Mortgage arrears forecast to peak at 16.5%
17 August 2012
This morning, we have released a report on Irish mortgage arrears (see below). The rise in mortgage arrears, and in particular the acceleration since 2011, has been driven by the deterioration in the labour market since 2008. While the steep falls in employment of 8.1% and 4.1% in 2009 and 2010 are unlikely to be repeated, weak growth going forward will weigh on borrowers' ability to service mortgage debt, and we see owner-occupier mortgage arrears peaking at 16.5% by value from our current RMBS-based estimate of 13.4%, based on our current macroeconomic assumptions. If employment growth disappoints, and long-term unemployment continues to rise, our adverse scenario forecast has arrears peaking at close to 18%.
The buy-to-let (BTL) mortgage book is of particular concern, with many loans originating during the peak years of the housing bubble. BTL arrears are currently running at over 2x owner-occupier arrears, driven up by mortgage terms switching to interest and principal payments from interest-only. The new insolvency legislation may encourage some repossession in the BTL sector, but large-scale liquidations are unlikely. We now expect banks loan losses to exceed the €9bn forecast in PCAR with eventual losses reaching €10-11.5bn. Tactical delinquencies and further property price falls pose a risk to the downside.
In a quiet day for macroeconomic news, markets will look for an indication of US consumer sentiment when the Michigan consumer confidence for August is released. The index is expected to remain unchanged at 72.3, well down year-to-date, but July's stock market rally and better-than-expected retail sales may have pushed up on sentiment, despite historic precedent of a fall in the index in August.