Irish mortgage arrears analysis
Banking recovery requires resolution of mortgage arrears challenge
17 August 2012
Conall Mac Coille, Chief economist
Continued rise in mortgage arrears a concern
We expect our RMBS measure of owner occupier arrears to rise from 13.4% by value in Q1 2012 to an eventual peak of 16.5%.
This forecast is based on a statistical regression model of arrears, conditioned on our economic projections. A slowly stabilising labour market should reduce the pace of mortgage arrears formation.
Arrears on buy-to-let (BTL) loans are a concern, running at over 2x owner occupier rates and driven up by mortgage terms switching to interest and principal payments.
Restructurings to move beyond short-term measures
Restructured mortgages have had limited success in restoring loan performance, with interest only and principal payment modifications prevalent.
A remarkable feature of the Irish housing market bust is the lack of principal write-downs and repossessions.
The new PIA regime may encourage repossession of BTL property loans, but there is a risk that the new measures merely delay loss recognition by banks.
If banks attempt to liquidate a large number of their delinquent BTL loans, property prices could fall.
Mortgage losses to exceed PCAR adverse case
We now expect covered banks' mortgage book loan losses to exceed the €9bn in last year's PCAR exercise.
But eventual losses of €10-11.5bn could be absorbed within the remaining €8.5bn of unused capital from PLAR deleveraging requirements.
Tactical delinquency, increased bankruptcy, further property price falls and macroeconomic developments pose risks to this view.
Banks need to show that they can absorb loan losses within Tier 1 capital to generate market confidence and return to profitability.