Buy-to-let debts ‘will derail insolvency bill’

There are growing concerns that mounting arrears in the buy-to-let mortgages sector will harm the effectiveness of the proposed personal insolvency legislation.

The bill, which is scheduled to pass into legislation at the beginning of 2013, will enable the resolution of secured debt up to a limit of €3m.

Fianna Fáil’s finance spokes-man, Michael McGrath, voiced concerns that the €3m limit will mean that the banks will get bogged down in dealing with investors who have exposures to the buy-to-let market rather than dealing with customers straining under residential mortgage and personal debt.

The Central Bank will release details in December of the level of arrears in the buy-to-let sector, but it is widely seen as being hugely troubled.

“I’m not sure this is the right course of action. I think the Government should have started with a more modest sum, which would encourage banks to prioritise personal debt,” said Mr McGrath.

When the personal insolvency legislation was being drawn up, a Department of Justice committee recommended that the bill should deal with debt levels of up to €10m.

The ECB and IMF recommended a debt ceiling of €1m be included in the legislation.

A Department of Finance spokesperson said the proposal of €3m is the right compromise, although it can be changed in the future.

“This bill is not going to create any debts that are not there,” said the spokesperson.

In a research note issued last week, Goodbody Stockbroker economist Dermot O’Leary said the legislation was based on previous schemes in Norway, the US, and Iceland. “In all of these instances, a case-by-case process was first adopted, but proved to be too cumbersome and took too much time,” he said.

“Given the scale of the Irish problem, we would fear that the banks do not have the resources to deal with the problems in an efficient way.”

Mr O’Leary also had concerns that bank customers would not fully disclose all assets and income details, or future earnings potential.

Moreover, the banks have lost a huge number of employees over the past few years with the skills needed to deal with complex debt restructurings, which has again prompted concerns they will be swamped by the scale of the challenge.

A former executive with one of the pillar banks argues that banks are still reluctant to write down mortgage and personal debt because of fears that it will create a hole in their capital bases.

Consequently they will use the personal insolvency legislation to extend “extend and pretend” schemes, like moving to interest only repayments in the hope the market recovers over the next few years, which would enable them to limit the amount of debt writedowns they face.