Ireland has issued its first subprime RMBS, a 370 million ($447 million) Lansdowne Mortgage Securities transaction. Similar deals are expected on the horizon, Fitch Ratings analysts said.
The deal issued by Kensington Mortgages Irish subsidiary, Start Mortgages, has a provisional pool that includes 2,550 first-charge, owner-occupied loans with a 62.5% weighted average LTV - 25% of these are located in Dublin. The transaction is structured with both fast and slow pay senior notes alongside four subordinated tranches and an IO strip. The one-year fast pay tranche was sized at 75 million, and the 4.1-year senior tranche at 258 million.
All tranches were well oversubscribed. They also priced inside guidance and in line with deals from frequent U.K. issuer Brittania's Leek Finance series. "In the past, first time issuers /asset classes used to command a premium but scarcity value is now what counts," analysts at Commerzbank reported. "Non-conforming RMBS spreads continue to offer very little pick up at the senior and mezzanine levels relative to prime, despite the noise around sub-prime pools of late."
Fitch recently updated its Irish RMBS criteria against a backdrop of a vibrant housing market that has seen real house prices increase more than three fold over the past six years. The GDP growth in Ireland is above the European average and Fitch anticipates that it will remain healthy. Fitch said it updated its criteria to keep up with these rapid developments and the resulting changes. For instance, home prices in Dublin have appreciated faster versus other areas, analysts said, creating a differential with other parts of Ireland of approximately 35%.
"The housing market maintained strong momentum and a high growth rate for the past decade," said Atanasios Mitropoulos, associate director in Fitch's RMBS group. "One of the main drivers of growth has been the prolonged turn around in migration. It used to be more U.S. Irish nationals returning home, but now we are seeing more Eastern European nationals coming to stay in Ireland."
In the short term, growth is ex-pected to continue but some concerns linger over whether this growth rate can be maintained over the medium- to longer-term. "Affordability has been stretched and that is made visible in higher LTV lending and the rise in interest only products," Mitropoulos said. "This is combined with a decrease in first-time buyers share."
Irish mortgages are typically variable rate loans or short-term fixed rate, so their credit quality is more vulnerable to the interest rate environment. Should rates rise rapidly or suddenly, lenders might see the credit quality of these mortgages deteriorate. "Since the Irish market for high LTV loans is in its early stages, we would expect higher than usual default rates for these loans should the economy enter in a downturn," said Mitropoulos.
Recent and soon-to-be-established mortgage lenders extend credit to individuals with poor credit histories by using securitization as a funding tool, explained Mitropoulos. Fitch has correspondingly developed criteria related to adverse credit default probability adjustment, employing similar criteria used for monitoring U.K. subprime RMBS. "We expect the securitization of non-prime mortgages to increase significantly going forward," said Mitropoulos. "Exis-ting issuers expected to continue coming to market but we should also see them increasingly tapping the covered bonds market."
Mitropoulos added that Ireland is slated to update its legislation on Irish covered bonds or Asset Covered Bonds (ACS), as the product is called locally, later this year. The changes are expected to make this market increasingly attractive, particularly for non-Irish originators.
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