MORTGAGE DEFAULTS WILL peak at nearly 20 per cent in early 2013, according to a new report from the credit rating’s agency Moody’s.

The scale of negative equity combined with new insolvency legislation and the ongoing economic difficulties means that there are still “substantial losses to be realised on Irish residential mortgage loans”.

The report, ‘Key Drivers of Default in Irish RMBS Pools Will Persist in 2013′, breaks down the levels of mortgage arrears on a county by county basis. Cavan and Laois have the highest rate of mortgage defaults, which is based on people not paying their home loan for 90 days, with Dublin and Cork among the lowest. 16 per cent of homes are currently in arrears.

Mortgage Defaults by region

Source: Moody’s Investors Service, servicer pool data

However the introduction of new personal insolvency legislation means that borrowers no longer fear the consequences of not paying their mortgages. Even the rumours and initial announcement of the new personal insolvency legislation caused a surge in arrears in late 2011 through early 2012, according to Moody’s.

“The recently proposed personal insolvency legislation, due to come into force in 2013, may further reduce incentives for struggling borrowers to remain current on their mortgage debt.” The report comes as the European Central Bank said yesterday that new personal insolvency legislation rules “could significantly increase default rates” and hurt the finances of Ireland’s banks even further.

Moody’s looked at €66bn of homes loans, around 46 per cent of the market and includes mortgages arranged by Ulster Bank, First Active, Bank of Ireland and Permanent TSB. Up to now, banks have been wary of debt forgiveness as it would hurt them further. However, according to Moody’s, this may be their only option. “Debt forgiveness provides an efficient mechanism to deal with the current mortgage arrears and negative equity issue.”

Other key Points of the report:

• Cork and Dublin continue to show default rates that are half the levels of other regions.
• Buy to let loans will continue to see higher default rates in 2013. They are expected to rise to 1.7 times the rate for owner occupied loans, up from just 1.4 times.
• Unemployment is no longer driving default rates as it has levelled at 14 per cent. However self employed are still hit hardest, with default rates two times that of employed borrowers, down from 2.3 times in 2010.