New Irish personal insolvency legislation that was proposed in January and expected to become effective in 2013 will introduce debt forgiveness for borrowers viewed as having unsustainable mortgage debt, Moody's Investors Service said in a report released today.
The rating agency sees the proposal as credit negative for Irish RMBS since many mortgage loans will be written down and many borrowers will become discouraged from maintaining their mortgage loan repayments. The rating agency projected that a quarter of all Irish mortgage debt is vulnerable to a write-down under the proposal.
Moody's noted that, under the proposal, borrowers who are not able to pay their debts when due can be eligible to enter into a Personal Insolvency Arrangement (PIA) with their creditors. Granting that at least 75% of secured creditors and 55% of unsecured creditors agree, the PIA can see the mortgage loan reduced to the property's current market value while the borrower still lives in their home.
Exact details of the insolvency tests utilized to single out borrowers who truly cannot pay their debts along with banks' willingness to veto an arrangement will determine the effect on the agency's expected loss assumptions for Irish residential mortgagel-backeds.