Ratings agency highlights risk of mortgage defaults

THERE ARE risks that borrowers may choose not to repay their mortgages in the hope of securing partial debt forgiveness under the new personal insolvency legislation, ratings agency Fitch has said.

The agency doesn’t expect a wide-scale take-up of personal insolvency arrangements, the new debt deals where mortgages can be written down, as the banks can vote against them.

“The PIA process will not be an easy way out for borrowers, which should limit the scope for borrowers to use PIAs strategically which should also limit borrowers going through this process.”

The agency also said that Ireland’s “BBB+” credit rating remains on negative outlook, meaning that it may be downgraded again due to the risks to growth and fiscal consolidation.

The recent sale of five- and eight-year bonds and the proposed sovereign annuity bonds underline the Government’s “improving financial flexibility”, the agency said, although it is “still uncertain” what degree of market access can be maintained after the EU-IMF bailout programme expires.

Although Ireland has largely regained external competitiveness, “it remains at risk from a further intensification of the euro zone crisis”, Fitch told Bloomberg.

In a report on the personal insolvency arrangements, after gauging the views of the banks, Fitch believes the arrangements “would not be an appropriate solution” until the banks’ forbearance measures for distressed borrowers are exhausted.

“Uncertainty remains on how personal insolvency practitioners and lenders would agree on the value of the property securing the mortgage debt and how mortgage affordability is assessed,” said the agency. “The rigour of these assessments will be key to deterring moral hazard.”

Up to €3 million in mortgage debt can be written down under the arrangements if 65 per cent of lenders vote to support it.

Fitch said it was yet to be seen if banks will vote against arrangements “that are clearly not needed” and that it is uncertain who will act as personal insolvency practitioners, how they will be paid, whether their pay will include incentives, and how any malpractice will be managed.

Fitch doesn’t expect the new legislation to have an immediate effect on the ratings of Irish residential mortgage-backed securities sold by banks to raise funding, as it already expects 20 per cent of mortgages to default.

The agency said it expected the arrangements to be implemented towards the end of this year.