Global ratings agency Moody's has forecast that house prices in Ireland will rise by 5 per cent this year due to a shortage in housing supply, the relaxation of mortgage lending rules for first-time buyers, and growing demand from those borrowers who stand to benefit from the State's new help-to-buy scheme.
Moody’s said mortgage arrears would continue to decline slowly, particularly long-time arrears as those borrowers were less likely to be offered a modification to their loan.
It said that while the housing market recovery and declining arrears are credit positive for Irish banks, elevated balances of mortgages in long-term arrears and a large proportion of restructured loans continue to pose downside risks to banks’ creditworthiness.
In its latest note on the Irish mortgage market, Moody’s Investors Service said the benefits of rising house prices in Ireland and lower mortgage arrears would continue to spread to Irish banks and bonds backed by home loans – namely, residential mortgage-backed securities (RMBS) and covered bonds.
“On average, 33 per cent of loans in RMBS portfolios we rate are still in negative equity, however, that is down significantly from 64 per cent close to the trough of the house price decline in 2013,” Moody’s said.
“Furthermore, the average amount of negative equity per borrower has also declined, to 6 per cent from 17 per cent in 2013.”
Moody’s said the favourable economic environment in Ireland and the related recovery in house prices had improved Irish banks’ asset quality.
However, the level of non-performing mortgages remained high, and loans in long-term arrears make up the majority of the total, posing tail risks for Irish banks.
Domestic mortgages
It noted that the share of domestic mortgages with loan-to-value ratios above 100 per cent for the four largest banks had decreased to 26 per cent as of December 2015 from 50 per cent two years earlier.
“While the use of restructuring solutions by the banks has contributed greatly to resolving mortgage arrears, it also resulted in the build-up of a large layer of forborne loans on Irish banks’ balance sheets – nearly €20 billion for the four largest rated banks at the end of 2015, or 20 per cent of the total mortgage lending in Ireland,” it added.
It said a larger part of these loans are currently performing, but they have a higher risk of eventually re-defaulting, compared with mortgages which have never been forborne.
Some restructuring solutions employed by the banks are short-term in nature (such as interest-only, reduced payment and payment concession arrangements).
Moody’s said the use of long-term sustainable restructuring methods would continue to aid the banks in the resolution of non-performing mortgages and, in particular, would help to address the long-term arrears in a more efficient manner than through repossessions.
As with banks, it said covered bonds will benefit from rising house prices.
Tighter lending standards should also improve cover pool credit quality over time, although Irish covered bonds have varying exposures to more recent mortgage loans.
Moody’s report showed that the highest frequency of default in 2016 was in Longford, with a rate of 12.7 per cent, and Cavan at 12.6 per cent.
The lowest rate was in Dublin at 6 per cent. It said the lack of employment opportunities in these areas was the “likely driver” of this trend.
