Brendan Kelly’s televised eviction from his Dublin house hit close to home for many of those watching in Ireland, where one in seven mortgages is in trouble.
Bailiffs dragged the shouting, 71-year-old pensioner away from his five-bedroom residence in the affluent Killiney neighborhood last week after he failed to keep up payments on a 2 million-euro mortgage ($2.6 million). It was a rare moment in a country where lenders dealing with about 20 billion euros of distressed loans have seized less than one percent of the properties backing them.
“I’m here on behalf of the people of Ireland,” Kelly said April 18 before being led from the property.
The country’s 10 largest banks, including four overseas- owned lenders, lost more than $155 billion on soured loans, mainly in commercial real-estate, in the past four years, according to Bloomberg calculations. Now lenders and the government are grappling with how to handle failing mortgages while avoiding widespread evictions amid concern that banks may need more money than they raised following a third round of stress tests last year.
“It is right to offer people a way out through restructuring, but that will create sizable losses for the banks,” said Michael Saunders, head of European economics at Citigroup Inc. in London. “Some of that has been allowed for in recapitalization, but I’m not sure enough has been done given the continued drop in house prices.”
Ireland’s decade-long real-estate bubble burst in 2008, leading to a 67.5 billion-euro international rescue and the nationalization of five of the country’s biggest lenders. The government helped cover bank losses after the sale of more than 70 billion euros of assets to the National Asset Management Agency, the country’s so-called bad bank.
Most of the mortgage debt remained on the books of domestic banks and foreign lenders with operations in Ireland. By value, late or restructured loans account for some 17.6 percent of the 113.5 billion euros of Irish private residential mortgages and the amount is set to increase, according to the Central Bank.
The four state-guaranteed banks were ordered to raise 24 billion euros, the majority of it from the government, after the stress tests were completed. The central bank earmarked 9 billion euros for a worst case-scenario of mortgage losses over three years, equal to 9.2 percent of all the Irish home loans held by the banks. By the end of the first year, the lenders had already set aside 5.2 billion euros of that amount to cover losses, according to Stephen Lyons, an analyst with Dublin-based securities firm Davy.
Average Irish Homebuyer
So far, banks have been reluctant to resolve defaulted mortgages through foreclosures and repossessions and the government has pushed for solutions that keep people in their homes.
Finance Minister Michael Noonan was quick to distinguish Kelly’s case from the average Irish homebuyer. Speaking two days after the eviction, he pointed out that Kelly is a professional landlord with numerous properties.
While the government “has pledged as far as possible to keep people in their homes,” it has made no promise to those like the Kellys with “21 different homes.”
The Irish Times reported April 20 that the Kellys bought 21 properties over the past two decades.
At the end of 2011, Irish banks held just 895 owner- occupied homes, equivalent to 0.12 percent of loans in arrears, according to the Central Bank. By contrast, U.K. lenders have been holding as much as 12 percent of their problem mortgages in repossession and re-sold a significant amount of properties, according to Glas Securities, a Dublin-based fixed-income firm.
That may prove costly for lenders as Ireland’s economy and its housing market head towards the Central Bank’s worst-case scenario, as residential values continue to fall and arrears mount.
About 14 percent of private home mortgages in Ireland were either more than 90 days in arrears or had been restructured as of the end of last year, and that’s likely to rise according to the Irish Central Bank.
Home prices may drop as much as 70 percent from their 2007 peak, according to Dublin-based securities firm Davy. The central bank assumed prices would fall 55 percent to 60 percent when it tested the banks’ financial strength in March 2011. The central bank forecast this month that unemployment will be 14.4 percent this year, above its 12.7 percent base estimate in the stress test and below the worst-case forecast of 15.8 percent.
“We’re migrating towards the three-year stress-case capital loss,” said Michael Cummins, an analyst at Glas. “The big issue is whether the banks will be able to return to a level of operating profitability beyond 2013 that could absorb future losses beyond that point.”
‘Breathe Down the Necks’
Regulators are pushing banks to face up to their bad loans, regardless of how they are resolved. Deputy Central Bank Governor Matthew Elderfield on March 2 pledged to “breathe down the necks” of lenders to make them identify and deal with unsustainable home loans. State-guaranteed banks must make “substantial progress” on working out the cost of expected loan restructuring by the time a fourth round of stress tests is conducted at the end of this year, he said.
