"Pepper will refinance a mortgage if arrears are capitalised"

[Brendan Burgess]

I was told this by a borrower who is under pressure from his lender.

A broker has told them that Pepper needs to see the arrears capitalised to less than 3 months.

Apparently this was the note from their underwriter.

This makes no sense to me at all.

The borrower has made full repayments for the last two years but has old arrears from around 5 years ago.

The mortgage is €200k and the arrears are €20k. Let's say that three months arrears would be €4,500

Pepper will be lending €200k whether the arrears are €20k, €5k or nil.

He has been paying the €1,500 per month for two years.

The arrears figure is notional figure. The existing lender's decision to capitalise them or not is totally arbitrary.

Why would it affect the quality of Pepper's assessment?

Has it anything to do with the Central Bank's regulations?

Brendan

 

[RedOnion]

Apologies, I misunderstood post earlier.

There are a few potential reasons for this.

The main ones are Pepper would have to offer MARP protection to borrower immediately. Also if it's more than 90 days in arrears, it's technically classified as a non performing mortgage (under CBI disclosures and accounting rules). Pepper would have to go through a process to 'cure' the arrears, but on their books it would always be a 'cured' rather than performing loan.

Easier for someone else to capitalise the arrears, and Pepper the take on as a 'performing' loan.

From a pure underwriting point of view, it helps prove affordability, but I'd imagine that's less of a factor as they can test affordability other ways.

I'm not sure how Pepper are funding the mortgage book, but it would also impact on the 'value' of the loan in a securitised bond portfolio if they ever had it classified as being in arrears.

 

[IdesofMarch]

I was told this by a borrower who is under pressure from his lender.

A broker has told them that Pepper needs to see the arrears capitalised to less than 3 months.

Apparently this was the note from their underwriter.

This makes no sense to me at all.

The borrower has made full repayments for the last two years but has old arrears from around 5 years ago.

The mortgage is €200k and the arrears are €20k. Let's say that three months arrears would be €4,500

Pepper will be lending €200k whether the arrears are €20k, €5k or nil.

He has been paying the €1,500 per month for two years.

The arrears figure is notional figure. The existing lender's decision to capitalise them or not is totally arbitrary.

Why would it affect the quality of Pepper's assessment?

Has it anything to do with the Central Bank's regulations?

Brendan

Brendan, the reason for this rule is underwriting and the ability to include this mortgage in a covered bond going forward.