Ireland’s commercial-property bust has knocked the country’s banks to their knees. Now the lenders are bracing for another blow: losses on home loans.
An art installation of Monopoly houses and hotels by Irish contemporary artist Fergal McCarthy floats on the river Liffey in Dublin Sept. 21, 2010. The installation is designed to highlight the troubled housing market in Ireland.
So far, residential mortgages haven’t been nearly as big a problem for Irish banks as their portfolios of loans to finance real-estate development and construction projects. Those ill-fated property loans have saddled the banks with tens of billions of euros in losses, forcing the government to mount a series of costly bailouts that have pushed Ireland to the brink of insolvency.
But problems in the residential-mortgage arena are starting to crop up, fueling fears that a second wave of losses could hit even Ireland’s healthiest banks. Those fears are one reason why jittery investors punished shares of Irish banks. An index of Irish financial stocks fell 5.3%, and shares in Bank of Ireland, one of the country’s biggest mortgage lenders, tumbled 5.6% in Dublin.
A rising tide of Irish households has been falling behind on their mortgage payments. More than 36,000 borrowers, representing 4.6% of Irish mortgage loans, were at least 90 days behind on their loans as of June 30, according to Ireland’s financial regulator. That compares with 26,000, or 3.3%, nine months earlier. Data for September, due next month, is expected to show another rise but remain below the U.S. rate, which was above 9% in June.
In a foreboding sign, nearly 200,000 Irish mortgages—about one of every four outstanding home loans—is expected to be “underwater” by the end of the year, according an estimate made earlier this year by David Duffy, a research officer at the Economic and Social Research Institute in Dublin. That means the outstanding loan balance will be greater than the underlying value of the home, increasing the odds that borrowers will default. If the house-price decline becomes even more calamitous, Mr. Duffy said in a March paper, some 350,000 homeowners could be underwater.
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Peter Mathews, a former Irish banker who now is an independent banking-sector analyst, reckons between 10% and 20% of the value of home loans made during the three frothiest years of Ireland’s property bubble, which peaked in 2007, could be written down. “There’s a bigger bump on the horizon than people would like to admit,” he said.
Such fears were shoved into the spotlight Monday. Morgan Kelly, an economics professor at University College Dublin, published an opinion column in the Irish Times newspaper warning that the country was headed over a financial cliff due partly to a coming flood of mortgage defaults.
“The perception growing among borrowers is that while they played by the rules, the banks certainly did not, cynically persuading them into mortgages that they had no hope of affording,” Mr. Kelly wrote. “Facing a choice between obligations to the banks and to their families—mortgage or food—growing numbers are choosing the latter.”
Meanwhile, Irish government bonds continued to weaken as investors worry that the country is moving toward a sovereign default due to the ever-rising costs of the banking bailout. The gap between yields on Irish 10-year debt and similar German debt widened to record levels, and the troubles spread to other euro-zone countries. The cost of buying insurance on Portuguese and Spanish bonds hit new highs Monday, while the cost of insurance on Irish debt hovered near record levels.
The renewed concerns about the continent’s health rubbed off on the euro, which fell below $1.40 after rising to $1.43 last week. And the European Central Bank said Monday that it had resumed its purchases of bonds from struggling countries like Ireland, after a three-week hiatus.
While Irish banks’ disastrous commercial real-estate lending has received the most attention, the banks were similarly profligate when it came to home loans.
Residential-mortgage debt soared from about €49 billion in late 2003 to €113 billion in March 2010, or from about $69 billion to about $159 billion, according to Ireland’s central bank.
Banks relaxed their lending standards, doling out large loans to first-time home buyers. In 1995, the average first-time buyer would borrow an amount roughly equal to three years of his earnings, Mr. Kelly wrote in a December 2009 research paper. By 2006, that figure had swelled to eight years of earnings.
Unlike in the U.S., where surging defaults on home loans helped ignite a global financial crisis, residential mortgage defaults have been relatively rare in Ireland. The percentage of mortgages on which Irish borrowers are at least 90 days behind on payments is roughly half the level of the U.S.
Some experts say that is partly because banks in Ireland typically can pursue borrowers’ other assets if they walk away from mortgages—a powerful disincentive to default.
Government actions also have kept a lid on defaults. Its financial regulator last year instituted a rule that lenders must wait six months from the time a borrower falls into arrears before going to court to seize his property. In February 2010, that period was stretched to 12 months.
And Ireland’s state welfare system will, with some limits, pay the interest on the mortgage of a person who is suddenly unemployed. In 2008, a total of 8,091 Irish borrowers took advantage of the interest-supplement program, receiving €28 million. This year, the government expects to spend €64 million on the mortgages of 17,500 people.