Mortgage-to-rent changes should help cut loan arrears - Moody’s

Changes made by the Government to the mortgage-to-rent scheme for people in arrears with their home loans should lead to a decline in late payments from struggling borrowers, according to a new report from Moody's Investors Service.

The international ratings agency also believes that changes to the way the scheme is administered should lead to more households entering mortgage-to-rent arrangements.

"Under the revised plan, private investors can buy back more properties from struggling borrowers, who in turn achieve certainty of occupancy through a long-term leasing arrangement," said the report's co-author Christophe Larpin, a Moody's vice-president and senior analyst. "Consequently, we expect delinquencies among these borrowers to decline further."

Based on an assessment of 11,084 home loans in arrears, which involved 10 transactions (four Fastnet deals and six Celtic securitisations), some 1,024 borrowers would be eligible for the mortgage-to-rent scheme, Moody's said. This would involve 800 delinquent loans eventually being removed from the collateral pool, as loans participating in the plan would be repaid.

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Plan outlined

The changes to the mortgage-to-rent plan were outlined by the Minister for Housing, Planning, Community and Local Government Simon Coveney in February. The scheme was initially set up in 2011 but has been dogged by low take-up. The revised plan would see increased involvement from private financial firms, which would buy batches of defaulted loans from banks at deep discounts to their original value and then lease the homes back to the State.

Under the revised plan, private entities would market mortgage-to-rent’s benefits to households with distressed mortgages and fund the purchase of their homes, typically targeting hundreds of sales per year, Moody’s said.

The report noted that a borrower would apply for social housing support from a local authority before submitting a mortgage-to-rent application. Confirmation of this support would be required prior to executing a deal and the property would then be leased to an approved housing body.

Moody’s said that, although losses might still materialise, the overall result would be credit-positive because arrears interest would cease to accrue. The agency said the revised plan allowed private investors to buy back more properties from struggling borrowers, who in turn would achieve certainty of occupancy through a long-term leasing arrangement.

Stability of rent

Moody’s said the success of the new plan was contingent on the stability of the rent level, which would ensure long-term occupancy.

“Furthermore, the private entity appetite depends on property discounts at purchase, and leasing terms agreed by approved housing bodies,” the report added. “Private entities would either tap the structured finance market or rely on equity to finance the private part of the investment.”

Moody’s noted that the individual borrower’s acceptance of the terms would still be required, with the transaction facilitated by a private entity taking over negotiations from an approved housing body on more appealing terms, but the projected number of borrowers entering into the plan might be overstated if they are not convinced of the benefits of the plan.

“This occurred occasionally in forbearance processes due to the borrower’s fatigue, and legal complexity,” Moody’s said. “The envisaged step-by-step guide, along with other marketing activities, therefore plays a defining role in the success of the [mortgage-to-rent] plan.”