Ireland’s Personal Insolvency Bill will allow customers who cannot manage their mortgage debt to continue living in their home with lenders wiping off any remaining debts. The ratings agency said that this would occur when all other avenues had been explored.
Around 15,000 people currently in negative equity could benefit from such writedowns.
Currently over 75,000 Irish mortgage accounts are over three months in arrears, with nearly 40,000 further mortgages already having had payments restructured. House prices in the Republic have nearly halved since peaking in 2007.
Anthony Parry, senior analyst at Moody’s, warned that lenders would have to take short term losses to improve long term credit conditions, but warned that this new legislation could give borrowers an incentive to default.
“In the short to medium term, the introduction of the new legislation will lead to an increase in arrears and losses.
“Under current Irish Law, a borrower defaulting on their mortgage loan could lose their home, but also remain liable for the full outstanding debt for at least 12 years. These ‘full recourse’ arrangements provide a strong incentive for financially distressed borrowers to meet their mortgage loan repayments.
“However, the new legislation poses the risk of moral hazard because it reduces borrowers’ incentive to repay.
“Moody’s believes that the credit-negative implications of an increase in arrears and losses will be most acute for RMBS pools, since those pools will not experience the long-term benefits available to banks and their covered bonds.”
UK banks operating in Ireland include Royal Bank of Scotland Group, via its Ulster Bank brand, and Lloyds Banking Group through its Bank of Scotland arm.
