Wednesday 16 October 2019

Securitisation of mortgages is back in favour as banks deliver

Stock photo: Reuters
Stock photo: Reuters

Gretchen Friemann

More problematic mortgages will be bundled up into bonds and sold to investors this year as private equity firms seek to refinance soured loans acquired from Irish banks.

Both AIB and Permanent TSB are in the midst of large-scale loan sales worth a combined €7.4bn, with the lion's share of these assets likely to wind up in the hands of distressed debt funds.

The opportunists in turn are expected to turn a quick profit by securitising the non-performing loans.

Securitisations, which fell out of favour following Lehman Brother's collapse, have staged a comeback in Europe as investors chase riskier yields amid historically low interest rates.

A new report on Irish mortgage trends by credit ratings agency DBRS highlights that securitisations have become a "common exit for portfolio purchasers in Ireland and Southern Europe".

The agency claimed the outlook for these asset-backed bond issuances remains benign "as house price appreciation, in combination with a clear regulatory stance on the workout process, has improved the environment for taking possession of the property as a last resort".

DBRS said this "provides a backdrop for securitisation of the large outstanding non-performing loan (NPL) portfolios, as well as the long-term restructured loans, such as split mortgages and re-performing loans."

The report's emphasis on the importance of securitisations comes as Fianna Fáil pursues legal reforms aimed at regulating the so-called vulture funds - a move prompted by PTSB's decision to offload 18,000 buy-to-let and owner-occupier mortgages.

Finance Minister Paschal Donohoe has pledged to support the opposition's motion.

But he also raised concerns about how the reforms may impinge on the economy and, in particular, securitisations.

In a speech to the Dáil earlier this month, Mr Donohoe pointed out that this "is not just a theoretical matter".

"If Irish banks cannot use securitisation effectively they will have less finance to provide to the real economy and it will come at a higher cost," he said.

Philip Lane, Governor of the Central Bank, has also signalled his discomfort with the bill, according to Goodbody stockbrokers.

Last Friday, at a speech to the Institute for International and European Affairs in Dublin, Professor Lane claimed that borrowers whose loans are sold are afforded the same regulatory protection they had prior to the sale.

In a note to clients yesterday, Goodbody claimed these remarks represented a "veiled reference" to Fianna Fáil finance spokesperson, Michael McGrath, and indicated that Professor Lane believes "there is no need for ...[the] proposed new bill to regulate non-regulated funds".

In its report, DBRS claimed that repossessions are a last resort, once all other options have been exhausted.

It also pointed out that securitisations of treated loans offer a better outcome for distressed debt funds.

DBRS's report noted that "investors can receive a steady flow of income and additional interest that can be accrued, as opposed to spending money on legal fees in the court process towards an uncertain pay-out in terms of amount and timing".

"In the end," the report concluded, "it is generally in the best interest of investors to work with borrowers."

The agency also noted the volume of split mortgages has also shot up recently as lenders and investors race to restructure loans.

These 'treated' loans, whereby the borrower can service part of the debt and repay the outstanding amount further at the loan's maturity, are also likely candidates for securitisations deals.

PTSB's upcoming loan sale includes close to €700m of these 'treated' mortgages, raising the possibility that these too may eventually be transformed into tradable securities and sold on to capital markets investors.

Irish Independent

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