It may turn out that vulture funds will, indeed, strike the necessary deals with distressed Irish households and write down impossibly underwater mortgages.
Last week that’s what Taoiseach Leo Varadkar said he believes may likely happen as the foreign-owned funds prepare to acquire large parts of the loan books from mainstream lenders in the coming months.
But his remarks involve an article of faith on the intentions of the vulture funds — the US-owned funds and Wall Street investment banks that generate profits to pay dividends to their shareholders back home.
That’s because the funds currently own a relatively small share of the Irish homeloan books.
And, despite what the Taoiseach may believe, there are no compelling ‘numbers’ that can tell how the funds will behave with ordinary Irish households.
Along with the Central Bank and Finance Minister Paschal Donohoe, the Taoiseach has now given his outright support to the three Irish mortgage lenders — over which the Government in part or fully controls — to sell vast amounts of distressed residential mortgages to the foreign funds.
This means that Ireland is about to embark on a big experiment that few other countries would embrace: Funds with no long-term grounding here will take control over many billions worth in long-term mortgages originally written by banks licensed and bailed out by the State.
After the misery of Ireland’s property and financial crash, there’s no mystery that Irish banks hold huge amounts of non-performing home loans.
The banks were given little incentive to write down distressed mortgage debt.
Expensively recapitalised after the disastrous lending binge of the boom years, Irish lenders did, nonetheless, enthusiastically strike deals over corporate mortgage debt.
Over the past six years, the lenders and the State have written down debt or sold distressed loans to vulture funds on all sorts of Irish businesses such as pubs and small retail outlets. The sales attracted relatively little fuss.
And in some cases, the big funds tapped generous tax breaks and handsome returns on Irish office developments underpinned by discounted loans, as market prices roared back. But consider the pub owner whose long-term loans were sold to a foreign fund by an Irish bank and was subsequently turfed out of the business after failing to keep up with the new and costlier loan terms.
There is no affordable route to the High Court for any beaten down small business owner to help out in the unequal legal struggle with the world’s largest investment funds.
The regulator of regulators, the ECB, now wants Europe’s problem children, namely Ireland and Italy, to sort out their crisis-era loans once and for all. Supposedly healthy banks, the ECB has rightly pointed out, don’t carry large amounts of non-performing loans.
A tad disingenuously, the ECB adds it has no favoured way to cleanse European banks of their soured loan books.
The end result is there are now no barriers — financially or morally — stopping Irish banks selling the mortgages of distressed households.
Having failed to write down hopelessly indebted home loans, they gaze at potential higher credit ratings and an improvement in Irish banking’s mediocre profitability scores that the loan sales may entail.
But for distressed households, there is little to no evidence to suggest that vulture funds are the answer. There is no guarantee Ireland’s mortgage debt problem will end happily.
“I’m always reluctant to use the term vulture funds because it is a political term. What we’re talking about here is investment banks, investment funds, finance houses, there are lots of different things and lots of different financial entities there and the term is used, vulture funds,” the Taoiseach told reporters last week.
But you’ll know from the numbers that they’re often better at write-downs of loans than our own banks.
“Our own banks tend to extend and pretend rather than coming to settlements with people. Increasingly they’re covered by the same regulations and the same consumer protections as the banks,” he said.
Experts who have long tracked the arrears crisis are not so sanguine about the unfolding vulture fund experiment.
Well over half of the country’s most distressed mortgages will end up in the hands of so-called non-bank firms if the planned homeloan sales go ahead, leading legal and debt adviser Paul Joyce of the Free Legal Advice Centres has estimated.
The latest mortgage arrears figures from the Central Bank were released earlier this month.
They showed the number of accounts in arrears for over two years, a category that captures the most distressed loans, was little changed, at almost 28,000 at the end of September.
By any reckoning, the number of people in arrears is huge.
Assuming that four people are linked to a single distressed mortgage account, the figures suggest that a population larger than that of Galway city has struggled to pay their mortgages for many years.
‘Bit by bit’ the cases of early arrears are diminishing but long-term arrears of anything over two years remain stubbornly high.
“It is a significant number of households and the question is where are they going in the long run,” when the new fund owners take control, Mr Joyce has said.
The latest arrears figures do not capture the high-profile announcements and proposed loan sales by Permanent TSB, Ulster Bank, and other lenders.
And the vast majority of as many as 14,000 loan sales in the pipeline will likely be in long-term arrears. Mr Joyce
estimates well over half of long-term arrears and the mortgages of the country’s most vulnerable households will be controlled by so-called non-banks, which include vulture funds.
There is another side to the Irish mortgage crisis: About 13% of all the huge amount of households whose mortgages have been “restructured” have failed to keep up with the new terms.
And a huge number of ordinary mortgage accounts have been restructured —almost 113,900 loans since the crisis started.
With no track record to go on, transferring or outsourcing underwater mortgage loans to foreign funds is highly questionable.