At first blush, mortgage delinquencies in Ireland appear higher than almost anywhere in Europe. But the data can be deceptive if it includes the Irish "specialist" market, since the rest of Europe is limited mainly to prime lending.

"You would be comparing apples to pears," said Oscar Heemskerk, senior analyst of RMBS ratings at Moody's Investors Service. "Excluding the specialist transactions, the delinquency trend for Ireland is more in line with the other countries."

Each market has its own mortgage characteristics. In the U.K., the nonconforming segment includes buy-to-let and self-cert, as well as subprime lending geared to borrowers with adverse credit profiles. While some European originators might focus on subprime, they do not generally securitize those mortgages. (The Netherlands constitutes one exception, where a Lehman Brothers subsidiary issued two securitizations last year.) In Ireland, the specialist market is more closely related to its U.K. counterpart.

Specialist lending, relatively new in Ireland, was launched in 2004 by GE. The business subsequently took off, with an increase in brokers and participants. However, many of those players have more recently closed shop, including Stepstone Mortgages and Fresh Mortgages. Only four remain: GE, Springboard Mortgages, Nua Home Loans and Start Mortgages. It is difficult to estimate the exact size of the Irish specialist market, which measured about 1.4 billion in 2007.

"This is sizable, considering five years ago it didn't exist!" said Paul Murphy, head of sales and marketing at Start Mortgages.

At Start, only 60% of customers have any adverse credit profile, with the remainder either self-employed or reliant on variable income, such as contract employment. Murphy described the underwriting process as "very forensic," with detailed attention to customers' current account statements and payment histories, and further verified by sources like employers. LTVs average about 63%, with a maximum value of 85%.

"We are equally or even more conservative than prime lenders in terms of affordability," Murphy added. Debt service ratios average 33%, maxing out at 45% of net after-tax income, including unconsolidated debt. All borrowers are charged by direct debit, so they make no active decision whether to write the check.

According to Moody's, about one in six of Start's mortgages that have been securitized are in arrears. Murphy maintained that those arrears are still in line with expectations, albeit understandably higher than those among traditional lenders. Since his firm launched in 2004, out of the 10,000 loans issued, only eight properties have been repossessed. The firm's two Lansdowne securitized transactions show no losses, despite the current environment.

But home prices are tumbling, down 8.8% over the past 12 months, which represents the steepest decline in Europe. A number of factors had led to a residential bubble. Massive immigration, a red hot economy and European Union funding all helped fuel a boom, which is now in the process of correcting. Meanwhile, demographics were changing too, as divorce rates rose or people chose to set up their own homes away from families.

"We saw huge volumes of construction, with strong pipelines of properties available for sale," said Christopher Greener, a senior analyst at Societe Generale. "Affordability fell, as people perceived they were overpaying or getting stretched."

As lenders pull in their horns, prices will likely fall further. Borrowers have less access to funds and must save longer for a larger deposit. Nonetheless, the outstanding transactions are still quite well seasoned, containing substantial house price appreciation already. "The older deals are better off because of the embedded house price growth," said Phil Adams, a research analyst at Royal Bank of Scotland.

House price inflation kept buyers wary of Irish securitizations, but they still liked them for diversification purposes. The market has always been small as a percentage of European ABS, so limited supply resulted in relatively tight spreads compared to other jurisdictions in early 2007. Later, as pressure on spreads built, Spain widened. Both Spain and Ireland are often lumped together, with similar construction industry sensitivity. "But those same credit concerns didn't flow through to Ireland," Greener said.

Now the entire prime market is suffering the knock on effects of the credit crunch, and there is no market down the capital structure for subordinated paper. "Irish deals were always infrequent, from a country with just over four million people," Adams said. Celtic, one of the larger programs, sold a few transactions in 2007, with its last one in December 2007 called Celtic 13. "It's unlikely to have cleared at the margins it was printed at," Greener said.

Although specialist lenders are not ready to close their doors, they realize they have only limited capacity, with no ability to raise cash to lend on, beyond committed facilities. Banks are reluctant to lend them money for that space, while securitization remains dormant.

Yet the overall picture in Ireland is not dire. "The economy is still growing at a higher rate than most EU countries," Heemskerk said. GDP remains robust, with unemployment at only 5%. Home prices have quadrupled over the past ten years, so negative equity becomes a problem only for those disposing of a property.

Loans used as collateral for securitization have reasonably conservative LTV values, which strengthens Moody's' long-term outlook.

There has been some shift, in that the originators for existing transactions often predicated their expected loss assumptions on the belief that borrowers would be able to sell the house since prices were increasing.

"Whereas losses were close to nonexistent on the outstanding securitizations, we have tried to make more realistic loss assumptions, representing a whole economic cycle," Heemskerk said.

(c) 2008 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

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