Moody's downgrades more bank bonds backed by Irish home loans

THE “WEAK and rapidly deteriorating” mortgage market has led Moody’s to downgrade a batch of bonds backed by Irish home loans.

The ratings agency also cited the weak credit quality of Irish banks as a reason for the move, which saw the downgrade of 50 tranches of debt contained within 17 bonds. It is considering reducing its rating on a further 16 loan tranches.

Moody’s said it expects the quality of Irish mortgages to deteriorate over the course of this year and “to remain at elevated levels for several years”.

It also anticipates that lenders will “continue to avoid recognising these losses by offering more loan modifications”. Loan restructurings, such as allowing interest-only payments or longer terms, reflect a limited appetite on the part of lenders and the regulator to act on “highly delinquent loans”, according to Moody’s.

The agency’s downgrades affect €31.4 billion in residential mortgages contained within a €40 billion pool that Irish lenders have used as collateral in raising funds. By last December, the proportion of these loans in arrears by three months or more had doubled from 2009 levels, from 2.9 per cent to 5.7 per cent.

The agency has raised its range of “lifetime expected loss assumptions” for the mortgages it tracks from between 0.6 and 8 per cent to between 3.5 to 13 per cent.

Some of the loan groupings it examines have a 60 per cent negative equity rate, with Moody’s also expecting this to become more widespread.

The agency points to growing joblessness and lower incomes arising from austerity measures as factors that will continue to eat into consumers’ ability to repay their mortgages.

It also warns that borrowers will be hit by rate increases because the mortgages it follows are “predominantly floating rate”.

Moody’s highlights housing oversupply, lack of movement in the market and further house price declines as additional negative factors.

The senior note downgrades applied by the agency vary depending on the lender that issued the mortgage bonds. Irish Life Permanent’s Fastnet Securities 8 was among the bonds where loss expectations increased most because it has a high concentration of buy-to-let loans.

Other lenders affected by the latest round of downgrades include: First Active, Ulster Bank, EBS, ICS, KBC and Bank of Scotland (Ireland). Some junior and mezzanine debt has been downgraded to junk status.