Opening Remarks by Governor Patrick Honohan, at the Central Bank of Ireland Conference, Radisson Hotel, Dublin

The Irish Mortgage Market in Context

The slow simmering of the problem of mortgage arrears is something which observers have been watching closely for quite some time. I recall a meeting of economists convened by NESC in January 2009 to ponder the emerging prospects for the Irish economy which just then was experiencing its most severe downturn on record (real GNP fell by an unprecedented 7.2 per cent in that quarter). While the continuing shake-out of the construction sector and fall in house prices, and the massive required adjustment in the public finances were already clear, the group noted the importance of building on fundamental strengths: the human and social capital and physical infrastructure which had already allowed Ireland to reach the global production frontier by the turn of the millennium. The looming bank losses were of course on everyone’s mind: for one thing, just how far were the property developers under water? But also the group discussed the big imponderable: how well would repayment of residential mortgages hold up? This would clearly depend not only on the evolution of unemployment, but on society’s ability to cope with widespread financial stresses associated with over-indebtedness, stresses whose severity would only become evident over time.

Some three years later this latter aspect of the crisis, the ongoing financial stresses being experienced by mortgage holders, increasingly manifested in the emergence of mortgage servicing arrears, has risen (as predicted) to the top of the policy agenda. The initially appropriate policy reaction, emphasizing moratoria and other forms of forbearance and ensuring fair treatment of distressed borrowers, is now being succeeded by more comprehensive measures to resolve the problem as well as it can be.

In order to do that, there has been a need for a much wider and deeper collection of information about the housing market and in particular about mortgage indebtedness, both for owner-occupier and for buy-to-let mortgages. This has been needed not only to generate an estimate of what capital is needed in the banks to ensure they can absorb unavoidable loan-losses, but also to measure the extent and patterns of household over-indebtedness.

At the Central Bank this data collection and analysis exercise has been a key priority over the past year in particular and, although there is a lot that we still do not know, today’s conference will show some of the progress that has been made, not only at the Bank, but also by other researchers. As we continue to gather and process information as quickly as we can, the findings can be used to help choose and calibrate appropriate policy solutions.

Yesterday, the Government published the report of the Inter-Departmental Working Group on Mortgage Arrears, which has been assessing such policies with particular emphasis on restructuring of unsustainable loan burdens and other recontracting by lenders for borrowers where full repayment is truly not possible.

To date, banks have restructured relatively few loans. They are naturally slow to take such action where a self-cure is possible. But it is time for them to ramp up their efforts in dealing with truly unsustainable situations. My colleague Matthew Elderfield will be speaking tomorrow on our initiatives in this regard and I won’t steal his thunder here.

Enough capital has been injected into the banks to absorb unavoidable losses from unsustainable mortgages; insufficiency of capital cannot be a reason to delay. At the same time, society will not tolerate - and the economy cannot afford - for those who could pay, but don’t want to pay, to be let off while others, including those who did not borrow, may be struggling to make ends meet. Making that triage between the truly unsustainable situation and the “can but won’t pay” is one of the key operational challenges for banks and other public authorities going forward.

For some distressed borrowers with a complex set of borrowing relationships, recourse to bankruptcy or possibly to a future non-judicial debt settlement procedure will be the only viable course of action. It is generally acknowledged that existing bankruptcy procedures are costly, inefficient and, in some respects, unduly onerous on the borrower. Reform of these procedures is in hand. Here too a crucial question is what can be regarded as affordable in terms of the remaining post-settlement payment obligations of the borrower. However, neither bankruptcy nor non-judicial debt settlement procedures can ever be comfortable for the borrower.

Continuing research, of the type being discussed at this conference today, will progressively improve the granularity and precision of the information on which projections of bank losses with respect to mortgage loans as well as the design and calibration of mortgage restructuring measures and other innovations to improve the functioning of the mortgage market are based.

There is also much to be learnt from the experience of other countries who have faced similar problems, and we have been drawing extensively on this and continue to do so as we will today.

Of course there is the temptation to look for a reset button that would bring us back a decade or so and allow us to re-run history without a property bubble. But decisions have consequences and Ireland has no such reset button. Instead, we will eschew such make-believe and base policy on hard facts and sound analysis such as will, I trust be the hallmarks of this Conference.