Irish RMBS: Dealing with Mortgage Arrears
Due to borrower-friendly financial regulation in Ireland, mortgage delinquencies have been steadily and continuously declining over the past decade. However, legacy mortgage arrears issues are still persistent in Ireland. In recent years, DBRS Morningstar has also observed that, in some rated residential mortgage-backed security (RMBS) transactions, the borrowers of interest-only (IO) mortgage loans have had difficulties repaying/refinancing their outstanding principal at maturity. This commentary examines how increasing interest rates, macroeconomic constraints, and macropolitical uncertainties may put further negative pressure on distressed borrowers in Ireland and reverse the positive trend of reducing mortgage arrears achieved over the past decade.Summary highlights include:
-- An overview of the legacy mortgage arrears situation, borrower engagement in restructuring arrangements, and repossession.
-- DBRS Morningstar’s observation that, in some rated Irish RMBS transactions, there has been an increase in IO borrowers that have had difficulties repaying/refinancing the outstanding principal.
-- The negative effect of loans in arrears and restructured loans on expected portfolio performance. However, some transactions envisage structural features, like arrears-based provisioning, which have a positive impact on ratings.
-- Several headwinds in Europe that will likely put certain pressure on the performance of Irish RMBS transactions.
-- Certain structural features embedded in several Irish securitisation structures that will mitigate the aforementioned risks to a certain degree and enhance the ability of rated bonds to meet their scheduled interest and principal payment obligations.
“The reduction of Irish mortgage arrears since mid-2013 could reverse under current macroeconomic and geopolitical circumstances across Europe”, said Shalva Beshia, Assistant Vice President, from the European Structured Finance Surveillance Team at DBRS Morningstar. “Increasing interest rates, higher cost of living and inflation, and lower expected economic growth in Europe could negatively affect borrowers' affordability and boost the likelihood of an increase in arrears in Irish RMBS portfolios”, Beshia added.
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