By Joe Leogue
Why are the banks selling off loans?
Banks are struggling with non-performing loans, particularly mortgages. These are debts that are in arrears and in some cases are loans where those in debt have not engaged with the bank to restructure their payments.
The more of these types of loans on a bank’s books, the more risk that lender is exposed to in the long run. The European Central Bank wants to avoid widespread risk, and so is looking to the banks to clear their books of non-performing loans. Which is where investment or “vulture” funds come in.
What is a vulture fund?
These are private equity firms and hedge funds that look to snap up non-performing or distressed loans off the banks at discounted prices, and then turn them around for a profit.
Even though they buy at a discount, these vulture funds are attractive prospects for the banks as they can clear non-performing loans off their books. There’s also the added bonus, from the bank’s point of view, of not having to give individual writedowns to distressed mortgages while expecting those who can afford to meet the terms of their loans to continue to do so in good faith.
So what are people’s problems with vulture funds?
The vulture funds are not typically in the game for the long haul, and want to make a quick return on investment. There is a fear that if mortgage-holders cannot meet the repayment requirements demanded by these firms, the vulture funds are more likely to trigger repossession proceedings.
Rising house prices only contributes to this fear. House prices have gone up by 12% in the last year alone. Critics of vulture funds say they will see a better and faster return on their investment by evicting the houseowners and selling on the property.
Speaking last month after Permanent TSB had sold thousands of loans to US firm Loan Star, independent financial adviser Padraic Kissane, said he was worried that a vulture fund with a short-term approach to seeking a return on its investment, and rising property prices, could spell trouble for mortgage holders in arrears.
“If the value of the property equates to the current value of the loan, then the vulture fund will be pressing to get that property sold because they get their return on money in the greatest degree by doing that,” he warned.
All these reports indicate that thousands of mortgages have been sold on in all these deals. How do I know if mine is included?
Your bank should write to you to let you know.
Will the vulture fund be expected to conduct its business in the same manner as my bank?
This is a source of debate.
Fianna Fáil has introduced the Consumer Protection (Regulation of Credit Servicing Firms) Bill in the hope of regulating vulture funds, though Sinn Féin say it doesn’t go far enough to offer protections to houseowners.
Some vulture funds can use credit servicing agencies to conduct their business in Ireland, but Fianna Fáil says that while these agencies come within the remit of the Central Bank’s code of conduct, the vulture funds themselves do not.
They argue this prompts the need for greater regulatory reach as provided in their bill.
Speaking about that bill last March, Finance Minister Paschal Donohoe sought to reassure mortgage holders.
“It is important to again highlight that all mortgage holders receive their full contractual conduct rights, regardless of the owner of the loan.
“They still have the same rights and obligations as they had before the sale,” he said of portfolio sales to vulture funds. However, David Hall, CEO of the Irish Mortgage Holders Organisation says that the Central Bank’s code of conduct is not binding.
“All that protects those in arrears is the code of conduct in mortgage arrears.
“However, this is a voluntary code and does not require any bank to provide solutions.
“The High Court and Supreme Court have ruled this is a voluntary code,” he said.