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Friday, 14th August 2020
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Ireland‚€ôs securitised mortgage markets - what 2008 may hold Back  
Paul Fenn looks at how the world changed between the first and second half of 2007, and considers what 2008 may hold.
The mortgage markets have been buoyant for some time now. Gross lending amounted to a record ‚ā¨40 billion in 2006, and this continued into 2007. The niche sectors in particular have been increasingly competitive. New entrants have been battling it out with existing players, intermediary lenders are more than ever taking on branch-based providers. The non-conforming sector in particular grew substantially in the last year. In 2007 alone, four new lenders - Nua, Fresh, Springboard and Stepstone - entered the market with new offerings.
Paul Fenn


For lenders adopting the ‚€ėoriginate and sell‚€ô model, the secondary market was hungry. Appetite for residential mortgage backed securities (RMBS) was particularly popular, driven by the success of the US and the UK. Indeed, it was the busiest time ever, with some sellers overwhelmed with potential bidders. Funders and investors were falling over themselves to get a piece of the action. Originators were realising increased profits, fuelling the desire for other entrants to these sectors.

In terms of servicing, things were hectic too. New entrants generally adopted the outsourced servicing model, offering competitive costs, a scalable business model and speed to market that they could not achieve on their own. This model facilitates secondary market activity, enabling assets to be bought and sold without changing the servicing infrastructure.

Towards late summer ‚€‘ before Northern Rock hit the headlines in the UK (there were, incidentally, around 25,000 Northern Rock customers in Ireland, with savings totalling ‚ā¨2.4 billion, at the point where queues to withdraw savings began in Dublin and across the UK) ‚€‘ the securitisation market virtually stopped in its tracks and dried to a trickle. Nervousness imported from the US started to affect the Irish market, despite the fact most Irish retail banks having little exposure to the sub-prime situation.

When it came to the crunch, lenders experienced sharp declines in volume. Irish Banking Federation figures for the third quarter of 2007 show a 25 per cent fall in new mortgages issued from the same quarter last year ‚€‘ 40,992 down from 54,623. The value of new lending also fell 18 per cent in the same period year on year, with loans issued declining from ‚ā¨10.96 billion to ‚ā¨8.98 billion. With lower volumes, many firms are revisiting their cost bases and rationalising. Conversely, those with an outsourced solution and a variable cost model are at an advantage. It enables them to rein in activity without impacting on their infrastructure, only paying for the servicing they use.

For some of those lenders funded by warehouse lines things started to look a bit more difficult, as in the UK. Some sources of funding quickly re-assessed and increased their rates or withdrew altogether, making things particularly difficult for the smaller fledgling lenders.

Is Ireland well-equipped to cope?
There remain a number of issues. The full extent of international firms‚€ô write-downs relating to the US sub-prime crisis has not yet emerged. If it ends up being worse than expected, that could have a negative impact on investor sentiment.

The payment shock experienced by many US sub-prime borrowers in 2007 when they came off their two year fixed and teaser rates originally set in 2005 could be repeated in 2008. Indeed, some commentators say the 2008 US payment shock could be greater still than 2007 - which could lead to further write-downs on US securitised assets, and do little to help investor confidence.

While the Irish market is influenced by what happens on the other side of the Atlantic, there are plenty of reasons to believe the associated problems will be more manageable. From September, the Financial Regulator has requested weekly liquidity reports to avoid a situation where financial institutions are forced to resort to emergency funding, as has occurred in the UK. Irish banks also have greater access to funding, thanks to their place within the European Central Bank (ECB) system. The inability to control interest rates means reduced flexibility in reacting to changing circumstances, but the ECB has maintained its benchmark rate at 4 per cent since June 2007.

What‚€ôs more, the non-conforming sector in Ireland is estimated to account for little more than 2.5 per cent of the mortgage market, compared with the UK where it comprises as much as 9 per cent of the market.

The Irish economy remains robust. The Economic and Social Research Institute (ESRI) forecasts GNP growth of around 3 per cent in 2008, while the unemployment rate is expected to average 5.6 per cent. There are signs that the mortgage industry will come back to life, even if we won‚€ôt see a return to the heady days of early 2007 any time soon.

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