“It’s too early to tell whether the banks will require additional capital,” said Cummins at Glas. “But continued property market declines and growth in mortgage arrears as experienced over the last 12 months will undoubtedly raise concern.”
Some 11.7 percent of owner-occupier mortgages by value were classified as restructured by the central bank at the end of last year. That mainly involved extending terms, allowing borrowers to pay interest only or adjustments to account for late payments. More than half of restructured loans were still in arrears at the end of December.
Though the previous stress tests assumed a surge in home repossessions, they didn’t consider the effect of proposed insolvency laws that would help borrowers obtain out of court settlements with lenders.
“In the most extreme cases of troubled loans, banks probably stand the best chance of recovery by doing deals with existing borrowers,” said Seamus Coffey, an economics lecturer at University College Cork. “That said there’s nothing in any government proposals offering borrowers a free lunch. All the current proposals would see the debtor forgo ownership.” Still, bankers are concerned that the new laws may encourage strategic defaults, according to John Reynolds, president of the Irish Banking Federation and chief executive of KBC Groep NV (KBC)’s Irish unit.
“The unintended consequences of what are termed strategic defaulters will have a very negative impact, not just on the banking system but also on broader national interests,” Reynolds said in a March 29 speech in Dublin. “In circumstances where there are financial incentives to categorize oneself as someone who can’t pay, it will be difficult to determine the difference between someone who can’t pay and someone who won’t pay.”
As Ireland seeks to make a full return to international credit markets by the middle of next year, the government may not want to spook international investors by forcing banks to find more capital if needed.
Instead, banks could be allowed to use some of the capital set aside to cover losses on asset sales as well as 5.3 billion euros of so-called contingent capital to absorb bad-loan losses, according to Stephen Lyons, an analyst at Davy. The company estimates that banks have 10 billion euros left to cover asset- sale losses out of the 13 billion euros raised.
“In a worst case, the banks may need concessions from Ireland’s bailout partners to delay their deleveraging plans to free up some of this capital,” he said. “But at least it would avoid opening a Pandora’s box of the banks having to raise more capital.” The biggest lenders, including four overseas banks with Irish operations, have reported 117.8 billion euros of loan losses since 2008, according to data compiled by Bloomberg. This includes impairment charges and losses on disposals and is the equivalent of a fifth of their total loans four years ago.
Some of the largest losses have come at the foreign banks that expanded in Ireland during the property boom. Royal Bank of Scotland Group Plc (RBS) has pumped as much as 10 billion pounds ($15.7 billion) into its Ulster Bank unit since 2008, while Lloyds Banking Group put about 8 billion euros into its Irish business.
Domestic banks have also taken a huge hit. Nationalized lender Irish Bank Resolution Corp. Ltd., formerly Anglo Irish Bank Corp. and Irish Nationwide Building Society, recorded the biggest loan losses over the past four years, at 35.5 billion euros, including discounts on the sale of assets to NAMA.
The figure excludes Irish Nationwide’s 6.47 billion euros of loan losses before its merger last year with Anglo Irish. Allied Irish Banks Plc (ALBK), 99.8 percent state owned, posted the second-highest level of loan losses over the four years, at 28.1 billion euros. The figure excludes 1.16 billion euros of losses at EBS Ltd. before Allied Irish took it over in July.
The government has been forced to inject about 62 billion euros into the six domestic lenders it guaranteed in September 2008, as the financial system came close to collapse. That amounts to about 40 percent of gross domestic product, making the Irish banking collapse among the most expensive in history, according to Alan Ahearne, who was an adviser to former Finance Minister Brian Lenihan.
The size of the taxpayer-led bailout means many Irish expect banks to be lenient when it comes to evicting owners, even wealthier ones like Kelly. Members of the Occupy Ireland movement staged a protest in his support at the Dublin Sheriff’s Office on the day of the eviction. His wife, Asta, greeted campaigners in front of her former house two days later.
“It is really a time for land leagues,” she said, referring to a 19th century Irish political movement that sought to protect tenant farmers against landlords. “I have very good neighbors.”