Mortgage arrears ease, thanks to the ECB

The latest arrears report from the Central Bank shows arrears growth is slowing. This is good news.

The figures show that 83,251 of private residential mortgage accounts are in arrears over 90 days, which is up from 77,630 accounts as at the end of March 2012.

The slowdown in the rate of growth over the last two quarters has been significant. Up until the 4th quarter 2011, mortgage arrears were increasing at an alarming rate but then, at the beginning of 2012, this all changed, went into reverse and figures have been getting better ever since.

Quarter Gross Arrears Net growth
Jun-12 83251 5621
Mar-12 77630 6719
Dec-11 70911 7941
Sep-11 62970 7207
Jun-11 55763 6154
Mar-11 49609 5101
Dec-10 44508 4036
Sep-10 40472 4034
Mar-10 36438  

Source: Irish Financial Review

While domestic banks appear to be sticking to the statutory guidelines on mortgage arrears, the slowdown in arrears growth is likely to have little to do with their actions; the European Central Bank is the real hero here.

To demonstrate this point, the rate of growth in arrears spiked in the 4th Quarter 2011, where there were almost 8,000 new cases. This happened following the hawkish actions of the Jean-Claude Trichet, the former President of the ECB who insisted on increasing interest rates in early 2011 to contain inflation. Mortgage arrears in Ireland accelerated as a result.

Then, in November and December 2011, just after succeeding Mr. Trichet, Mario Draghi quickly reversed Mr. Trichet’s rate increases, announcing two separate quarter-point reductions. The impact of those rate cuts fed into the first quarter 2012 statistics and beyond. Those with tracker mortgages (approximately 400,000) saw their mortgage repayments fall immediately. Standard variable rate mortgage holders were not as fortunate as some banks refused to pass on the rate cuts.

In the first quarter of 2012, mortgage arrears growth eased, and this trend has continued. Earlier this summer, there was a further rate reduction announced by the ECB, which took the base rate of interest to a record low and resulted in even lower repayments for many here.

There is an inarguable correlation between rising and falling interest rates and rising and falling arrears.

Domestic mortgage lenders here need to take note of the correlation. Mortgage forbearance is a temporary fix for those facing immediate and significant financial difficulty. ECB led rate cuts have proven a much more powerful influence on mortgage affordability and it is a lesson domestic banks could do well by taking on board. Following the latest ECB rate reductions, AIB took the bold step on increasing, not reducing rates for its customers with standard variable rate mortgages. It is a move that is likely to serve neither bank nor customer well in the long-term.

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