Mortgage-backed securities to come under stress as house prices decline

IRISH residential mortgage-backed securities are expected to come under severe pressure as house prices continue to plummet.

Yesterday, the Fitch Ratings, in a special report, disclosed that it expects these securities transactions to come under severe stress because their performance deterioration to date is not yet reflecting the house price decline and recent economic stress in Ireland.

“House prices have fallen 31.5% from their peak while Ireland is undergoing one of the deepest recessions of all the advanced economies.

“Prepayment rates have reduced significantly over the last year in Irish RMBS transactions due to limited benefits available to borrowers from refinancing in the current environment of restricted new lending and low existing mortgage costs,” Fitch said.

The ratings agency points out that arrears and the repossession rate have increased over the last year. However, the deterioration is far below levels Fitch would expect given the stress in the economy.

“The low repossession rate in Ireland reflects the attempts made by both servicers and courts to give borrowers all possible opportunities to resolve their financial difficulties,” they observed.

The report, entitled Around the Houses – Quarterly European RMBS Performance Update Q4 2009, is available on www.fitchratings.com.

It covers each major jurisdiction and highlights the main drivers of changes in arrears and principal payment rates, as well as providing an overview of recent rating actions, current ratings and the outstanding balance of rated notes.