Ryan's novel mortgage plan heading for problems
Published 02/02/2010 | 05:00
Plans by Minister Eamon Ryan to assist mortgage holders with arrears are likely to run into significant problems with the ratings agencies and providers of liquidity to the Irish banks.
The ratings agencies are likely to seek information on any government plan to write off mortgage arrears, offer payment holidays, or undertake debt-for-equity swaps for hard- pressed householders.
Shortly before Christmas, a plan by the Italian banks to offer a payment holiday scheme to householders immediately ran into problems with Moody's which warned it could lead to downgrades for Italian residential mortgage-backed securities (RMBS).
RMBS, which Irish banks undertake regularly, involve residential loans being packaged up and sold off to investors. These investors are then entitled to interest and principle payments from the mortgages.
Irish banks have also used residential mortgages as collateral for general liquidity, and any reduction in the value of these mortgages, via a write-off or payment holiday, is likely to make such funding more expensive, or possibly prohibitive.
The ratings agencies' chief concern is that payment holidays, in particular, where the householder does not have to make any payments for an agreed period, simply end up creating a backlog of defaulting mortgages. In other words, defaulting loans are simply frozen for a period, but will still be in arrears at the end of the 'holiday' period.
"Without proper implementation, certain deals, especially those with low excess spread or no additional liquidity, may potentially suffer downgrades, especially on junior notes, mainly due to an increased risk of back-loaded defaults," Moody's analysts wrote recently about the Italian scheme.
Yesterday the Department of Finance declined to comment on the potential impact of Mr Ryan's proposals on bank funding, but the Department said Finance Minister Brian Lenihan had held discussions with Mr Ryan and some proposals would go to cabinet shortly.
Mr Ryan has yet to specify the precise measures he would favour. But in recent months Irish banks have raised concerns that the wrong measures, if adopted, could seriously weaken bank funding.
Just before Christmas, a senior executive at EBS, Fidelma Clarke said: "There are, unfortunately, consequences for the banking industry in doing that. The way the system works is that institutions use loans as collateral for lines of credit for wholesale funding purposes and liquidity.
"Any damage to any contract, as would be seen by an international investor, could have unattended negative consequences for the Irish banking system. If all covered bonds, securitisations or liquidity facilities with the ECB were no longer deemed to be of the quality people thought they were signing up for, they could be downgraded.''. However she said the banking sector was open to new suggestions and government initiatives.