Landmark legislation in Greece on consumer debt could lower recoveries on mortgages that are already underwater, according to a recent report from Moody’s Investors Service.

But the agency concluded that overall the law’s impact on the performance of ABS and covered bonds backed by consumer and mortgage loans will be limited.

Those who avail themselves of the law — which basically introduces the concept of personal bankruptcy to Greece — can get a court to write down a mortgage on their main residence to 85% of the current price of the property.

A new loan of over 20 years would replace the old one. The upshot is that a drop in home values since the loan was originated or a high LTV ratio to begin with could let the borrower off the hook for a portion of the original loan. 

Nevertheless, Moody’s believes most Greek borrowers will avoid declaring bankruptcy, even if they are eligible. “

Although a borrower who complies with the payment terms imposed by the court receives a discharge of remaining balance of his debt to creditors for four years, the discharge will hurt the borrower’s credit history for up to five additional years,” the agency said. “The need for the borrower to liquidate assets and the lengthy period of credit impairment will serve as disincentives” to seek bankruptcy protection.

Subscribe Now

Access to a full range of industry content, analysis and expert commentary.

30-Day Free Trial

No credit card required. Access coverage of the securitization marketplace, including breaking news updated throughout the day.