This report does not constitute a rating action.
Key Takeaways
- Total arrears in Irish reperforming loan (RPL) residential mortgage-backed securities (RMBS) increased to 25.7% in December 2024 from 8.4% in January 2022, whereas prime arrears increased to 1.1% from 0.8% within the same period. The weighted-average one-month conditional prepayment rate (CPR) in Irish RPL RMBS increased to 6.0% from 4.7% over the same period, while prime CPR levels also increased to 14.9% from 6.9%.
- Within a sample of prime RMBS that we rate, 44% of borrowers refinance their mortgage before the end of their fixed rate term, while another 24% are granted a product switch to re-fix with their existing lender. For remaining borrowers, their loan rolls onto a variable rate product. Refinancing activity has increased prepayments in prime RMBS and accelerated deleveraging of their pools. RPL RMBS mainly comprise more seasoned collateral originated pre-2008, with most borrowers on variable rate mortgages.
- There appears to be no material difference in prime RMBS arrears, regardless of whether borrowers take a product switch or not. Our analysis shows 1.3% of loans which exited a fixed-rate mortgage are in arrears, compared with 1.1% that did not.
Irish prime RMBS transactions rated by S&P Global Ratings have one of the lowest arrears levels in Europe, whereas Irish RPL RMBS transactions have one of the highest. Prime RMBS collateral benefits from being originated under the Central Bank of Ireland macroprudential rules introduced in 2015. As the borrower credit profile of these loans tends to be strong, borrowers have greater flexibility with product switches and the option to refinance elsewhere once a mortgage rolls off its fixed-rate term. These factors have contributed to the strong performance of prime Irish RMBS over the past three years.
Conversely, RPL RMBS performance has deteriorated. Underwriting standards for loans in these transactions were much weaker than in the prime RMBS sector. Most borrowers in RPL transactions have a variable rate of interest, with those who could have refinanced away from a floating rate doing so already. As a result, rising interest rates have meant borrowers have struggled to repay the outstanding loans in these pools (see “Unraveling Irish Reperforming RMBS Uncertainty”). However, the pools have had stable loss projections, as rising house prices have offset deteriorating collateral performance (chart 1 shows RPL RMBS arrears have been falling since Q3 2024).
We expect this collateral performance to improve in 2025 as interest rates continue to fall. As seen in table 1, ratings within these transactions have remained resilient due to a build-up of credit enhancement and the availability of reserve funds to cover shortfalls if required. This diverging performance reflects the difference in collateral quality between prime and RPL transactions. If rates continue declining and unemployment remains low, we expect arrears in RPL transactions to decline. Prime RMBS arrears are likely to remain low. Also, in prime transactions, we envisage the mortgage switching market to remain competitive as lenders look to retain borrowers and sustain the market share. Rising house prices may support high prepayments, especially from borrowers in the buy-to-let (BTL) space or those who were previously in negative equity on their property.
Scenario Analysis Of Reperforming Irish Transactions
The results in table 1 indicate that the ratings are less sensitive to rating movements mainly due to the build-up of credit enhancement. These reviews occur throughout the year and therefore in some cases may not capture the full rise in arrears or house price increases at the time of review. This may lead to greater rating sensitivity than outlined in the scenario analysis below.
Table 1: Average rating sensitivity at 2024 reviews
WAFF--Weighted-average foreclosure frequency.
The graphic below shows the ratings transition during our 2024 review. Several tranches were upgraded due to the credit enhancement build-up and rising house prices. However, higher arrears in these transactions resulted in several downgrades for more junior tranches, which are the first to bear losses.
Delinquencies
- Diverging mortgage performance across prime and RPL portfolios. High cost of living and rising interest rates are the main contributing factors as borrowers exposed to higher variable rates in RPL portfolios tended to struggle to adjust to their higher repayments.
- Loans in RPL transactions were primarily underwritten before the introduction of the macroprudential rules. In some cases, borrowers’ financial circumstances have changed, meaning they struggled with higher mortgage payments. Typically, large proportions of loans in these pools have had one or more loan restructures completed to date.
Chart 1
Product switching and prime versus RPL RMBS arrears
- Product switching volume has increased in the past three years, the alternative being borrowers rolling off short-term fixed rates onto a much higher variable rate. Prime borrowers take the option of a product switch to re-fix and limit the impact on the scheduled repayments from rising interest rates in the short term. A new fixed rate is generally cheaper for borrowers than a variable rate product.
