Ratings agency warns on losses from insolvency law

THE GOVERNMENT’S new personal insolvency regime may increase losses at the banks if it is not carefully managed to tackle the most severe cases of financial distress, the credit ratings agency Standard and Poor’s has said.

The agency expects losses on residential mortgages at the Irish banks to be in line with the “stress” level of €9 billion forecast in last year’s stress tests for which the banks have been recapitalised.

“The new, more borrower-friendly insolvency regime would, at best, lead to a similar outcome,” said the ratings agency in a report on the new legislation published by the Government last week.

“We believe that a more negative scenario could arise if access to what is in effect a mechanism of debt forgiveness is not carefully constrained, by law and in practice, to the most acute cases of personal insolvency.”

Standard and Poor’s said the new regime would not come into practice until mid-2013 because the legislation is unlikely to be passed until late this year and the new Insolvency Service, which will approve out-of-court debt settlement deals with creditors, will take some time to be set up.

The agency said that it expected the banks, where possible, to agree alternative outcomes with borrowers that fall short of debt write-offs that would result from the new insolvency arrangements.

“Together, these alternative outcomes and the insolvency arrangements could add supply to the housing market, lowering house prices more quickly to the clearing level or trough by late 2013,” said the ratings agency.

Standard and Poor’s expects that residential property prices will fall by between 60 per cent and 65 per cent from peak in 2007. Central Statistics Office figures show that prices have halved.

The level of non-performing mortgages will continue to rise over the coming months and impairment charges for bad loans would “remain elevated” during 2013, the agency said.

The Government had to resolve “the impasse on new repossession orders if Ireland is to have a body of laws and regulation that work effectively for both borrowers and lenders,” the agency warned.

The legislation will allow borrowers who cannot repay debts to agree an out-of-court arrangements with creditors where mortgage debt can be written down if 65 per cent of creditors agree.

This arrangement will last six years and can include debts of up to €3 million, though this can be increased if all creditors agree.

These deals will be overseen by the Insolvency Service, though borrowers must first explore other solutions with their banks.

If an out-of-court deal cannot be reached, borrowers can file for bankruptcy, the term of which will be reduced from 12 to three years.

Standard and Poor’s described the legislation as “a necessary step forward in tackling the growing mortgage debt crisis in Ireland”.

The agency said the law could have a negative effect on mortgage-backed bonds sold by the banks if the insolvency arrangements led to significant loan write-downs without cash coming from the accompanying sale of properties.