Repossession will be a “last resort” used by banks to tackle mortgage arrears, says Fitch

Repossession or the voluntary surrender of homes are likely to be a "last resort" to resolve the mortgage arrears crisis in the Republic, according to international ratings agency Fitch.

The agency said long-term restructuring of mortgages would become more prevalent in Ireland now that a “cohesive and credible framework for dealing with arrears has taken shape”.

In a note published yesterday, Fitch, said: “We expect tools such as split mortgages or trade-down products for borrowers in negative equity to be used first, followed by Personal Insolvency Arrangements (PIA). Repossession or voluntary surrender will be a last resort.”

In July, the latest version of the Code of Conduct on Mortgage Arrears (CCMA) and the Personal Insolvency Act came into effect, and the Land and Conveyancing Law Reform Act passed into law.

Fitch said these would play an important role in dealing with the arrears issue.

The agency said it was "still early" to estimate how many mortgages would be subject to the three main options of restructuring, PIA and repossession. "But we can make an initial assessment of how they will interact."

Incentives

It noted the Land and Conveyancing Law Reform Act reopens the repossession route.

“But we also think it will create incentives for lenders and borrowers to agree longer-term alternative repayment arrangements,” it added.

Fitch said lenders here had started deploying “longer-term strategies” as the short-term arrangements common in Ireland, such as principal payment holidays, had “often failed” to restore borrowers to “performing status”.

It also noted the Central Bank had set targets for lenders to achieve sustainable solutions for mortgages in arrears.

“By allowing more borrower contact and widening the definition of non-co-operation, the new CCMA should accelerate discussion of arrears problems between borrowers and lenders, and limit the risk that the prospect of debt-relief reduces willingness to pay,” Fitch said.

The agency said its discussions with lenders suggested they would deploy their own restructuring tools first, before moving to a PIA arrangement.

Debt write-off

“The number of borrowers in negative equity means that lenders may not want to repossess a distressed property and crystallise a larger loss. Nevertheless, all three options are likely to involve losses for mortgage pools, if not through recovery shortfall then through debt write-off.”

Figures from the Central Bank show that 95,554 or 12.3 per cent mortgages on residential homes were in arrears of 90 days or more at the end of March.