Moody's: Increased use of restructurings credit positive for Irish RMBS, covered bonds and banks

Persistent high levels of late-stage arrears indicate that Ireland's mortgage arrears crisis is not yet resolved, Moody's Investors Service says in a new report. Nonetheless, the expansion of restructuring methods and introduction of restructuring targets have helped address borrowers' payment problems, and are therefore credit positive for Irish residential mortgage-backed securities (RMBS), covered bonds and banks.

"Borrowers are benefitting from the strong economic recovery in Ireland, with improving employment and housing markets almost halving 60 to 90 day arrears over the past year" says Assistant Vice President -- Analyst, Gaby Trinkaus. "With the level of late-stage arrears still the highest in Europe, the expanded use of restructurings should help curb losses as the economy continues to pick up steam."

Over the past three years, existing restructuring methods such as temporary payment arrangements have been supplemented by new options such as split mortgages and dual approach arrangements, Trinkaus says in "Increased Use of Restructurings Is Credit Positive for Irish RMBS, Covered Bonds and Banks." The shift from temporary to long-term payment arrangements is credit positive for RMBS, providing both certainty and further incentive to pay for borrowers with a long-term insufficient debt servicing capacity. The shift is also credit positive for Irish banks, since it will reduce their costs on workout units and help resolve long-term arrears in a more efficient manner than through repossessions. Restructuring involving debt write-down is positive for covered bonds while the issuer's support continues.

Information from Irish lenders covering about 89% of Moody's-rated Irish RMBS shows that the restructuring of buy-to-let (BTL) loans has outpaced that of owner-occupier loans. This is due to BTL borrowers' weaker credit profile and high willingness to reach a restructuring arrangement in order to avoid the appointment of a receiver of rent. Debt write-offs either fall outside the lenders' policies or are applied only under strict circumstances, limiting moral hazard among borrowers.

"With borrower-friendly courts allowing repossession only after all attempts to engage with a borrower have failed, it can take up to four years to repossess and sell a property in Ireland," Trinkaus says. "And even though limited or no reporting of restructurings in most Irish RMBS exacerbates uncertainty around their performance, we expect arrears and losses to decline during the next year on the back of economic recovery."