Irish banks warned on mortgage crisis

Ireland’s central bank has told the country’s lenders it could force them to raise more capital if they fail to tackle a growing mortgage crisis that threatens the country’s exit from its international bail out programme.

The blunt warning comes amid frustration in Dublin at the failure of its bailed out banks to live up to repeated commitments to engage with the one in five mortgage holders currently in arrears.

“There is huge uncertainty about this, which may be a problem for Ireland when exiting the programme because the capital needs are uncertain,” said Lars Frisell, chief economist at the Central Bank of Ireland.

Stubbornly high unemployment and a 50 per cent fall in Irish house prices since 2007 has left hundreds of thousands of Irish borrowers trapped in negative equity. By the end of September 2012 some 86,146 residential mortgage holders and 26,770 buy to let mortgage holders were in arrears of more than 90 days.

Mr Frisell made the comments at the publication of the bank’s quarterly bulletin, which cut Ireland’s growth forecast to 1.3 per cent from 1.7 per cent for 2013 due to slowing export growth.

He said Irish banks should have enough capital to absorb mortgage losses but that the central bank was considering options for putting pressure on lenders to act, including raising capital.

“There is a wide range of tools that the regulator can use. Capital leverage is the ultimate stick that the regulator controls,” said Mr Frisell.

The central bank says the main banks have been slow to appoint dedicated personnel to manage the arrears process and to make provisions for unsustainable mortgages.

Banks say they are introducing a wide range of complex loan modification and resolution options. They also claim delays in passing new insolvency legislation have hampered their efforts.

Forcing Ireland’s mainly state controlled banks to raise extra capital would pose a headache for a financial sector that is struggling to wean itself off government support. It would also prove politically toxic if taxpayers, who have already spent €64bn shoring up Ireland’s banks, were forced to inject yet more capital.

At the end of 2011 Ireland’s three main lenders – Allied Irish Banks, Bank of Ireland and Permanent TSB – had made €5.1bn in provisions to cover mortgage book loses. Davy Stockbrokers forecasts mortgage losses could peak at €10.5bn-€11.5bn. This is higher than the €9bn losses forecast in a 2011 stress test on Ireland’s banks. But the banks should have enough capital to absorb these additional losses, according to Davy.

“With private sector employment flat since 2011, stabilising labour market conditions point to a natural reduction in arrears formation,” said Conall MacCoille, Davy chief economist.

Felix O’Regan, director of public affairs at the Irish Banking Federation, said banks had committed significant resources to working with customers in arrears. New legislation would also enable lenders to “enforce their security in situations where all re-mediation measures have failed and the mortgage is deemed unsustainable,” he said.

But the continued increase in arrears is causing significant uncertainty and risks undermining improved investor sentiment towards Ireland. In a note published on Tuesday, Moody’s, the credit rating agency, cited poor mortgage loan performance as one of the key reasons for maintaining a negative outlook on Ireland’s banking system.

Moody’s has expressed concern that new insolvency legislation that shortens the bankruptcy term to three years from 12 years could lead to some strategic default by mortgage holders.

It forecasts Irish banks will remain under pressure for 12-18 months.