- Within the prime Irish RMBS transactions that we rate, 77.4% of borrowers currently pay a fixed rate, compared to only 11.5% (includes split loan with a fixed portion) in RPL RMBS transactions. Borrowers in prime Irish RMBS transaction tend to have lower interest rates than borrowers in RPL transactions.
- Product switches are seen in our rated prime RMBS, but with strict conditions and generally only up until the first optional redemption date of the RMBS (usually three to five years after closing). Lenders tend to use product switches as a means to retain certain borrowers by refixing them on a competitive rate before the end of their initial fixed rate period. Our data show a high level of borrower awareness to refinance their mortgage on better terms before their fixed end date.
- Our payment shock analysis found little difference in performance between borrowers who have exited a fixed-rate mortgage and those who are still on a fixed rate. Our analysis over the past three years shows 1.3% of loans are in arrears that exited a fixed-rate mortgage, compared with 1.1% that did not exit a fixed-rate mortgage. This reflects the robust underwriting standards by lenders under the macroprudential rules, as lenders stress test borrowers at the point of loan origination to account for higher repayments
- As we expect interest rates to continue decreasing in the eurozone in 2025, we expect this limited impact of payment shock to persist (see “European Structured Finance Outlook 2025: Up In The Air”).
Chart 2
Chart 3
Prepayments
- In tandem with rising interest rates, the average CPR for both prime and RPL RMBS transactions also increased (see chart 4).
- The CPR for RPL transactions tends to be lower compared to prime transactions due to borrowers being less able to repay their loans. Specific credit features of loans in RPL RMBS (for example, tracker rate, split loan, interest-only) tend to limit refinancing options and/or limit additional funds available to make prepayments, resulting in a lower weighted-average CPR in these transactions. Low interest rates before 2022 meant there was little incentive for these borrowers to prepay.
Chart 4
Rising House Prices Support Prepayments
- Ireland's historical RMBS investor-placed issuance volumes have increased over the last seven years amid increasing volumes of RPL transactions. Furthermore, tier 2 banks and non-bank lenders have originated several new prime Irish transactions.
- We predict a 6.1% increase in house prices in 2025, year-on-year. Continued house price growth is primarily due to limited housing supply, as high construction costs and a long planning process hinder housing development at the necessary critical mass.
- Rising house prices and restrictive legislation will continue to support current prepayment levels in Irish RMBS, especially in the BTL space as landlords look to exit the market and clear legacy mortgage debt.
Chart 5
Chart 6
Related Criteria
- Global Methodology And Assumptions: Assessing Pools Of Residential Loans--Europe Supplement, April 4, 2024
- Environmental, Social, And Governance Principles In Credit Ratings, Oct. 10, 2021
- Global Framework For Payment Structure And Cash Flow Analysis Of Structured Finance Securities, Dec. 22, 2020
- Methodology To Derive Stressed Interest Rates In Structured Finance, Oct. 18, 2019
- Counterparty Risk Framework: Methodology And Assumptions, March 8, 2019
- Incorporating Sovereign Risk In Rating Structured Finance Securities: Methodology And Assumptions, Jan. 30, 2019
- Global Methodology And Assumptions: Assessing Pools Of Residential Loans, Jan. 25, 2019
- Asset Isolation And Special-Purpose Entity Methodology, March 29, 2017
- Global Framework For Assessing Operational Risk In Structured Finance Transactions, Oct. 9, 2014
- Principles Of Credit Ratings, Feb. 16, 2011
- Methodology For Servicer Risk Assessment, May 28, 2009
Related Research
- European RMBS Index Report Q4 2024, Feb. 20, 2025
- Over One-Third Of U.K. Interest-Only RMBS Borrowers Miss Maturity Payment, June 17, 2024
- Unraveling Irish Reperforming RMBS Uncertainty, Jan. 30, 2024
- U.K. RMBS Is Set To Withstand Payment Shock, Dec. 11, 2023
- A Primer On Ireland's RMBS Market, Oct. 10, 2023
- Landlord Exodus Sustains Higher Irish RMBS Prepayments, April 27, 2023
- Global Structured Finance Scenario And Sensitivity Analysis 2016: The Effects Of The Top Five Macroeconomic Factors, Dec. 16, 2016
- European Structured Finance Scenario And Sensitivity Analysis 2016: The Effects Of The Top Five Macroeconomic Factors, Dec. 16, 2016
| Primary Contact: | Philip Bane, Dublin 353-1-568-0623; philip.bane@spglobal.com |
| Secondary Contacts: | Stephen Kemmy, Dublin 353-1-568-0604; stephen.kemmy@spglobal.com |
| Alastair Bigley, London 44-20-7176-3245; Alastair.Bigley@spglobal.com |
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