A quarter of all Irish mortgage debt is susceptible to a write-down under proposals contained in the Personal Insolvency bill, it was claimed today.
Ratings agency Moody's has rated the Government-proposed mortgage arrears Bill as credit negative for banks because many mortgage loans will be written down while borrowers may become discouraged from maintaining payments.
The proposed legislation, announced late last month, allows for debt forgiveness for people with unsustainable mortgages.
It has previously been estimated that up to 30,000 homeowners could benefit from the legislation while tens of thousands of others who have amassed large unsecured and unaffordable personal debt would also be able to use measures contained in the Bill to lessen their debt burden or lift it entirely.
Almost 13 per cent of private residential mortgages were either more than 90 days in arrears or had been restructured at the end of September, according to the Central Bank.
In its new report, Moody's noted that, under the proposal, borrowers who are unable to pay their debts when due could be eligible to enter into a Personal Insolvency Arrangement (PIA) with their creditors.
The agency said that providing at least 75 per cent of secured creditors and 55 per cent of unsecured creditors agree, the agreement could see the mortgage loan reduced to the current market value of the property with the borrower allowed to continue to live in their home.
"Precise details of the insolvency tests used to identify only those borrowers truly unable to pay their debts, together with banks willingness to veto an arrangement, will determine the impact on our expected loss assumptions for Irish residential mortgage-backed securities ," the agency said.
Responding to Moody’s estimate, Minister for Finance Michael Noonan said that the Government’s personal insolvency legislation would not be published in draft form until the end of April and that it was “premature for a rating agency to make any kind of a call on that”.
“Nobody has the basic information to make that kind of decision,” he said of the agency’s estimate of the potential mortgage debt that could be affected by the proposals.
Speaking at the publication of the 2012 Finance Bill, he said that under the proposals mortgage debt write-offs had to secure the approval of 75 per cent of the mortgage lenders under the personal insolvency arrangements.
Minister for Justice Alan Shatter has previously described the Bill as the "most radical reform of insolvency law since the foundation of the State."
The new Bill proposes the appointment of a State-run insolvency service to help people manage their debt and it cuts the bankruptcy period from 12 to three years.
It also introduces voluntary debt settlement systems to help people sort out their finances outside of formal court insolvency.
One of the new measures in the proposed Bill will see the introduction of debt relief certification allowing people who owe up to €20,000 in unsecured loans apply for a debt relief certificate if they meet certain criteria. Once granted, their debt would be frozen for a year and then written off.
Legislation giving judges powers to refuse home repossession orders was withdrawn from the Dáil last week for talks about including some of its provisions in the promised insolvency Bill.
