Mortgage-debt laws will lead to short-term arrears spike, says Moody's
NEW laws that will provide a legal structure for mortgage- debt writedowns will lead to a spike in arrears in the short term, a leading ratings agency said yesterday.
But Moody's said the new personal-insolvency legislation should eventually become an efficient mechanism to deal with mortgage holders who are in trouble.
As many as 15,000 people are expected to benefit from debt writedowns as part of new personal-insolvency laws to be enacted by the end of the year.
These people are expected to avail of new out-of-court debt- settlement arrangements.
At the moment, some 77,630 mortgage accounts are three months or more in arrears, while another 38,658 mortgages have had the repayments on them restructured.
Of the numbers in arrears, around 60,000 mortgages are six months or more in arrears, putting these people in danger of losing their homes.
Moody's said it expects the new personal-insolvency rules will mean debt forgiveness rather than repossession will become the preferred option for lenders dealing with those with unsustainablex mortgages.
"Long-term, the legislation provides an efficient mechanism to deal with the current mortgage arrears and negative-equity issue," the agency said in a note yesterday.
It added that resolving the arrears issue will strengthen the balance sheets of Irish banks, and they should not need extra capital to cope with the losses.
"However, in the short-to- medium term, the rating agency expects that the legislation will increase arrears and losses on existing mortgage loans," the ratings agency said.
But it warned that the new legislation could pose the risk of moral hazard as it may lead some to choose not to repay their mortgages, even though they can afford to do so.
This is considerably less alarmist than a note issued by the same ratings agency in February when it said up to one- quarter of all Irish mortgage debt was susceptible to being written down under the personal-insolvency legislation.