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New insolvency law in Ireland will increase mortgage defaults, says Moody’s

New Irish personal insolvency legislation proposed in January will discourage borrowers from keeping up with their mortgage payments and make a quarter of Irish mortgage debt susceptible to write-down, according to Moody’s.

The ruling, expected to come into force in 2013, will allow borrowers unable to pay their debts to enter into a personal insolvency arrangement with their creditors.

Providing at least 75% of their secured creditors and 55% of unsecured creditors agree, the PIA would see the mortgage loan reduced to the current market value of the property and the borrower allowed to continue living in their home.

In a report published today, Moody’s says this will have a credit negative impact on Irish residential mortgage-backed securities, as it would result in as much as 25% of all Irish mortgage debt being written off.

Furthermore, the ratings agency says the legislation would discourage borrowers from maintaining their mortgage payments.

Anthony Parry, senior analyst at Moody’s, says: “Under current Irish law, a borrower defaulting on their mortgage loan faces the prospect of not only losing their home but also remaining liable for the debt in full for at least 12 years.

“Such ‘full recourse’ arrangements provide a strong incentive for financially distressed borrowers to meet their mortgage loan repayments. But under the proposed legislation, a struggling borrower – if able to use a PIA – would be able to stay in their home while also seeing part of their mortgage written off.”

He adds: “Debt forgiveness is expected to replace repossession, as Irish lenders are showing limited appetite to enforce security and political pressures encourage them to seek alternatives.

“We therefore expect debt forgiveness to become the default option for lenders dealing with unsustainable mortgage debt.”

Moody’s adds that 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 be key to determining the extent of the impact of the proposals.



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