Increased "lender forebearance" in the wake of the financial crisis whereby banks allow borrowers to extend the repayment period for their debt, switch a repayment mortgage to an interest-only product, or even allow them a holiday on interest payments, pose a risk to British banks.
In a report on the flexibility of UK banks to troubled mortgage borrowers, the ratings agency's analysts said the practice was a "credit negative" for the country's banking system.
"There is still high indebtedness on mortgages and there is potential for more borrowers to get into difficulty. As the forebearance numbers are aggregated it is hard to know the scale of the issue for any individual bank, but it is a concern," said Elisabeth Rudman, a senior credit officer at Moody's.
Moody's concerns follow the publication last week by the Financial Services Authority of its risk outlook report for the financial system, which drew attention to the issue.
FSA figures show that for every UK mortgage borrower in arrears, two are subject to some kind forebearance process to help them avoid defaulting on their debt. (read more)