* More borrowers than ever to be three months behind
* Government may change rules to fast-track repossession
* Investors still banking on market recovery
* GDP growth without wage growth will hurt affordability
By Owen Sanderson
LONDON, Jan 22 (IFR) - The Irish mortgage market is facing its toughest year yet, according to Fitch Ratings, which expects arrears to peak in 2014. This comes six years after the advent of the crisis, and just as the Irish sovereign's prospects have been upgraded by rival rating agency Moody's.
These rising arrears will hit Irish banks and securitisations, just as new rules recommended by the Irish government's Expert Group on Repossessions could force them to crystallise losses earlier, turning mortgages in long-term arrears into property repossessions.
Fitch said that although early stages arrears - borrowers less than three months behind on payments - had peaked, late stage arrears were building. In RMBS portfolios (securities backed by Irish mortgages, which report detailed performance measures on the underlying loans) it sees 18% of loans more than three months behind.
Borrowers have been protected to some extent in the last five years by changes to the law, forcing lenders to obtain new legal permissions before foreclosing on properties. Fitch explained that "legislative changes ensured that enforcement remained infrequent, even as borrower distress increased."
Mortgage servicer Acenden said in its monthly research that "foreclosure levels remain artificially low with just 206 properties repossessed" in Q3 2013.
But now the legal pendulum is swinging back. The Expert Group on Repossessions, set up on the Troika's recommendation last September, said that the Irish government should streamline repossessions, allowing lenders to use standardised documents and to accelerate servicing of notice and enforcement of repossession orders.
Irish banks already have targets for resolving their mortgage books, set by the Central Bank of Ireland in March 2013. In early December, all the lenders were said to be in line with their resolution targets, but these have been toughened to require sustainable solutions on 75% of loans more than 90 days in arrears by the end of June 2014.
The IMF's Financial Soundness Indicators for Ireland show EUR53bn of non-performing loans, net of provisions - against total capital in the banking system of EUR70bn. The IMF does not break out domestic residential real estate lending from other bank exposures, however.
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Despite the awful performance of the Irish mortgage market so far, investors are clamouring to get exposure, expecting the medium term performance to pick up. Some firms, such as Australian specialist lender Pepper, have bought businesses that offer new Irish lending - Pepper took on GE Capital's Irish lending in 2012 - while others are buying portfolios directly or RMBS bonds.
Lloyds, for example, agreed the sale of a book of non-performing Irish mortgages for GBP257m in December, a price of 42c on the euro, to Tanager, a unit affiliated with US private equity firm Apollo Global Management. Apollo entities also bought a book of Irish credit cards from Bank of America, along with a servicing platform.
In the RMBS world, prices have been on a tear (along with the rest of the periphery). Fastnet 9, the only publicly placed post-crisis Irish RMBS, priced at 165bp in late November, and is now in the low 120bp.
Fitch acknowledges in its report that it expects Ireland to return GDP growth this year, while it also points to an increase in new lending, to EUR83.4bn in November 2013 from EUR78.7bn the previous November.
Acenden, however looks at affordability for Irish mortgages in the light of the drop in real wages over the last four years. It argues "despite the early signs of economic recovery taking hold in Ireland there remains significant potential for affordability squeezes and hence further increases in arrears as long as wage inflation continues to lag price inflation and the economic recovery remains weak." (Reporting By Owen Sanderson, editing by Anil Mayre)