There will be "significant volumes" of distressed mortgage portfolios sold by the banks this year, with the likes of PTSB and AIB looking to offload large quantities, according to analysis by a credit ratings agency.
In its report, Irish Mortgage Market Trends, DBRS Ratings said non-performing loans (NPLs) remain a "significant issue" for lenders. "Possibly because of reputational concerns, lenders in Ireland generally do not directly securitise NPL portfolios," it said.
“NPL business strategies either focus on getting borrowers to a performing status, or enforcing collateral to provide cash flows to the transaction.
“Under the second option, lenders are fearful of damaging their reputation in the market, whereas investors purchasing the portfolios have less reputational risk in Ireland when repossessing mortgaged properties.”
DBRS said investor motivation to improve NPL borrowers to performing status was a “more significant driver of their actions”.
“A portfolio of (re-)performing assets is more valuable for investors, as opposed to a non-performing portfolio going through repossessions, due to the beneficial cash flow options of the first,” said the report.
“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, it is generally in the best interest of investors to work with borrowers.”
As of the third quarter of 2017, borrowers more than 720 days in arrears represented 53 per cent of all owner-occupied delinquent mortgages by outstanding balance.
“The late stage of these delinquencies shows the underlying difficulty for servicers to enforce mortgages and end relationships with delinquent borrowers,” said the report.
“Buy to let (BTL) mortgages demonstrate an inferior performance to owner-occupied loans, with borrowers more than 720 days in arrears representing 66 per cent of all delinquent BTL loans.”
In total, 27 per cent of all BTL mortgages in Ireland are delinquent, which remains above the total market NPL ratio.
The outstanding volume of Irish mortgage debt continues to decline, with contractions in BTL mortgages far greater than for owner-occupied loans. BTL volumes declined by approximately 9 per cent year-on-year, compared with 1 per cent for owner-occupied loans.
During the five years to the third quarter of 2017, the volume of outstanding mortgages declined by 15.5 per cent, with BTL loans declining by over 27 per cent. However, in terms of population, the size of Irish mortgage debt – €121 billion – “remains large”.
In terms of house prices, they “continue to demonstrate a robust recovery” from the depression between 2008 and 2013, “albeit with significant regional discrepancies”.
Real house price growth remains most prominent in Co Dublin, with an increase of 84.8 per cent between the trough (February 2012) and October 2017.
Since bottoming out, the Dublin City, Dun Laoghaire-Rathdown and South Dublin regions have all shown significant increases of 100.9 per cent, 89.8 per cent and 79.5 per cent respectively.
Irish house prices outside of Dublin have also demonstrated significant growth since early 2013, with an increase of 61.8 per cent since the trough.
At slightly over 55,000, the number of properties sold in 2016 reached a post-crisis peak. DBRS said this equates to 1 in every 30 properties changing hands during the year – a turnover rate of roughly 3.2 per cent.
The number of private dwellings has remained roughly constant between 2011 and 2016 (approximately 1.7 million properties), but the number of sales has more than doubled, increasing the turnover rate from 1.5 per cent.
DBRS anticipates that this has not increased significantly since 2016 because of stagnation in the number of property transactions since then.
“The market is not showing signs of overheating, with a relatively low turnover of properties compared with other European countries,” the report said. “For example, the 2017 turnover rate in the Netherlands was 5.5 per cent.”
