A court ruling that Pepper Finance must offer a low interest fixed rate mortgage to a couple who had difficulty repaying their mortgage could lead to interest rate risk for the servicers of such loans if the case is replicated, a ratings agency has warned.
Pepper Finance will be locked into a fixed rate of 2.5 per cent for the next 25 years on the loan of more than €280,000 after Judge Mary O’Malley Costello gave the green light to a personal insolvency agreement (PIA) for a couple at a sitting of Tullamore Circuit Court.
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The decision offers hope to as many as 32,000 homeowners with distressed mortgages of a “roadmap” towards a degree of financial security, campaigners said. Personal insolvency specialists are expected to use the judgment as precedent when negotiating with lenders.
In a research note on Friday, S&P Global Ratings said that if the ruling serves as a precedent, forcing third-party servicers to provide fixed rates to PIA applicants, servicers “may be unable to effectively service loan pools backing Irish re-performing securitisations”.
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Soaring interest rates have left many Irish re-performing borrowers on floating-rate mortgages well in excess of typical fixed rates.
“Servicers of these loans do not grant fixed-rate products and borrowers can’t resort to refinancing elsewhere, given their past arrears history,” the note said.
About €3 billion of Irish owner-occupied mortgages across about 17,000 unique borrowers are serviced by third-party servicers across nine re-performing transactions that S&P rates.
“Lower fixed rates for borrowers in Irish re-performing pools could lead to both liquidity stresses and interest rate risk due to a lack of hedging,” it said.
“Whilst the uptake of PIAs has been relatively low, this ruling may encourage certain borrowers to avail of this option, regardless of the legal uncertainties. It is something we will continue to monitor as the situation evolves.”
S&P said borrowers who enter into a PIA will incur costs and must agree to make monthly payments, resulting in consequences such as their credit rating being impaired for a period of time.
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It said, however, the Circuit Court ruling “may increase the appeal” of PIAs for struggling borrowers on high variable rates, including those in these types of arrangements.
The 2.5 per cent fixed-rate mortgage for 25 years in the case in question was described as “below what is available” in the market and the term “far longer” than for a typical Irish mortgage generally and “certainly” for a borrower with negative performance history.
“Although, historically, the uptake of PIAs has been very low and the servicer in this instance did not agree to this PIA, the uptake of PIAs will potentially increase as a result of this ruling,” the note suggested.
“Overall, we expect the effect to be limited to re-performing transactions with third-party servicers as bank servicers have more options at their disposal when dealing with similar situations.”
