Labour Market Conditions are Behind Mortgage Arrears

Three quarters of current mortgage arrears cases are due to underemployment, not unemployment.

According to a recent research paper by Central Bank analyst Yvonne McCarthy, 75% of mortgage arrears cases involve loans where the head of the household is employed, yet not gainfully. Contrary to popular belief, negative equity and unemployment are not the sole or even main drivers of mortgage distress. Many besieged borrowers have experienced a recent change in employment or a significant drop in their income during the worldwide recession.

The research indicated at the end of November, of the 697,690 mortgage holders in the country about 17% (116,481) were in arrears, according to Central Bank data on mortgages. McCarthy’s study was based on the combination of a survey of mortgage holders and administrative loan-level data from the three major mortgage providers. It produced a more comprehensive picture of the problem than previously illustrated.

The study found that 20% of people employed but behind had a recent experience of unemployment. This compared to only 8% of performing borrowers that had been unemployment at some point during the crisis. Similarly, 24% of distressed borrowers were on temporary employment contracts, compared to just 13% of their up to date counterparts on temporary employment contracts. Sixteen percent of behind borrowers have been with their current employer for less than two years compared to 6% of performing borrowers employed for less than two years.

“Initially when you look at the headline figure you might find it quite surprising, but actually when you dig deeper and look at the characteristics of these employed people [with mortgage arrears] you see that they’re not the same as your typical secure employee,” said McCarthy. “These are people who are on temporary employment contracts; they are relatively new to their job and they have a recent history of unemployment. While unemployment is important in determining mortgage arrears it’s not the full story.”

She added, “While a significant portion of borrowers in arrears are still in employment, many of them have experienced deterioration in affordability. The results show that the current mortgage crisis, and efforts to prevent a further deterioration, requires more than simply targeting overall unemployment or negative equity. Rather, such efforts should also aim to strengthen labour market conditions and job security as well as targeting long-term unemployment.”

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