25% of mortgages at risk of writedown: Moody’s

Moody’s Investors Service says that Ireland’s proposed personal insolvency laws, which will introduce a measure of debt forgiveness for “unsustainable” home loans, is credit negative for Irish residential mortgage backed securities.

“A quarter of all Irish mortgage debt is susceptible to a writedown under the proposal,” Moody’s said in a statement yesterday.

“The proposal is ‘credit negative’ because many mortgage loans will be written down and many borrowers will become discouraged from maintaining their mortgage repayments,” the company said.

The Government is reshaping its bankruptcy and insolvency laws after a property bubble collapsed in 2008, trebling unemployment and leaving some homeowners unable to meet their loans.

Almost 13% of private residential mortgages were either more than 90 days in arrears or had been restructured at the end of September, according to the country’s central bank.

Homeowners seeking to get mortgages at least partially written off need the agreement of their lenders under the proposals published Jan 25.

Any writedown agreement will need the support of at least 75% of creditors who have security on the loans. Borrowers may be able to obtain debt relief, including a possible writeoff of as much as €3 million where creditors and the debtor agree.

The government also proposed cutting the term of automatic discharge from bankruptcy to three years from 12 years. It plans to publish final legislation by the end of April.

“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 residential mortgage backed securities, Moody’s said.

The planned insolvency laws are unlikely to trigger a “tsunami of mortgage defaults,” according to Glas Securities, a Dublin-based fixed-income firm.

The proposed legislation may make banks more active in dealing with home-loan arrears, a Glas spokesperson said.

Bloomberg