Irish residential property prices were still 29% below their 2007 peak in the summer of this year – despite rising steadily since 2013. So it should be no surprise that mortgage lenders are sitting on high levels of non-performing housing debt – dealing with borrowers whose incomes have fallen or have lost their jobs and whose homes may have a market value significantly below the level of mortgage debt.
Banks are unable to sit tight with portfolios of non-performing mortgages hoping for the economy to fully rebound. For one thing, they would like to have their money working productively. More pressingly, though, the European Central Bank, the European Banking Authority and the European Commission are pushing them to dispose of non-performing loans. According to an unpublished European Commission report, leaked to the Irish Times, the level of non-performing loans held by Irish banks is approaching three times the EU average – 14.2% at September last year, compared to 5.4% across the EU.
The Central Bank of Ireland’s most recent quarterly bulletin reported that 76,422 residential mortgages were in arrears at the end of March this year. Some 43% of these are more than 720 days in arrears – suggesting resolution may be very difficult without repossession.
That process of property repossession is now well underway. All the major lenders have become increasingly engaged in court actions to take possession of homes where they believe there is little willingness or capacity to renegotiate repayments in ways that are acceptable to the lender. Some of the loan portfolios have been sold to so-called ‘vulture funds’ – which caused much distress to Irish businesses through hard-nosed debt recovery where they bought commercial loan portfolios. In some instances, vulture funds have initiated repossessions as part of commercial loan recovery where homes were used as loan security.
The level of non-performing loans remains a serious problem for banks and the wider economy, but also as a simmering social problem. AIB reported this year that it has €5.6bn of non-performing residential mortgages, as part of a total of €12.1bn of non-performing loans. AIB sold its non-performing buy-to-let mortgage portfolio earlier this year to Goldman Sachs for €200m, representing a discount of around 50% on the nominal value. KPMG is reported to be working with AIB on the disposal of other non-performing loans, excluding mortgages on first homes. AIB is also keen to get rid of its non-performing mortgages.
Bank of Ireland’s financial results for last year reported outstanding non-performing loans of €7.9bn. This was a reduction of €4.1bn during last year, through “resolution strategies that include appropriate and sustainable support to viable customers in financial difficulty…. the realisation of cash proceeds from property asset sales activity”, said the bank’s annual report.
KBC Bank sold a portfolio of non-performing loans earlier this year to Cabot Financial Ireland. In its latest financial results, the parent KBC Group said its Irish subsidiary would continue to “carefully and efficiently manage its legacy portfolio for maximum recovery”. It said that nine out of ten customers that were in financial difficulty had been “offered a range of solutions”.
Permanent TSB is in the worst position of the Irish domestic banks and has been told by the European Central Bank that it is unlikely to be permitted to pay shareholder dividends until it reduces its level of non-performing loans, which at €5.8bn represent 28% of its total loan portfolio. In an interview with the Irish Times, the bank’s chief executive Jeremy Masding indicated it will take tougher action on half of these loans where no resolution agreement is regarded as possible. Those options will, though, include pushing mortgage-to-rent facilities. Foreclosure, Masding said, is a last resort.
Vulture funds are willing to take over portfolios of non-performing debt, but not on terms that are attractive to the sellers. The funds will typically pay 40% to 50% of nominal value, while hoping that tough recovery action will lead to a good return. Banks have other options: these include removing non-performing loans from the bank’s balance sheet by placing the portfolios into special purpose vehicles, upon which bonds might be raised. The European Commission is also supportive of a greater level of debt write-off and more commitment by banks to debt restructuring.
Some accountants in practice are dealing with an increasing number of clients facing the loss of their homes through repossession. Aidan Clifford, advisory services manager at ACCA, says: “There is a whole range of assistance available through a scheme called Abhaile [see box], the client needs to engage with the scheme and use the expert advice available free to the borrower through the scheme. The free advice includes legal, accounting and personal insolvency advice.”
Box – Sourcing help
Various approaches are being taken to the challenge of home repossessions. The Right2Homes lobby group is promoting the Housing Co-operative Bill, with the backing of Fianna Fail and some independent TDs and senators. Under the Bill’s provisions, a housing co-op would buy non-performing mortgages and keep people in their homes as tenants. The group points out that more than 6% of total residential mortgages in Ireland are now in the hands of ‘vulture funds’.
The government is unlikely to back the Bill and is instead providing practical assistance through the Abhaile organisation, which is operated by the Money Advice and Budgeting Service (MABS) in conjunction with the Insolvency Service of Ireland, the Legal Aid Board and the Citizens Information Board. Abhaille has panels of qualified and regulated professionals who provide advice to those facing repossession and eviction, or are otherwise in serious mortgage repayment difficulties or are insolvent. It can be contacted through MABS on the helpline number of 0761 07 2000.