Irish re-performing mortgages ‘particularly vulnerable’ to cost-of-living crisis — S&P

Irish boom-era mortgages which fell into arrears but have since returned to making payments are more vulnerable to running into trouble again during the cost-of-living crisis than “prime” loans issued since 2015 under new Central Bank lending restrictions, according to Standard & Poor’s (S&P). Many of the loans concerned have been sold in the past decade to overseas funds.

The report by S&P focuses on almost €12.8 billion of Irish home loans that have been refinanced in the international bond markets through a process called residential mortgage-backed securitisation (RMBS).

RMBS deals have been used by investment funds that bought problem loans from banks, non-bank lenders and some active banks. Most of the loans in the transactions that S&P follows are classified as prime loans, which have a low default risk.

More broadly, some 63,400 Irish owner-occupier loans, or 9 per cent of all such loans in the market, were categorised as restructured at the end of June, according to the Central Bank.

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“Irish borrowers are facing the biggest cost-of-living squeeze in decades; consumer price inflation reached abnormal levels during 2022 and interest rates are expected to continue to rise,” S&P said.

S&P expects consumer price inflation to average 8 per cent in the Republic this year, falling to 3.7 per cent in 2023, and interest rates to continue rising in 2022 and beyond.

“These pressures could push more vulnerable borrowers into mortgage arrears. While arrears levels can indicate immediate borrower stress, analysis of borrowers who are now current on their payments but have recently been in arrears may indicate the level of vulnerability to future pressures, such as the rising cost of living.”

More than half of the Irish mortgages in the RMBS transactions are variable or track the European Central Bank’s (ECB) main rate, leaving them “exposed to payment shock” as interest rates increase. The ECB is on track to raise rates on Thursday for the third time in four months to try to rein in inflation.

“Legacy mortgage loans in re-performing transactions are particularly vulnerable to rate increases as the borrowers in these transactions predominantly (94 per cent) pay a variable rate of interest [including trackers]. These borrowers are typically among the worst credit performers and their performance will likely deteriorate when hit by both [general inflation] stress and rate rises,” S&P said.

In a separate report, S&P said that while non-bank lenders — which would include ICS Mortgages, Finance Ireland and Avant Money — are much more exposed to rising market interest rates than banks, they are “likely to play an increasingly vital role in the Irish mortgage market, despite recent headwinds that are testing borrowers and lenders alike”.

Non-bank lenders accounted for 13 per cent of the €10.7 billion of new Irish mortgage lending last year, up from 3 per cent in 2018, S&P noted.

Although the decisions last year by Ulster Bank and KBC Bank Ireland to withdraw from the market and the Central Bank’s move this month to ease its mortgage-lending restrictions have opened up opportunities for non-bank lenders, S&P said difficult market conditions have limited the appetite among such firms to take full advantage of the developments.

Still, S&P said the “recent tightening of lending criteria” by some non-bank lenders “may be a temporary measure”.