Proposed rules for cases of personal insolvency in Ireland could
deliver a fresh blow to the country's market for residential
mortgage-backed securities, already under pressure from rising
arrears and restructuring, according to analysts at Barclays.
More than 10% of all outstanding residential mortgages in
Ireland have been in arrears for more than 90 days, while 10.5%
have undergone some form of restructuring since the financial
crisis, according to the most recent statistics published by the
Central Bank of Ireland.
The government is trying to address these problems with the
Personal Insolvency Arrangement, which it approved in June and
expects to implement next year. The PIA is designed to help
borrowers who cannot pay off their debt set up a "reasonable level"
of repayment to creditors.
However, Barclays said in a research note this week that such
moves could come at a cost to Ireland's RMBS sector, which was hit
hard by the financial crisis but which -- as with the wider
securitisation market--remains an important way for local banks to
offload capital-intensive loans to investors and free up capital to
lend and benefit the real economy.
There has been no public issuance of RMBS in Ireland since 2007
and Priya Balan, an analyst at Barclays and one of the authors of
the report, said that the PIA could result in more people writing
off their mortgages and further weaken the collateral pool that
underpins the existing RMBS market.
She wrote: "The PIA, with its potential to result in mortgage
debt write-offs, is an additional negative for Irish RMBS
transactions...as far as RMBS pools are concerned, the risk of a
write-off cannot be ignored because it has the highest potential
for causing losses on the bonds."
As holders of existing Irish RMBS, asset managers, institutional
investors and banks are among those that would face losses as a
result of any deterioration in the quality of underlying loans.
However, Michael Greaney, director in structured finance at Fitch
Ratings, said it had not yet been determined to what extent the PIA
could affect investors in Irish RMBS.
He said: "There are risks that the PIA could create moral hazard
as borrowers may seek to go down the insolvency route in order to
reduce their debt burden. But it all depends on the robustness of
the PIA process."
Barclays ran scenario tests to determine what might happen to
existing RMBSs if debt write-offs started to occur. In its
base-case scenario, pool losses will remain minimal as long as
current conditions remain. But in its worst-case scenario with
falling house prices, higher mortgage arrears and shrinking RMBS
pools, all Irish RMBS pools suffer losses, even on some senior RMBS
notes.
Web site:
http://www.efinancialnews.com/story/2012-08-22/ireland-rmbs-market-pia-barclays-w
rning
Subscribe to WSJ: http://online.wsj.com?mod=djnwires