Negative equity falls to 6% per borrower

The benefits of rising house prices in Ireland and lower mortgage arrears will continue to spread to Irish banks and bonds backed by home loans, while the average amount of negative equity per borrower has fallen significantly, according to a report released today.

Moody’s Investors Service found that the favourable economic environment in Ireland and the related recovery in house prices have improved Irish banks’ asset quality, while negative equity per borrower has fallen to 6% from 17% in 2013.

However the level of non-performing mortgages remains high, and loans still in long-term arrears make up the majority of the total, posing tail risks for Irish banks.

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 €20bn for the four largest rated banks at the end of 2015, or 20% of the total mortgage lending in Ireland, the report found.

Gaby Trinkaus, a vice President at Moody’s, said: “We expect mortgage arrears to slowly decline and house prices to rise by up to 5% over the next 12 to 18 months, which is credit positive for several sectors, namely Irish banks and mortgage securities.

While residential mortgage-backed security exposures to borrowers in long-term arrears and negative equity are still high, we note that the latter has halved to 33% from almost two-thirds around the trough of the house price drop in 2013.”

In 2017, Moody’s forecasts the supply shortage and looser lending rules will push up Irish house prices by up to 5%. It says residential mortgage-backed security transactions benefit from Ireland’s stronger mortgage market via declining exposure to arrears and lower loss severities.

However, exposures to borrowers in long-term arrears — 720 days or more — and those in negative equity, are still high.

Covered bonds will also 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, it said.