Welcome to Ireland, Where Mortgage Payments Are Optional and the Banks Are a Mess

With laws that make foreclosures almost impossible and a financial sector stuffed full of bad loans, the Emerald Isle's problems might only just be getting started
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Among the many nasty side-effects of the European debt crisis, bigotry's return to pleasant conversation may be the least-commented upon, and the nastiest.

Granted, few actually say Germans are power-hungry, anal-obsessed skinflints. And it's only usually hinted broadly that Spaniards are hot-blooded, undisciplined spendthrifts; and Greeks shiftless tax-dodgers. Those people, you know?

Likewise, Ireland's debt-fueled housing boom and banking bust--which eventually dragged the entire country under--is often dressed in ethnic livery. The Irish went on a bender and they're dealing with the hangover. They're guilty, have confessed their sins and willing to years of painful austerity budgets as penance.

That last bit, the submission to painful remedies demanded by foreign authorities, has earned Ireland something of a starring role in the ongoing European morality play: that of "the good debtor." ("Greece has a role model and the role model is Ireland," Jean-Claude Trichet, former chief of the European Central Bank, famously said back in March 2010.)

But this overlooks a few uncomfortable details. Ireland's homeowners are the European and perhaps the world champions in not repaying mortgages. The country's national debt has increased fourfold in about as many years. Its banking system is being kept afloat by borrowing from Europe. And while a change in the law may soon force the banks to start cleaning up their balance sheets, nobody is quite sure how bad a mess they will find there when they do.

Welcome to Ireland, where the hangover is in fact just beginning.

The Rising

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In the last few years, a staggering number of Irish homeowners have simply stopped making mortgage payments. The Irish central bank says that at the end of December 2012, 11.9% of Ireland's mortgages were late by more than 90 days, up from September's 11.5%.

And the truth is probably even worse. The chart above, which was produced by Deutsche Bank using Moody's data, pegs the percentage of Irish mortgages that are three months late somewhere closer to 16% in September. S&P analysts argue that 25% of Ireland's home loans are in some kind of trouble, either behind on payments, or in foreclosure, or in forbearance, which is when the bank just isn't collecting payments. (We'll get to why later.)

Why? To be sure, things are tough in Ireland. The recession has driven unemployment from less than 5% at the end of 2007 to more than 14%. Incomes have crumbled.

But Greece is in an even worse economic crunch. Unemployment is at 27%. The economy has shrunk by 25% since the end of 2007. Newly impoverished people are turning to firewood because they can't afford heating oil. And even so, the amount of Greek mortgages in late-stage arrears was only 5.1% in November, according to Fitch Ratings.

What's going on here?

Safe at Home

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The simple answer is that Ireland is one of the hardest places in the world to drive a family from its home. Though thousands aren't paying, repossessions of Irish homes remain "negligible relative to the level of arrears," according to a recent report by Moody's analysts.

The most recent update on repossessions from the Irish central bank shows that during the entire fourth quarter of 2012 only 38 houses were repossessed by court order. At a pace like that, it would take more than 620 years to get through the backlog of nearly 95,000 mortgage accounts that are at least 90 days behind on payments.

The chart to the right is a look at the levels of problematic loans--that is, loans in arrears--in Ireland and neighboring Britain. In Ireland, repossessions are effectively non-existent.

In fact, Moody's analysts note that the number of Irish delinquent on their mortgages shot higher in 2012, just as political discussions centered on the possibility of a large-scale debt forgiveness plan. (It never materialized.) Moody's suggested that the increase was driven--at least in part--by some who are gaming the system. "The current dearth of repossessions and the recently proposed personal insolvency legislation is starting to result in higher defaults due to moral hazard," the analysts wrote.

That's financial-speak for "people think they can get away without paying their mortgage because they know they're not going to lose their house." Gregory Connor, a professor of finance at the National University of Ireland in Maynooth, estimates that about 35% of those who have fallen into arrears on their mortgages have done so "strategically." That is, they can afford to pay, but just aren't.

Birthplace of the Boycott

There are any number of explanations for the dearth of Irish foreclosure. For one thing, Irish courts ruled in July 2011 that Ireland's recently revamped foreclosure law contains a massive loophole. Long story short, the judge found that the law allows lenders to foreclose only on mortgage loans made after Dec. 1, 2009, when the new law went into effect. After the judgement, arrears shot higher.

The legislature could fix the the problem by passing a new law. But it hasn't (although one is expected soon). And that's likely because any Irish politician introducing such a bill would be brave indeed, given long-standing antipathy towards foreclosure and evictions among the Irish public.

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An eviction, County Galway, circa 1866. (Getty Images / Hulton Archive)

After all, modern Irish patriotism first coalesced as a revolt against unfair evictions during the so-called land wars of the late 1800s. The period gave Ireland some of its earliest and most enduring political heroes--Charles Stuart Parnell, Michael Davitt--and villains, such as Charles Boycott, an unpopular, English-born magistrate and collector of rents from Irish tenant farmers. He gave his name, or rather he had it given for him, to the method of organized, non-violent shunning of which he was the subject until he was ultimately driven from the island.

Ancient history? Perhaps. But the notion of the sanctity of the family home still carries considerable weight in Ireland. In fact, the inviolability of a citizen's dwelling is laid out starkly in article 40, sub-paragraph 5 (pdf, p. 158) of the constitution. So present is Ireland's unpleasant history with eviction that Irish prime minister Enda Kenny felt compelled to give it a nod when he introduced a new personal insolvency bill last year. "There is probably no time, since the Land War, when the Irish people have felt so stressed, so anxious about their home and their family's future security," Kenny said. Given such historical and political backdrops, it shouldn't be a surprise that Ireland's legal and regulatory system is, as Moody's put it in a euphemistic moment, "borrower friendly."

You Really Owe It to Yourself

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Matt Phillips is a reporter at Quartz, where he writes about finance, markets, and economics.

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