Mortgage arrears have spiked across a segment of Irish boom-era mortgage borrowers who had previously had trouble meeting repayments, following a spike in variable interest rates in recent years, ratings agency S&P Global said.
Some 25.7 per cent of Irish reperforming loans – loans that had got back on track after previous arrears – held in residential mortgage-backed securities (RMBS) deals were behind in repayments at the end of December, up from 8.4 per cent in January 2022 before the European Central Bank (ECB) started to raise official rates aggressively to rein in inflation.
The rate of increase was amplified by certain better-off borrowers repaying loans more quickly to minimise the effect of rate hikes.
Investment funds, or so-called vulture funds, that acquired billions of euro of non-performing loans from banks in the wake of the financial crisis have essentially refinanced many of these loans on the bond markets through such RMBS deals.
The spike S&P refers to relates to what are often referred to as “mortgage prisoners”, homeowners who are typically charged higher rates than mainstream banks and who have not been able to refinance elsewhere because of their low credit ratings.
As of last June, more than 80 per cent of mortgages in the hands of firms not actively lending were on rates of at least 6 per cent – with many paying between 8.5 and 10 per cent, following rate hikes in recent years, according to a recent report from the Oireachtas Library and Research Service.
At the time, the average new loan was being priced at a little over 4 per cent, Central Bank data shows. Market rates have come down since then as the ECB has been reducing official rates since last June and it is expected that the level of arrears across reperforming loans will fall too.
Most loans held by non-lending investment funds have variable rates, whereas there has been a major shift in the wider market towards fixed-rate products in recent times.
The sharp increase in arrears across reperforming loan RMBSs contrasts with prime RMBS transactions, where borrowers have higher credit ratings. Arrears in the latter have inched up to 1.1 per cent from 0.8 per cent over the course of the past three years, according S&P.
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“Irish prime RMBS transactions rated by S&P Global Ratings have one of the lowest arrears levels in Europe, whereas Irish RMBS transactions have one of the highest,” S&P analysts, including Philip Bane and Stephen Kemmy, said in the report.
“[The] high cost of living and rising interest rates are the main contributing factors as borrowers exposed to higher variable rates in portfolios tended to struggle to adjust to their higher repayments.” Many are on interest-only payment arrangements.
Loans in reperforming loan transactions were mainly issued before the Central Bank introduced strict mortgage lending rules a decade ago.
Diarmaid Sheridan, an analyst at Davy, said the low level of arrears across prime RMBS deals “demonstrates how effective the Central Bank macroprudential policies have been”.
The sharp increase in arrears in the reperforming RMBS deals tracked by S&P is much more pronounced than the performance of the wider pool of restructured Irish mortgages tracked by the Central Bank.
The Central Bank said 52,865 owner-occupier loans were categorised as restructured at the end of December. Some 80 per cent were not in arrears, while 84 per cent were meeting the terms of their current restructure arrangement.
At the end of 2021, some 83 per cent of restructured accounts were not in arrears, while 88 per cent were deemed to be meeting the terms of their revised arrangements.
Núa Money, a new nonbank lender, recently launched a product, called Núa Freedom, aimed at borrowers that had previously been in trouble but have maintained a restructuring arrangement for at least five years.
The lender is offering an initial fixed rate of 5.25 per cent for three to five years, before moving to a standard variable rate, to such borrowers, subject to a maximum LTV of 75 per cent and the borrower being able to cover the entire value of the loan, including portions that had previously been warehoused under a split-mortgage arrangement.
