More banks to copy AIB split plan

More Irish banks will begin writing down debts of their troubled mortgage holders, following AIB’s introduction of a limited split mortgage scheme according to ratings agency Fitch.

Fitch analyst, Ketan Thaker, said the perfect storm of underwater mortgages and Central Bank targets mean that Irish banks have little choice but to write off some debt.

“The level of distress in the Irish housing market coupled with the Central Bank’s introduction of targets for banks to find long-term solutions for the majority of their distressed borrowers has made some form of debt writedowns inevitable.

“We expect some Irish banks to introduce products to provide long-term viable arrangements for co-operative borrowers,” he said. Mr Thaker said he couldn’t foresee widescale foreclosures in Ireland as neither the banks nor the borrowers would be well served by a wave of repossessions.

“There are some borrowers that just need to change their lifestyle, but a large number of borrowers have suffered a change or loss in their income. There has to be some resolution mechanisms. It is very unlikely that there will be widespread foreclosures in Ireland,” he said.

Even if a bank was to foreclose on a property and sell it due to the demise in the value of homes, down 45% from peak, the bank would make a bigger loss than if they were to engage with a mortgage holder.

Fitch believes that other banks are likely to use a similar product as AIB’s split scheme as it offers a carrot for the borrower and the lender. The split mortgage scheme means the bank may recover some of the value while the borrower can have a better standard of living than entering a personal insolvency arrangement.

Mr Thaker said there was a danger people with performing mortgages could be tempted to try and avail of a writeoff of their mortgage.

“The process of moving some borrowers onto a new product will need to be managed carefully to minimise the potential for other borrowers to go into arrears in expectation of writedowns, or for those who are already in early arrears to try to obtain this type of debt workout,” he said.