February 5, 2015 / 12:12 PM / 3 years ago

Fitch: Irish Mortgage Caps Reduce Banks' New Asset Quality Risks

(The following statement was released by the rating agency) LONDON, February 05 (Fitch) Limits on mortgage lending announced by the Central Bank of Ireland last week are positive for the health of the banking system in the long term as they should support more sustainable and prudent lending by Irish banks, Fitch Ratings says. But in the short term credit demand and supply may be lower, which could slow loan growth recovery, house price growth and recoveries on non-performing loans. Reducing high levels of impaired loans remains a key challenge for the banks. Irish house price growth was among the highest in the world at end-3Q14, at 15% yoy and 24% in Dublin due to an improved Irish economy and increased credit availability. We had already considered the CBOI's limits in our overall house price expectations for 2015: we forecast price growth to slow to 4%, partly because the high numbers of cash buyers last year is likely to fall. Around half of residential property transactions were in cash in 3Q14, according to the IMF's January report. In addition, an overhang of borrowers with debt issues remains, which could lead to repossessions adding supply to the market. But supply constraints are likely to remain in areas such as Dublin, supporting modest house price appreciation. The new mortgage regulation will dampen credit growth as fewer borrowers are able to meet the new requirements. Nevertheless, the higher loan-to-value ratio (LTV) cap for purchases up to EUR220,000 for first-time borrowers should support their ability to access credit. We have revised our mortgage lending volume growth expectations for Ireland in 2015 to 10%-15%, from 15%-20% as a result of the new regulations. Slower house price growth may extend the time banks take to resolve non-performing loans and may reduce recoveries. Rising prices are likely to bring a portion of borrowers back to positive equity, giving them incentives to work with lenders to resolve arrears problems. Working through the high levels of impaired loans and ensuring restructures are sustainable is an important challenge for Irish banks. But we expect further reductions in non-performing loans in 2015, with restructurings and renegotiations remaining important. We also expect improvements in arrears in RMBS transactions as existing cases start to be resolved and the inflow of new arrears cases lessens, although they will remain high. It is likely that market-wide arrears will continue to decline in 2015 by 2pp to 15.9%. In the longer term systemic risk for the banking system and over-borrowing will fall as borrowers adjust to the new rules. We expect the loan-to-income ratio (LTI) limit to be the more important cap on borrowing. The Irish central bank announced new mortgage regulations on 27 January. Owner-occupied mortgages for all new non-first-time buyers will be subject to limits of 80% LTV and 3.5x LTI. A maximum LTV of 90% will apply to first-time buyers of properties valued at up to EUR220,000, and amounts above the limit would be subject to the 80% LTV cap. Buy-to-let mortgages will have a maximum LTV cap of 70%. Exceptions to the rules for owner-occupied properties will be limited to less than 15% of the cumulative annual value of loans. Contact: Alan Milne Associate Director Financial Institutions +44 20 3530 1491 Fitch Ratings Limited 30 North Colonnade London E14 5GN Stephen Kemmy Director Covered Bonds +44 20 3530 1474 Ketan Thaker Senior Director Structured Finance +44 20 3530 1392 Cynthia Chan Senior Director Fitch Wire +44 20 3530 1655 Media Relations: Elaine Bailey, London, Tel: +44 203 530 1153, Email: elaine.bailey@fitchratings.com. The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings. Applicable Criteria and Related Research: 2015 Outlook: Irish Banks here Global Housing and Mortgage Outlook – 2015 here

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