH) mortgages, where loan restructuring has played a pivotal role. This reflects the importance of the Mortgage Arrears Resolution Process (MARP) framework developed by the Central Bank of Ireland to support homeowners in arrears.
• In contrast, loan exit – through liquidations, write-offs and sales – accounts for the large majority of NPL reduction in the commercial real estate (CRE) market.
• Buy-to-let mortgage resolution shares some of the characteristics of PDH mortgages and CRE loans. Exit plays a relatively more important role for BTLs than for PDH mortgages, while cure plays a greater role for BTLs than it does for CRE loans.

Long-Term Mortgage Arrears in Ireland, by Terry O’Malley, examines the characteristics of Irish residential mortgages in long-term arrears, meaning those mortgages that have accumulated at least two years’ worth of missed monthly payments. The mortgages examined in the research were taken out on the primary home of the borrower with one of the five main banks in Ireland. The loan sample dates from July 2015 to December 2017.

The key findings of the Financial Stability Note are:

• While the number of mortgages in long-term arrears continues to fall, the pace of reduction each quarter has begun to slow. For the first time, as many loans are exiting the portfolio of the main banks as are curing to lower arrears states.

• As at December 2017, the average amount of missed payments on these mortgages is €66,409. 10% of the loans have accumulated over €129,148 worth of missed payments and half have arrears of more than €52,544. The average loan has arrears outstanding of around 23% of what the property is estimated to be worth.
• Long-term arrears cases tend to have received a smaller number of modifications and are less likely to be currently modified. Loans that go through the Mortgage Arrears Resolution Process are twice as likely to end up in a lower arrears state six months later, compared to exit. This demonstrates the importance of borrower engagement with the arrears resolution process.

Note: The ratio of unique borrowers to mortgage accounts in this research by Terry O’Malley is roughly 80%, because a borrower may have multiple loans. As such, for every five loans in the data, there are four associated households.

The views expressed in these Notes are those of the authors and do not represent the official views of the Central Bank of Ireland.

Notes:

The Central Bank’s most recent comments in relation to mortgage arrears and non-performing loans are:

• Speech: Deputy Governor Sibley: Addressing dysfunction in the mortgage market, and the associated risks, requires continued efforts by all involved to sustainably address mortgage arrears
• Signed article - Ability to resolve long-term arrears essential to tackling non-performing loans – Deputy Governor Donnery
• Speech - Macro-Financial Risk Management - Governor Philip R. Lane
• Library of Financial Stability Notes