Mortgage losses at banks 'may be less than feared'
Published 17/01/2014 | 02:30
MORTGAGE losses at the banks may be less than originally feared, according to new research from stockbrokers Davy.
Lenders may be over estimating the scale of losses because of an assumption that mortgages falling into arrears will end in repossessions, according to Davy economists.
Banks must make allowances for losses based on an assessment on loans that have gone bad.
But these losses may not be as large as previously feared because more cases are being worked out, according to economists Conal MacCoille and David McNamara.
Banks are currently forced to write off close to 70pc of the value of some distressed mortgages -- based on a 55pc fall in house prices and a further cost of up to 14pc of the loan to actually carry out the repossession.
There is also an assumption that just 25pc to 35pc of arrears cases will end up back on track, according to Davy.
But evidence suggests that a high number of arrears cases were being "cured" through debt restructuring.
Trying to pin down the true extent of losses in the Irish banks, especially on home loans, has vexed investors and policy makers since the start of the crash. For much of that time the fear has been that banks were downplaying the extent of the problem.
But the Davy report cites evidence from an unpublished Central Bank report that looked at borrowers' ability to meet repayments.
It found that many distressed borrowers have a higher level of income available than is widely assumed.
"This evidence still suggests that for significant cohorts of borrowers, mortgage modifications have plenty of scope to restore loan performance.
"In doing so, banks may realise smaller losses than the 'repossess and sell' provisioning model suggests," Davy said.
The law on repossessions was tightened up last year, making the threat of having your house taken back by the bank more credible for people in arrears.
This is also prompting more people to repay more of their loans, Mr MacCoille told the Irish Independent.
"If the average borrower can be brought back on track with modest spending adjustments, you could get big changes (in provisioning) very quickly," he said.
However, he refused to put a figure on the likely impact of that change.
Stress tests later this year could still see lenders forced to conform to very strict rules on their anticipated losses, with Davy saying their assessment should feed into the analysis of investors looking at the longer term.
It comes as rating agency Fitch lifted its assessment of Bank of Ireland's strength on a stand alone basis -- and kept its main credit ratings for all the main banks unchanged.
Fitch left its credit ratings for AIB, Bank of Ireland and Permanent TSB unchanged in contrast to rival Moody's which cut its assessment of all three in December. Fitch also upgraded Bank of Ireland's "viability rating" by one notch to B+, reflecting improvements in the bank's risk profile -- including the agency's expectation of a return to profitability this year.
In a further sign of normalisation, NAMA announced the end of its so called 80/20 mortgage scheme -- which protected home buyers from falling house prices -- due to lack of demand.