OF BANKS AND VULTURE FUNDS
10,700 mortgage holders got a nasty surprise over the August Bank Holiday weekend with letters from one of the country’s major banks, the PTSB , informing them that their loans were being sold on to Start, a US owned vulture fund. Start paid €1.3 billion for the mortgages to the PTSB, the Irish bank saddled with the highest percentage of bad loans on its balance sheet. The move was followed within the octave by similar moves by two more Irish banks. All done in August, when there were few around to protest.
Most of the mortgages have been non-performing for years, with only official regulations and political pressure staying potentially thousands of repossessions. Quite how the new owners will treat their new clients remains to be seen, but they are unlikely to be as accommodating, or as pliable, as the banks. The issue has acquired a sharp political edge since most of the mortgages, non-performing or no, are on family homes, in a country where repossession carries the toxic stigma of eviction.
Mortgage arrears are one of the enduring legacies of the collapse of the Celtic Tiger. The collapse was part of the worldwide recession of the time, yet the first reactions in Ireland were that it couldn’t be happening to us. We’d believed the politicians blather. Hubris had been in the air as ordinary people rushed to spend during the Noughties. Above all there was a scramble to get on the property ladder, seen as a gold-plated investment, as prices skyrocketed. Credit was freely available and cheap, thanks to our membership of the Euro; 100% mortgages were commonplace; subprime borrowers were facilitated. The scramble pushed property prices ever higher, buoyed by the illusion that the heady prices obtaining for quite ordinary Irish houses represented real wealth rather than the chimera of a full blown housing bubble.
It couldn’t last; and it didn’t. Even before Bear Stearns and Lehmans went belly up the Irish property market had peaked; the Crash followed. Public finances collapsed, unemployment soared and In the end Ireland needed a bail out from the IMF and heavy increases in taxation to survive. Property prices fell by up to 50% ( ten years on my house, a modest four bedroom, is “worth” €750,000, still a third down from the unreal peak – and this when the Irish economy is “booming” again). At the time I described the Crash as the “Celtic Tsunami.” The lesson in basic economics that followed was bitter sweet.
Now, a decade later, the economy has recovered. Most of the effects of the Crash have been undone, with economic indicators and employment now back up to pre -crash levels and a more sensible and prudent approach to financial matters among politicians and the public alike. Most but not all. “Distressed Mortgages,” a euphemism for mortgages very seriously in arrears, remain. The issue is political and complicated. Many borrowers lost their jobs during the Crash. Others had simply bitten off too much, overextending themselves with a very large mortgage in the expectation that the bubble would last. As property prices plummeted negative equity compounded their problems. Thousands fell into serious arrears, in many instances not making payments on their mortgages for several years.
Ireland has a small population (4.773, 000 at last count). Last March the number of mortgages was roughly 850,000. A decade earlier, when the wheels came off, the number was around 790,000. Five years ago, at the nadir, 94,488 mortgages were at least 90 days in arrears – a staggering one in eight of all mortgages, most on family homes. Today, five years later, there are still 65,000 over 90 days in arrears, 50,000 of them family homes. More ominously, despite efforts at restructuring, 20,000 family home mortgages are over two years in arrears. There lies the crux of the problem. Despite the return of economic growth, attempts to encourage engagement between lender and debtor and the recovery in property prices, lifting many mortgages out of negative equity, the disaster cases remain.
Put simply, these, plus a further 13,000 mortgages on buy-to-lets, are never going to become viable. So what to do? They remain on the balance sheets of the banks, which have been bullied, cajoled, hemmed in and leaned on by politicians to desist or go slow on any moves to repossess the properties. As protocols and codes of conduct restrictions have gradually become exhausted the number of applications by the banks to the Courts (mandatory) for repossession have increased but the numbers actually repossessed remains a trickle – 632 family homes in the six months to last March.
Cue the current situation regarding demand for housing and the issue of homelessness, both hot political potatoes. After years of stagnation the housing market is now slowly recovering. There is plenty of demand with nearly full employment and a rising population but credit continues to be in short supply, thanks in large part to new tighter controls on lending, designed to head off another housing bubble. Houses and apartments are being built in increasing numbers but it will be several years before equilibrium is reached. The shortage of credit has also impacted on the second-hand house market, where the traditional “trading up” by homeowners on the lower rungs of the property ladder has all but dried up. With properties in short supply a further consequence has been a sharp increase in the numbers of homeless, including many families.
The banks COULD provide more finance and credit, helping the property market along, but are hamstrung by the tighter credit controls and by the volume of “bad” loans still clogging up their balance sheets. Our own Central Bank has now joined with the European Central Bank, which, with its low interest rates contributed greatly to fanning the flames of house price inflation in the period before 2007, in demanding that the Irish banks take action to reduce their non-performing loans. It’s a delicate political issue. Reducing bad loans frees up more capital, with the banks having a better loan to deposit ratio and thus able to loan out more productively, benefitting the economy in general and, inter alia, providing more credit to house purchasers. All good! But how to reduce bad loans without foreclosure of some form, both likely to increase the number of repossessions – and evictions – something politically toxic?
The PTSB, slashed at the Gordian Knot by selling to Start, a move seen as very much a watershed moment with the PTSB the first Irish bank to sell to a vulture fund. Vulture funds, non-Bank entities, usually foreign owned, with the money to purchase assets at a discount have been actively buying up the loan books of Non-Irish banks here in recent years. They have vigorously pursued defaulters and sought repossession through the Courts, acquiring a negative reputation. The PTSB sale included mortgages not in trouble, with the suspicion that some of these , including buy-to-lets, constituted sweeteners, low hanging fruit which could be capitalised rapidly, as opposed to family homes in arrears, where evictions could prove difficult and troublesome. There have been calls for official action to block the sales by the state-owned bank. The issue is one that could run.