Fitch warns that the joint effect of re-defaults, accounting changes and regulatory scrutiny will cause significant increases in troubled debt restructuring rates, especially non-residential debt.
The accounting standard update was designed to increase TDR portfolio data transparency. Starting in the third quarter of 2011 when the new guidance comes into effect, for the first time financial institutions are required to report re-default rates on restructured debt “on a portfolio segment basis.”
Fitch reports that currently at 87% of the total TDRs, first-lien residential mortgages continue to dominate the TDR market due to “extremely high re-default and growth rates” in the last two years.
And while the number of residential TDRs may continue to grow, the ratio of residential and non-residential TDR status loans is expected to change.
Fitch’s “Troubled Debt Restructurings: Accounting Standards Update Set To Increase TDR Recognition” report indicates a shift that started in 2010 is changing the loan type mixture of TDRs.
If traditionally most troubled debt consisted of residential loans, in line with a new trend that started last year, going forward the ratio will reverse. Fitch said the number of non-residential loans moving into mortgage debt restructuring status will “grow at a significantly faster rate” than that of residential TDRs.
In 2010 the volume of non-residential TDRs increased by a staggering 85%, which is almost double the overall TDR growth rate of 48% for both residential and non-residential TDRs.
According to Fitch as the new broad basis data on residential troubled debt becomes available it will help improve the performance analysis of mixed loan type portfolios with a very high percentage of commercial real estate loans.
The rating agency said only the ratings of issuers with very high increases in TDR rates or unusually high re-default rates may be “negatively affected.”
