By Gary Digney
Director/Personal Insolvency Practitioner
As has been widely reported, Permanent TSB and Ulster Bank plan to sell up to 25,000 mortgages to so called Vulture Funds. This move is mainly driven by the requirements of the European Central Bank for lenders to reduce the number of loans and arrears on their balance sheet.
Deuska Bank, Apollo Service Loan Star, Carvan, Goldman Sachs and Cerebus have emerged as the main purchasers of such loans.
The term Vulture Fund is a metaphor used to compare investment funds to the behaviour of vultures praying on debtors in financial distress by purchasing the debt at discount to make a large gain.
However we at PKFFPM see vulture funds as an opportunity for borrowers to finally achieve a long term, sustainable full and final settlement.
Loan Servicing in Ireland
Although vulture funds are not regulated, they must appoint a regulated entity to service the loans they acquire which includes managing the process with borrowers in financial difficulties.
The contractual position between the borrower and lender does not change when the loan is acquired by a vulture fund. Whatever rights the borrower had with the original bank they still have with the vulture fund. The legal process is also unchanged and the code on the mortgage arrears still applies.
PKF-FPM experience is that judges in the Circuit and High Court tend to favour borrowers over vulture funds trying to repossess Irish citizens’ principal residences.
All borrowers have access to the legislation introduced in the Personal Insolvency Act 2012-2015. The fact that their loan is now owned by a vulture fund can actually enhance their chances of getting a deal under the Personal Insolvency Act.
Personal Insolvency Arrangement (PIA)
The Personal Insolvency Act introduced a new insolvency procedure called a Personal Insolvency Arrangement (PIA). A PIA can be entered into between a debtor and one or more of his creditors. Importantly a PIA can include both secured and unsecured debts.
Secured debt is a debt backed or secured by an asset, for example a mortgage.
Secured debts can be restructured under a PIA and one or all of the following restructuring methods can be applied:
• Write down of the debt to market value of the property.
• Reduction or change in the Interest Rate to fixed or variable for the term of the mortgage.
• Extension of the Mortgage Term.
Will the funds / Bank accept such deals?
In short, usually ’No’. However, Section 115A (S115a) was introduced in 2015 to give the personal insolvency legislation more teeth. This section gives the courts power to review and approve a PIA which has been rejected at a meeting of creditors. In effect, the courts can force the deal on the funds/Bank. The Court’s power to force a proposal on a bank or fund is commonly known as a ‘no veto proposal’.
In a recent S115A case, the courts forced a PIA on the vulture fund that included a fixed rate of interest of 3.65% for the extended 27 year period of the restructured mortgage. Funds are not banks. In this case, the terms on which the fund had purchased the mortgage debt was not presented to the court and it was unclear when the fund might need to return to the market to finance its capital needs. Taking into account that the mortgage loan was owned by “an investment vehicle and not a commercial bank”, Judge Baker did not see sufficient evidence that the 27 year fixed rate caused unfair prejudice to the fund.
This decision reflects the tendency of the Irish courts to encourage arrangements which enable debtors to remain in their family homes, and to encourage secured creditors to approve PIA proposals.
As funds are highly unlikely to disclose to the courts the cost of the purchase of the loan, it is possible that an even more favourable rate of interest could be applied to a restructured loan in a PIA where the owner of the debt is a vulture fund.
PKF-FPM experience is that the borrowers who are not in default should not be disadvantaged when their loans are transferred to a vulture fund.
For borrowers who want to sell their property and reach compromising residual debt, dealing with a vulture fund means dealing with a motivated party who expects a debt write off.
While it is true that for some mortgage holders whose situation is irretrievable dealing with a vulture fund may bring forward the day of reckoning, that day of reckoning was going to arrive sooner rather than later in any event.
The situation facing borrowers under a loan sale may push debtors to seek novel insolvency deals such as that signed off by Ms Justice Baker under the new Personal Insolvency Act.
The introduction of Personal Insolvency Arrangement provides borrowers with the opportunity to restructure their mortgage, allowing them to retain the family home on a sustainable basis. One of the first steps borrowers should consider, therefore, is whether they are eligible for a no veto type PIA.
The underlying principle of the PIA process is that no Irish resident should have to leave their principle residence. This should provide significant comfort for borrowers struggling with their mortgage and something they may have to call upon to provide protection perhaps from vulture funds and other lenders
PIA Case Study
The Problem: Mr and Mrs White have a property with a mortgage of €500,000. The property is valued at €250,000. The mortgage has been in arrears since before January 2015. The interest rate is 4.65%. The Whites have little disposable income and their loan has been sold to a vulture fund.
Statement of Affairs:
The Solution: A Personal Insolvency Arrangement (PIA) is proposed and the home value is written down from €500,000 to €250,000. The mortgage term is extended from 16 years to 25 years. The interest rate is reduced to 3.65% fixed for the term of the mortgage. A relative introduced a lump sum payment of €15,000 in full and final settlement of the debt. The creditors were paid 3.6 cent in Euro in full and final settlement.