Ross Maguire: Borrowers have little to fear from vulture funds
Passing unsustainable bank debt burden to another generation will not help
Permanent TSB (PTSB) intends to sell a large portfolio of defaulting loans. Given the huge size of the portfolio it is inevitable that the buyer will be a fund. Photograph: Alan Betson
The argument is simple. State-owned banks, and therefore the State itself, intend to sacrifice ordinary people (aka honest, but defaulting borrowers) by abandoning them to unregulated vulture funds who will gouge them for super profits. This must, in the name of all that is decent and civilised, be stopped.
Let’s look at the facts. Permanent TSB (PTSB) intends to sell a large portfolio of defaulting loans. Given the huge size of the portfolio it is inevitable that the buyer will be a fund. These funds invest on behalf of pensioners, universities, charities and others and look for opportunities across the globe. Distressed debt is an opportunity.
PTSB needs to sell these loans because of the negative effect they have on its balance sheet. It is important to understand that every defaulting loan severely inhibits a bank’s ability to lend. The bank could continue to wait it out hoping that things will improve – but PTSB has been waiting for a decade.
It no longer makes economic sense to keep going as is. The sale is a financial imperative.
Millennials will have less access to credit and on more expensive terms. The lack of credit will hinder economic growth, and most significantly, hinder delivery of the homes those younger people need
On the other side of the equation are the borrowers whose loans will be sold.
What are the consequences for them? If those consequences are so severe, as claimed by some, a political decision could be made that will, of necessity, mean a younger generation bails out the older defaulting borrowers. Millennials will have less access to credit and on more expensive terms. The lack of credit will hinder economic growth, and most significantly, hinder delivery of the homes those younger people need.
Even still, this may be the “just” approach.
But before we run to the barricades we owe it to the twenty-somethings to examine the claims being made.
Some complain that funds are “unregulated”. The truth is that some funds are regulated, and others are not.
Service a loan
Either way, nobody can service a loan in Ireland without being regulated. Where a fund is not regulated, it must appoint a regulated entity to service the loan and this includes managing the process by which a borrower’s financial difficulties are addressed. The fund commits a criminal offence if it instructs the servicer to act otherwise than in accordance with the rules. Others complain that the funds will gouge debtors. Is this true and could this happen?
Firstly, the contractual position between borrower and lender does not change one iota. Whatever rights a borrower has with PTSB, they have with a fund.
Secondly, the legal process is unchanged. The code of conduct on mortgage arrears applies and the Irish courts, especially local ones, are cold places for banks and colder still for funds. Judges do not like putting people out of their homes and do so only in extremis. Given the protracted nature of the legal process around homes, and given the commercial imperative driving the funds, court enforcement is the least preferred route.
Thirdly, defaulting borrowers have access to the personal insolvency system.
My experience is that honest borrowers are not disadvantaged when their loans transfer to funds – though this does not suit every narrative
That system, probably the most powerful in the world, gives a court power to force debt write off, extension of loan term, interest rate reduction – in short, whatever it takes to keep a borrower in their home. The only defence a bank or fund can use is that they are being unfairly prejudiced. But funds do not disclose what they paid for the loans, so they must fight the case with one hand tied behind their backs.
To date, and despite owning a relatively small percentage of the defaulting home loans, it is the funds who have completed almost all the mortgage to rent cases – selling properties at a discount to approved housing bodies to ensure defaulting borrowers remain in their homes.
Is this gouging?
My experience is that honest borrowers are not disadvantaged when their loans transfer to funds – though this does not suit every narrative.
For those borrowers who want to sell and reach a compromise on residual debt, dealing with a fund means you are dealing with a motivated party who expects a deal to involve debt write off.
It is quite a different case for the investor hoovering rents and not paying their mortgage, or for the won’t pay brigade. The arrival of a fund puts an end to this behaviour.
There are, of course, difficult cases – but those cases are difficult whether with bank or fund. The argument that an Irish bank will act more benignly toward Irish defaulting debtors is laughable.
Unsustainable debt can have horrible consequences but passing the buck to another generation will not help.
We need to move on.
Ross Maguire SC is founder of New Beginning which provides debt management services