THE FEARS SURROUNDING the IBRC mortgage book, which houses Anglo and Irish Nationwide loans, are being overhyped. There will just be a different intensity of collections than IBRC has had since 2011.
An ongoing theme is the worry that Code of Conduct on Mortgage Arrears (CCMA) might not be adhered to. The CCMA is a piece of Central Bank regulation that sets out the process for resolutions in several stages, which came out in the start of 2009 and has been revised several times since.
It doesn’t offer guarantees of different outcomes to repossession or rate hikes, which we are told are the issue. The validity of the code is also questionable – since 2009 arrears have just gone up and up, it isn’t fit for the purpose. Key protections have also been reversed by the creators; there used to be a limit to creditor contact but this was removed, which lets banks hound borrowers more.
The one-year ban on repossessions, now rescinded by the Central Bank, merely mimicked failed policy that had already been tried and found ineffective in countries like Hungary.
In the main it is good for creating delays, but delays aren’t resolutions. In fact, it wasn’t until the State and Central Bank set the Mortgage Arrears Resolution Targets (MART) that any significant ground was made, and that had nothing to do with the ‘protections’ of the code of conduct on mortgage arrears.
Is the CCMA the greatest regulatory failure in this crisis?
The CCMA is perhaps the single greatest regulatory failure in this crisis to date, and we want to ensure this is the thing we use to help INBS borrowers? We may as well offer Superman some kryptonite.
Every politician, advocate and lobbyist is drumming up the fear of ‘vulture funds’ being the buyers. But, provocative imagery aside, the loans are already housed in the most toxic institution we have: IBRC was the noxious morphing of our biggest failures, Anglo and Irish Nationwide. They should be more afraid of a future with the seller than any buyer.
For the most part, these loans can be no worse off in a hedge fund than they currently are, the fact that a hedge fund might be the best type of buyer is played down, and often misunderstood. Anybody purporting to want the best deals for ‘distressed borrowers’ should realise a hedge fund buyer is how you get the best deals for them.
Australian-based Pepper, one of the bidders (who is structurally in the same descriptive category as most sub-prime lenders) has been cutting great deals with huge write-downs for clients of the now-defunct GE Money loan book.
When it comes to offering write-downs there is nothing in the consumer protection space that requires regulation to offer it; outright debt forgiveness or other solutions can be done with or without Central Bank oversight, and operationally using the code may actually delay solutions. The key question is about the protections these borrowers had when their loans were issued relative to the protections they have now. Are they greater or lesser?
Drowning is drowning
The CCMA often has surrender as the end solution, even advocates like the Irish Mortgage Holders Organisation saw about one in five of their solutions under the AIB joint venture end in repossession. That there is no recourse to the Financial Services Ombudsman (FSO) is another common theme, but how are people being ‘sold down the river’ when they already don’t have recourse to the FSO under IBRC ownership? Drowning is drowning the water temperature matters little.
And how are people being ‘hung out to dry’ because the new buyer could increase their interest rates, when every other borrower with every other bank on a variable rate faces the same risk and, in many cases, has had it worse than IBRC borrowers in terms of rate hikes? The real issue is that IBRC variable rate loans are mispriced below the market standard at about 3.9 per cent and everybody knows it will rise because there’s no reason for them to be cheaper than necessary. The rate hike won’t be predatory, it will be normalisation.
Even with full Central Bank oversight, lenders can and do increase interest rates; only one responded to political pressure (AIB) when the Taoiseach himself called them in over the practise, then he later defended said rate hikes. Banks just did what they wanted to do anyway.
There is also a precedent: a firm called ‘Certus’, which is not regulated under the Irish Financial Regulator jurisdiction, manages the former Bank of Scotland Ireland (a defunct bank with no licence) loan book – but no mention of it, instead we just focus on crying wolf without supporting evidence.
The other issue is that there are serious delinquencies within the loan book; one source who has worked on previous deals of this nature said it’s likely sale price (mortgage portion) will be in the region of 30c on the euro which indicates it has huge underlying problems already.
The code of conduct may not apply because many of these loan cases will go straight to litigation, and once legal proceedings start (even in regularly regulated firms) you can’t go to the FSO.
At some stage somebody will have to do the dirty work
IBRC loans are not part of the Mortgage Arrears Resolution Targets (MART) either, so we don’t know how many are already under legal threat. It’s likely to be large but that isn’t the fault of the buyer, it’s due to the borrower’s deterioration and the accusation a lender will make in many cases of ‘non-engagement’ which now has a set definition.
So any gentleman’s agreement, contract to mimic the CCMA, or Central Bank oversight won’t stop an uplift in repossessions. IBRC didn’t do this because their resources were deployed elsewhere, but at some stage somebody will have to do the dirty work and everybody knows this. No emergency legislation to force the CCMA will make a difference to that either, it’s all window dressing and a misguided belief that proven failed policy will result in better outcomes this time. Repetition of an ineffective action with an expectation of different outcomes isn’t the answer.
It may be the realisation that an endgame can no longer be avoided that will be the true downside, the last reported figures of the Irish Nationwide loans put that sum as being over 50 per cent of the loan book being 90 days or more behind, where those loans are now will be the litmus test.
And it is likey the harsh realisation that these problems will finally have to be dealt with that has many clamouring for greater protection against repossessions, but it is being done with the guise of regular non-defaulting borrowers who are at greatest risk of this. In truth, it will be the deeply defaulted loans that will lose their homes – albeit with a likelihood of better outcomes than they would have gotten had they lost them to IBRC.
The rest will just start to feel the same pinch that other equally-innocent people, who took out loans from other loveless banks, have been feeling for years.
Karl Deeter is a founder and Compliance Manager at Irish Mortgage Brokers in Dublin 2. His expertise is in credit, regulation and financial advice. Follow @irishmortgages on Twitter.