Higher defaults and lower collateral values will impair Irish re-performing RMBS

Mortgage lenders in Ireland have received a flood of requests for payment holidays: the top four retail banks have granted or are in the process of granting 475,000 mortgage payment holidays, equivalent to roughly 5% of all mortgages. “A temporary interruption in collections will have a limited impact on Irish re-performing RMBS considering their strong liquidity coverage, but transactions will face more long-lasting effects from the Covid-19 outbreak,” said Iris Sie, senior analyst in the structured finance team of Scope Ratings and co-author of a report out today.

Cash reserves on Irish transactions generally cover two to six years of senior expenses and interest on senior notes, significantly higher than on Spanish and Italian NPL deals rated by Scope, where reserves usually cover around one year of senior costs. “But we anticipate that a significant correction in historically volatile Irish real estate will cause a decline in the collateral value of transactions and an increase in the propensity to default as home equity declines,” Sie added. Scope also expect delinquencies and defaults to increase following a rise in unemployment.

“We expect a rapid deterioration in mortgage defaults as household income significantly shrinks, especially among re-performing loans,” said Paula Lichtensztein, senior representative of Scope’s structured finance team and co-author of today’s report. “Performance of Irish RMBS between 2013-2018 shows that default rates of restructured loans were two to three times higher than default rates of loans that had not previously been restructured.”

Property price readjustments will increase default risk. Restructured loans with negative equity defaulted roughly twice as frequently as those with low LTVs. However, Scope believes adequate loan security and good historical payment levels of Irish re-performing RMBS transactions will mitigate the increased credit risks. “We expect the increase in defaults will drive another wave of restructuring, increasing recovery timings. We also expect new debt haircuts will decrease lifetime recovery inflows of Irish re-performing loan transactions,” said Lichtensztein.

On the plus side, the 60%-65% weighted average LTV of securitised Irish re-performing pools is significantly lower than LTV levels of NPL securitisations in other jurisdictions. For instance, Italian NPL transactions rated by Scope contain, on average, around 35%-70% of loans with LTVs over 100%. The proportion of Irish loans with negative equity is also limited (typically less than 10% of the pools). Low LTVs incentivise debtors to avoid defaults and serve as a cushion for recovery rates in the event of adverse movements in property values.