Ireland’s bankers and bailout masters are pressing the Government to make it easier to seize homes bought as investments to rent out as defaults on the loans surge.
The troika of the IMF, European Commission, and ECB want the State to tackle a legal loophole impeding lenders from foreclosing on loans taken out before 2009, according to three people familiar with the matter, who declined to be named as final decisions haven’t been taken.
The Government’s effort to overcome legal and cultural obstacles to foreclosures is growing more urgent as delinquencies on rental properties grow, making it harder for banks to increase lending, and slowing the recovery.
At AIB, the biggest mortgage lender, more than a third of its loan book for so-called buy-to-let properties is in trouble.
“A well-functioning repossession framework is important to maintain debt service discipline and to underpin the willingness of banks to lend, which is crucial for Ireland’s economic recovery,” Craig Beaumont, the IMF mission chief for Ireland, said.
Before Dec 2009, lenders used a 1964 law as the basis to repossess homes. This was repealed and replaced in 2009, which, due to a drafting oversight, applied only to loans taken out after Dec 1, 2009.
The flaw became apparent in a Jul 2011 case overseen by Ms Justice Elizabeth Dunne. She ruled a lender wasn’t entitled to repossess a home used for security on a defaulting €93,000 loan because demand for repossession and repayment was made in Jul 2010. She said another lender was entitled to repossession on a defaulting €209,000 loan taken out in 2007 because it demanded repossession and repayment in Sept 2009.
The Department of Justice said that the “complex and related issues raised in this case continue to be the subject of discussions within the department and within the office of the Attorney General”.
The Government is considering introducing new laws to fix the loophole.
Buy-to-let investments took off during the boom, and now account for about a fifth of the €130bn mortgage market. Values have collapsed since the bubble burst in 2008, with figures signalling they are faring worse than owner-occupier loans.
Resistance to evictions and repossessions is at least partly linked to the Famine, which saw thousands of families thrown off the land. Later, around 1880, when Ireland was controlled by Britain, the Land League’s resistance to evictions during rent strikes often ended in violence against landlords and their agents.
More recently, opposition to repossessions stems at least in part from the banks’ reliance on taxpayer support to avoid collapse in the wake of the 2008 crisis. In all, the State has injected or pledged about €64bn to banks, and five of the six largest domestic lenders are now in Government hands.
“Many of the buy-to-let properties are in the hands of doctors, accountants, bankers and other professions,” said Stephen Kinsella, an economics lecturer at the University of Limerick.
Buy-to-let is “a massive house of cards built around middle-to upper-middle-class Ireland”, he said.
“There is a huge fear among lenders in what is a post-Famine, post-colonial Ireland of being seen to be acting like the Big Bad Bank plc coming in and turfing people out of their properties,” said Bill Holohan, senior partner of Holohan Solicitors in Cork and Dublin.
Policymakers and banks are starting to draw a distinction between owner-occupier homes and buy-to-let properties. Patrick Honohan, the governor of the Central Bank, said in March that “it’s past time” for banks to repossess such properties.
“Three years ago, we believe banks had limited appetite to repossess troubled buy-to-let properties,” said Michael Greaney, associate director in Fitch Ratings mortgage-backed securities unit.
“Over the last year, there seems to have been a change in attitude and banks are willing to use the repossession route if necessary and are pursuing buy-to-let arrears cases more actively.”
The “legal flaw” is impeding lenders from repossessing properties, John Reynolds, head of KBC’s Irish unit and president of the Irish Banking Federation, has said.
“While repossessions remain the last and least desirable resort for KBC Ireland, there are cases where customers won’t work with KBC,” Mr Reynolds said in June, adding he was disappointed that the legal impediment hadn’t been addressed.
“As a last resort, we need to be in a position to repossess.”