Warning over level of borrowers only paying interest
Ratings agency says banks could be compromising cash flows
Published 09/03/2011 | 05:00
Key ratings agency Standard & Poor's (S&P) has raised concerns over the number of interest-only mortgages present in the loan books of some of the Irish banks.
The agency has warned investors that the cash flows available from some pools of mortgages could be compromised because banks are putting under-pressure borrowers on interest-only arrangements, where monthly payments are reduced.
The comments are made in a new note on a pool of securitised mortgages linked to ICS Building Society, a division of Bank of Ireland. The ratings agency has cut its ratings on notes issued by the securitised vehicle.
The agency said its view was that loans that were converted into interest-only status have a "greater risk than other loans in the portfolio".
"We have also noted that ICS Building Society, in its role as investment manager, has stated that it is discontinuing a previous practice of buying back loans that become interest-only. We believe this will have a negative effect on the deal," claimed the agency.
"Loans that convert to interest-only will carry a greater risk than other loans in the portfolio. Arrears in this transaction remain lower than those we have observed in other Irish transactions.
"However, in our opinion the declining house prices and the presence of interest-only loans, together with high unemployment and continuing austerity measures in Ireland, are likely to cause higher delinquencies and to increase pressure on the cash flows of this deal."
The transaction was originated by ICS Building Society. The collateral consists of prime residential mortgages secured over properties in Ireland.
According to the Permanent TSB/ESRI House Price Index, house prices in Ireland have fallen 38pc since the price peak at the end of 2006.
The ICS transaction closed in March 2007 and house price declines have increased the loan-to-value ratios in the pool, states the agency.
The level of interest-only arrangements has been hidden across the banking system up until recently.
However, the Financial Regulator has now published details of borrowers only paying interest and those who are on a moratorium, not paying any interest.
Recently it emerged that the number of people in mortgage arrears has climbed to nearly 6pc of the total market, while the rate of repossessions has also speeded up.
Homeowners in arrears now owe about €8.6bn. At year end, 44,508 mortgage accounts, or 5.7pc of residential mortgages, were in arrears of at least 90 days, compared with 28,603 accounts at the end of 2009, a rise of more than 50pc.