Fitch: Managed Mortgage Debt Write-Downs More Likely in Ireland

Tue Feb 11, 2014 10:16am EST

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(The following statement was released by the rating agency) LONDON, February 11 (Fitch) Recent speculation in the Irish media regarding Allied Irish Bank's move to offer troubled Irish mortgage borrowers debt write-downs through split mortgages is consistent with our expectation that mortgage write-downs and restructurings as well as enforcements will increase in 2014 among Irish banks, Fitch Ratings says. The impact will depend on the ability of the banks to restrict the availability of these products to specific distressed borrowers who co-operate throughout the period of any arrangement. The level of distress in the Irish housing market coupled with the Central Bank of Ireland's introduction of targets for banks to find long-term solutions for the majority of their distressed borrowers has made some form of debt write-downs inevitable. We expect some Irish banks to introduce products to provide long-term viable arrangements for co-operative borrowers. For a lender, splitting a mortgage rather than writing it off keeps the possibility of some future recovery on the deferred payment portion of the loan, even if part of it will be written down. Given the relatively modest living expenses allowed under the Personal Insolvency Arrangement (PIA), for a borrower, a split mortgage may be preferable, even though mortgage loans under a PIA can be written off up to the market value. With house price declines of more than 45% from peak-to-trough, most of the distressed loans will be in negative equity. Therefore the loss at sale and the foreclosure costs are expected to be greater when compared with a co-operating borrower who makes annuity repayments on a large proportion of the total outstanding debt. The process of moving some borrowers onto a new product will need to be managed carefully to minimise the potential for other borrowers to go into arrears in expectation of write downs, or for those who are already in early arrears to try to obtain this type of debt workout. Affordability has been the biggest driver of Irish mortgage delinquencies, but we believe that borrower behaviour has also played a role. This risk is partly offset by the greater sanctions available to Irish banks since last year's changes to the Code of Conduct on Mortgage Arrears and the Land and Conveyancing Act made enforcement and foreclosure more viable. The impact on RMBS transactions from potential losses through partial write-offs of split mortgage debt is already captured in our current RMBS criteria, which factors in the prospect of greater losses through loan foreclosures. Regarding mortgage covered securities programmes, the covered bond pools are dynamic and loans three months plus in arrears are removed on a regular basis in outstanding Irish programmes; therefore three month plus arrears would only occur in the cover pools post issuer insolvency. Contact: Ketan Thaker Senior Director Structured Finance +44 20 3530 1392 Fitch Ratings Limited 30 North Colonnade London E14 5GN Stephen Kemmy Associate Director Covered Bonds +44 20 3530 1474 Mark Brown Senior Director Fitch Wire +44 20 3530 1588 Media Relations: Athos Larkou, London, Tel: +44 203 530 1549, Email: athos.larkou@fitchratings.com. The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings. Applicable Criteria and Related Research: Mortgage Market Index - Ireland - 4Q13 here Global Housing and Mortgage Outlook here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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