Fitch cautious over drop in early mortgage arrears

Agency says Irish experience shows stady decline in early arrears may not materialise


A slowdown in the pace of new mortgage arrears in euro zone economies hit hardest by the financial crisis may indicate some stabilisation returning to the sector, but those hoping for a steady decline may be out of luck, Fitch Ratings has said.

The ratings agency pointed to Ireland as the example when trying to predict the pattern for mortgage arrears, noting that early arrears levels will not necessarily drop steadily even after they appear to have peaked.

It said new arrears cases in Spain, Portugal and Greece had begun to slow, benefiting from more stable macroeconomic backdrops. In Portugal, fourth quarter arrears on one to two months reached 0.5 per cent, the lowest level since the financial crisis began.

However, Irish experience showed that early mortgage arrears peaked at 2.9 per cent in November 2011, before falling steadily in the first half of 2012. In the fourth quarter of 2013, however, early arrears rose once more, from 1.9 per cent to 2.2 per cent.

The agency said this could be prompted by changes to how lenders approach borrowers in difficulty, with changes to the Code of Conduct on Mortgage Arrears and the Land and Conveyancing Act enabling enforcement and foreclosure more viable.

Mortgage arrears are likely to peak in Ireland in 2014, Fitch Ratings said.

The increase may be due to changes in lenders or servicers’ approaches to troubled borrowers, enabled by changes to the Code of Conduct on Mortgage Arrears and the Land and Conveyancing Act that make enforcement and foreclosure more viable.

“This may have reduced banks’ willingness to offer some troubled borrowers options such as payment holidays or a switch to interest-only payments,” Fitch said.

“We do not expect arrears to peak in Greece or Spain until 2015, although they are likely to peak in Ireland this year, suggested by the overall trend of falling early-stage arrears due to a stabilising economy and firmer housing market, combined with banks’ increased ability to resolve existing arrears cases.”