Almost half of a portfolio of €300 million boomtime Permanent TSB (PTSB) buy-to-let loans that are currently being refinanced on international bond markets remain in negative equity, even after home prices have rallied strongly in the past eight years.
The loans stem from a wider pool of €1.2 billion of mainly interest-only loans, where borrowers are only required to pay back the principal as the mortgage matures, that PTSB sold to US banking giant Citigroup late last year. The transaction was aimed at paving the way for the loans to be refinanced with bond markets through a process known as securitisation, where bond investors receive regular interest payment backed by interest income from the loans.
A prospectus document for the €300 million securitisation deal, known as Glenbeigh 2, said that 47.8 per cent of the loans exceed the value of the underlying property. By comparison, the level of mortgages in negative equity in Ireland have fallen from about 40 per cent at the height of the financial crisis in 2013 to less than 4 per cent, according to a recent chart published by the Central Bank.
Delinquency rates
"Mortgage loans with higher LTV (loan-to-value) ratios typically experience higher rates of delinquency, write-offs, enforcement and bankruptcy than mortgage loans with lower LTV ratios," the bond document warned. Irish residential prices have jumped 88 per cent from their lowest point in 2013, according to the Central Statistics Office.
More than 86 per cent of the loans are on interest-only terms until they mature, it said. While less than 0.9 per cent of the loans are classified as non-performing, 13 per cent have been restructured during their lifetime.
PTSB sold the loans last October, eight months after it signalled that it was assessing risks associated with thousands of buy-to-let mortgages that were handed out before the crash and were issued on interest-only terms until the loans matured.
Tied-up capital
PTSB was able to release €200 million of expensive capital tied up against the risky portfolio, which will stand to the bank as it is in talks to buy a large portion of Ulster Bank's performing mortgages and small business loans, as the latter seeks to exit the market.
PTSB would most likely be interested in €9 billion of Ulster Bank's €20 billion loan book, including non-tracker mortgages, and small business and consumer loans, Deutsche Bank analysts said in a report last week. That's the equivalent of 60 per cent of the size of PTSB's own loan book.
It estimates that PTSB will need €550 million of additional capital to support the acquisition, and that it would “ideally” come from the both the Government, which owns 75 per cent of the bank, and private investors.
