According to the figures, the Irish economy has never been in such a strong position. There is considerable diversity in industry and the housing market is buoyant, while the prospects for significant growth in the country's securitization sector, in particular MBS, look good.

However, there are some European financial commentators who believe that the expansion has been achieved too quickly and is not sustainable, leading to fears that the growth of the structured finance market will be slowed.

But despite concerns over signs that the Irish mortgage market is in danger of overheating, this will not hinder the continued development of the Irish mortgage-backed securities market. That, at least, was the consensus amongst speakers at an MBS conference, organized by Fabozzi/IMN and held in London recently.

What Goes Up?

House prices in Ireland have doubled since 1996. This, coupled with low interest rates and rapidly increasing levels of disposable income, has led to fears that Ireland could suffer from the same type of boom-bust economic cycle experienced in the U.K. housing market in the 1980s, which ultimately led to a severe correction in property prices.

Many securitization pros, however, believe that the current market conditions are fundamentally different to the U.K. and the economy can maintain strong growth into the future. "In terms of prices, it must be remembered that Ireland had a very low starting point," said John O'Grady Walshe, director of investment banking at Bankgesellschaft Berlin's Dublin office. "And the rate of savings, which is used to pay for mortgages, is 11.5%, much higher than the U.K. and most of continental Europe."

Savings Are Paying for the Boom

Certainly, Walshe's assertion that it is savings and not excessive borrowing that is financing the housing boom would appear to be backed up by the figures. Loan-to-value ratios on Irish mortgages have remained around 65% to 70% for a number of years, and this has been reflected in the few MBS deals that have been brought to market.

First Active has been the largest Irish issuer of mortgage-backed paper, including the five Celtic transactions, and is looking at reducing the LTV's in the pool of loans used in its transactions. "The LTV on the Celtic V deal was 70%, which was up on the previous transactions in the series," said the mortgage company's head of structured finance, Joe Simpson. "We'll be working at bringing that down again when we launch Celtic VI later this summer."

Irish securitizers are putting an increasing emphasis on stress tests designed to calculate defaults on payments in times of high interest rates. A high number of defaults could have serious implications for MBS transactions and ratings agencies would probably be more circumspect when looking at new issues.

Although the figures are not publicly available, the initial view across the financial sector is that defaults on loans would not increase dramatically in a high interest rate environment. BNP Paribas is one bank that conducted stress tests and the word is that it was pleased with its findings. The fact that Ireland has a high savings society would certainly be beneficial in the event of a downturn in the economy.

So Securitizers will Keep Coming

In terms of future MBS deals, there is a belief that more and more companies will turn to securitization as an alternative source of funding. "In the current low interest rate environment, there is huge competition for savings which means that mortgage providers have to look elsewhere for funding," said Simpson. "Although the Irish MBS market is immature at the moment, there are signs that companies will definitely look towards it in the future."

Mike Jaffe, a director with UBS Warburg's asset backed finance group, agreed. "There is a general squeeze on financing due to the highly competitive mortgage markets," he said. "There is pressure on banks' capital ratios and securitization acts as a relief valve against that."

And the Euro Helps

Jaffe was also positive about the impact of the Euro for the Irish MBS market. "It completely opens up the investor base to the originator," he said. "Firms looking towards issuing more than one transaction find that they can sell paper to the same investors."

Simpson was also upbeat about the Euro's impact. "With the first two Celtic issues, almost the entire take-up came from U.K. and Irish investors," he said. "With the last two deals, however, most of the bonds were placed in mainland Europe, with Germany being the major source of investors."

A Systemic Shock Can't be Ruled Out

At the moment, the situation does look good for the Irish MBS market, but it would be foolish to ignore the fact that a negative series of economic events could change the picture entirely.

"Overall, the news is pretty positive," said Simpson. "But there is this perception from European banks that the bubble could burst and there are some signs of pressure in the market. A systemic shock to the economy is possible and we have to be prepared for that."

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