No impact on mortgage securities ratings from variable cap - Fitch

The introduction of legislation that would force Irish banks to reduce Standard Variable Rates (SVR) on home loans would not affect the ratings of residential-mortgage-backedsecurities, according to Fitch.

These securities are essentially bonds tied to homeloans issued by banks, most of which date back to the middle of the last decade.

The ratings agency said a reduction in borrowing costs would improve the affordability of mortgages and reduce the stress on borrowers, thereby improving the performance of mortgage pools.

It warned though that another side effect of rate reductions could be an artificial increase in reported arrears, as the calculation is usually based on the overdue amount divided by the payment due in the period.

Fitch said that as the payment due would become lower following a rate decrease, the reporting could suggest that borrowers have been in arrears for a longer period. However, it added that the majority of delinquent loans are already in late-stage arrears and therefore the effect on this artificial increase would be limited.

Political pressure has been mounting on banks in Ireland to cut rates in recnet months after research published by the Central Bank identified Irish SVRs as the highest in Europe.

Minister for Finance Michael Noonan set a July 1st deadline for lenders to offer cheaper mortgages to customers or risk sanctions. Taoiseach Enda Kenny also indicated that action might be taken against banks in the next budget if rates are not reduced.

Despite the threat of sanctions, most of the country’s lenders have made only minor tweaks to rates, with the majority offering to move customers to fixed-rate options instead.

Currently, there are more than 300,000 variable rate mortgage customers in the Republic, paying an average of 2 per cent more than the average European customer. However, banks are reluctant to reduce rates as they are effectively subsidising tracker mortgage holders.

While Fitch does not see an impact on residential-mortgage-backed securities, it did recently warn that the introduction of legislation on standard variable rates could be highly damaging for financial institutions.

The agency said any move to make lenders cut rates would make it difficult for them to sustain profitability and build up capital through retained earnings. It also said that risks associated with mortgage lending in Ireland are still high and added that this provided some explanation for the reason why banks were charging higher margins.