A QUARTER of all Irish mortgage debt is susceptible to being written down under proposals in the Government’s personal insolvency legislation, the ratings agency Moody’s has estimated.
This would amount to about €35 billion of Irish mortgage debt, including buy-to-let mortgages, based on the statistics from the Central Bank.
Moody’s said the proposals announced last month, which include measures to write off mortgage debt in out-of-court settlements, was “credit negative” for bonds backed by residential mortgages sold by Irish institutions.
This was because “many mortgage loans will be written down and many borrowers will become discouraged from maintaining their mortgage loan repayments”.
“We estimate that a quarter of all Irish mortgage debt is susceptible to a write-down under the proposal,” Moody’s said in the report.
The agency expects Irish property prices to fall by an average of 60 per cent from peak, leaving 75 per cent of mortgages in negative equity where the loan is greater than the value of the property.
“In the unlikely event that all negative equity loans were to be written down to the market value of the home, we estimate that 25 per cent of all mortgage debt would be written off,” said the agency.
The proposals will “weaken the ‘full recourse’ nature of Irish mortgage lending and lead to a rise in arrears and losses”, Moody’s said.
The agency assesses mortgages for investors who fund the banks by investing in residential mortgage-backed securities (RMBS), which covers about €50 billion of Irish residential mortgages.“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 RMBS,” the agency said.
Moody’s expects debt forgiveness to replace repossession as the lenders try to deal with mortgages that borrowers cannot repay.
“Irish lenders are showing limited appetite to enforce security and political pressures encourage them to seek alternatives,” said the ratings agency.
“We therefore expect debt forgiveness to become the default option for lenders dealing with unsustainable mortgage debt.”
Minister for Finance Michael Noonan said the draft legislation would not be published until the end of April so it was “premature for a rating agency to make any kind of a call on that”.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, speaking at the publication of the 2012 Finance Bill.
Under the proposals mortgage debt write-offs had to secure the approval of 75 per cent of mortgage lenders, under a Personal Insolvency Arrangement, he said. Almost 13 per cent of mortgages were either more than 90 days in arrears or had been restructured at the end of September.
