Fitch says more debt write-off schemes by Irish banks are ‘inevitable’

International ratings agency Fitch says it is "inevitable" that more banks in Ireland would apply "some form" of debt write- downs for mortgage customers in arrears.

“We expect some Irish banks to introduce products to provide long-term viable arrangements for co-operative borrowers,” Fitch said yesterday.

The note on mortgages follows AIB’s move last week to offer debt write-offs, under certain conditions, to mortgage arrears customers selected for a split mortgage. It is understood that about 70 customers who were already on split mortgages have already been transferred to the new arrangements.

Restrict availability
Fitch said it expected that mortgage write-downs and restructurings, as well as enforcements, "will increase in 2014 among Irish banks".

“The impact will depend on the ability of the banks to restrict the availability of these products to specific distressed borrowers who co-operate throughout the period of any arrangement,” it added.

Fitch said 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 had made some form of write-down inevitable.

Fitch said splitting a mortgage rather than writing it off “keeps the possibility of some future recovery on the deferred payment portion of the loan, even if part of it will be written down”. Given the relatively modest living expenses for a borrower allowed under the new Personal Insolvency Arrangement, a split mortgage may be “preferable”.

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

Mortgage delinquencies
The agency said affordability had been the biggest driver of Irish mortgage delinquencies, but that borrower behaviour had also played a role.

“This risk is partly offset by the greater sanctions available to Irish banks since last year’s changes to the Code of Conduct on Mortgage Arrears and the Land and Conveyancing Act made enforcement and foreclosure more viable,” it noted.