No impact on mortgage securities ratings from variable cap - Fitch

Interesting article in today's Irish Times

No impact on mortgage securities ratings from variable cap - Fitch

"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.
...
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."


Of course if a lender is prevented from overcharging borrowers, it will be less profitable and will build up less capital. But the same will happen if a new lender enters the market and offers loans at fairer rates.





http://www.irishtimes.com/business/...ies-ratings-from-variable-cap-fitch-1.2290949

This is how the Examiner headline reports it

Fitch recommends interest rates cut on variable mortgages

However there is another article online as follows

Fitch backs variable rate plan

There is an interesting quote from an earlier report

The report also found, however, that the higher cost of funding faced by banks is “comfortably passed onto consumers” and that their margins on retail mortgages, at about 3.5%, are well in excess of the EU average of 2%.

Here is their statement

Fitch: No Rating Impact on Irish RMBS from Potential Mortgage Rate Cap

Fitch Ratings-London-20 July 2015: Fitch Ratings says that the potential introduction of legislation giving Irish courts the power to cap the standard variable interest rates (SVR) that banks charge on residential mortgage loans would not affect ratings of Irish RMBS.

Irish lenders have come under political pressure to reduce the debt burden on borrowers and have taken various types of action to cut mortgage interest rates. A legislative cap on banks' SVRs has also been proposed, although it is not yet clear whether this will be introduced or the level at which any cap would be set.

The current Irish SVRs range from 3.9% for Allied Irish Banks (AIB) to 4.5% for KBC and Permanent TSB. In its analysis of Irish mortgages, Fitch typically assumes an SVR of up to 2.5% above Euribor, as such rates are set at the discretion of the lender. Therefore, provided any SVR cap is set above this assumed level, the ratings of the Irish RMBS transactions will not be affected by its introduction, despite an expected reduction in excess spread generated by the portfolios.

Fitch notes that two lenders have already reduced their SVR: in March 2015 Ulster Bank decreased its SVR to 4.3% from 4.5%, while AIB cut its SVR twice, to 4.15% from 4.4% in November 2014 and further to 3.9% in May 2015.

KBC's borrowers currently paying an SVR of 4.5% can switch their mortgages for either a variable rate with a 20bp lifetime discount or a new fixed-rate product. Permanent TSB has also introduced new variable rates without decreasing its existing SVR (see Fitch: "No Rating Impact on Fastnet RMBS from Introduction of Lower Variable Mortgage Rates", dated 6 July 2015).

In addition to these reductions in variable rates, most Irish lenders have already improved the terms of their fixed-rate mortgages, following political pressures to offer more competitive rates. Cuts in fixed rates have a limited effect on Fitch-rated Irish RMBS as fixed-rate loans only account for a minor portion of outstanding portfolios to date from 4.17% (Fastnet 3) to 7.6% (Mespil 1).

In Fitch's view a reduction in borrowing costs will improve the affordability of mortgages and reduce the stress on borrowers, improving the performance of mortgage pools.

Another side effect of the rate reductions could be an artificial increase in reported arrears, as the calculation is based on the overdue amount divided by the payment due in the period. 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, the majority of delinquent loans are already in late-stage arrears; therefore the effect on this artificial increase would be limited on Fitch's analysis of transactions.