Moody’s: Irish mortgage performance and home prices buoy several sectors, amid arrears concerns
The benefits of rising house prices in Ireland and lower mortgage arrears will continue to spread to Irish banks and bonds backed by home loans (namely, residential mortgage-backed securities (RMBS) and covered bonds), says Moody’s Investors Service.
“We expect mortgage arrears to slowly decline and house prices to rise by up to 5% over the next 12-18 months, which is credit positive for several sectors, namely Irish banks and mortgage securities. While RMBS exposures to borrowers in long-term arrears and negative equity are still high, we note that the latter has halved to 33% from almost two-thirds around the trough of the house price drop in 2013,” says Gaby Trinkaus, a Vice President at Moody’s. Furthermore, the average amount of negative equity per borrower has declined, to 6% from 17% in 2013.
Moody’s report, entitled “Cross Sector — Ireland: Mortgage performance and home prices buoy several sectors, amid arrears concerns,” is available on www.moodys.com. The rating agency’s report does not constitute a rating action.
In 2017, Moody’s forecasts the supply shortage and looser lending rules will push up Irish house prices by up to 5%. Moody’s says RMBS transactions benefit from Ireland’s stronger mortgage market via declining exposure to arrears and lower loss severities. However, exposures to borrowers in long-term arrears (720 days or more) and those in negative equity, are still high.
The favourable economic environment in Ireland and the related recovery in house prices have improved Irish banks’ asset quality. However, the level of non-performing mortgages remains high, and loans in long-term arrears make up the majority of the total, posing tail risks for Irish banks.
The balances of loans in negative equity have fallen significantly. The share of domestic mortgages with LTV ratios above 100% for the four largest banks Moody’s rates has decreased, to 26% as of December 2015 from 50% as of December 2013. While the use of restructuring solutions by the banks has contributed greatly to resolving mortgage arrears, it also resulted in the build-up of a large layer of forborne loans on Irish banks’ balance sheets, (nearly €20 billion for the four largest rated banks at the end of 2015, or 20% of the total mortgage lending in Ireland). A larger part of these loans are currently performing, but they have a higher risk of eventually re-defaulting, compared to mortgages which have never been foreborne. Some restructuring solutions employed by the banks are short-term in nature (such as interest-only, reduced payment and payment concession arrangements). Moody’s nevertheless considers that the use of long-term sustainable restructuring methods will continue to aid the banks in resolution of non-performing mortgages and, in particular, will help to address the long-term arrears in a more efficient manner than through repossessions.
As with banks, covered bonds will benefit from rising house prices. Tighter lending standards should also improve cover pool credit quality over time, although Irish covered bonds have varying exposures to more recent mortgage loans.