Repossession Trap « cbpa.ie

by shay

A complete ban or long delays on repossessions is going to be difficult for the banks who use their mortgages as collateral for their own borrowing, reports Jon Ihle

Last Wednesday, just in time for the budget, Moody’s issued a press release highlighting further deterioration in the quality of securities backed by Irish residential mortgages.

Delinquent loans – those overdue by three months or more – reached 2.9% of total loans in October, the agency said, double the amount from the year before. Borrowers more than a year behind on payments hit 0.7%, an increase of 300% over last October.

Why does Moody’s, a bond-rating agency, care about Irish mortgages? Because the banks who issue those mortgages use them as collateral for their own borrowing, which is done by wrapping the mortgages into bonds and either selling them or lodging them with a third party, such as the European Central Bank, in exchange for cash. So mortgages are crucial not just to a bank’s profits and capital, but for access to funding.

Although Moody’s acknowledged in the statement that Irish mortgage-backed bonds had not yet reported significant losses, the analysts worried that delays in foreclosure on bad loans – very common in repossession-averse Ireland – would only lead to higher losses later on. When that happens, the banks who depend on these bonds to raise money for new lending are going to face a funding problem as counterparties refuse to provide fresh cash.

So the banks are facing another conundrum: mortgage arrears are rising, but tough collection action is impractical due to social, political and economic reasons. Yet if they don’t curb loan-delinquency, the banks won’t be able to pledge mortgages for new money to fund lending. In fact, the various measure banks are using – and the government is insisting on – to keep delinquent borrowers from defaulting and losing their homes could ultimately cut off vital credit to the economy down the line.

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