A senior banker once justified to me the sale of a portfolio of Non-Performing Loans to vulture funds on the basis that the bank had received “market value” for them. I debated with him whether the bank had actually achieved market value from the vulture funds, given that the “market value” was actually being dictated by a small circle of vulture funds, who were seeking to achieve annual returns of 15%. The classic definition of market value is the price to be achieved between a “willing” seller and a “willing” buyer. Unfortunately, the banks have not been “willing” sellers, but have been “forced” sellers due to regulatory pressures, and thus, in my view, have not been achieving full value for their loan sales.
The continuing regulatory pressures are contributing to further loan sales in the Irish market. The exit of Ulster Bank and KBC from the irish market are obviously contributing to further loan sales.
This posting deals with solutions for personal debt, as the solutions for dealing with corporate debt are generally well known. While the solutions for corporate debt are well known, it takes specialist skills to deal with corporate debt and the frequently attached Personal Guarantees. A successful Examinership or SCARP can still leave the loan guarantors with significant liabilities. Further information on SCARP is available at www.scarp.ie
In our experience, the first issue initially facing personal borrowers is how they access advice on dealing with their mortgage arrears on the family home. The tendency is to go initially go to the family solicitor. However, some solicitors simply do not have the expertise or experience to properly navigate around loan sales, receivers, mortgages, Codes of Conduct on Lending to SME’s, the Mortgage Arrears Resolution Process, appeals to the Credit Review Office, the Personal Insolvency Act 2012, the Companies Acts, Income Tax, VAT, Capital Gains Tax, Capital Acquisitions Tax, share valuations, members voluntary liquidations, Examinerships, SCARP, bank offer letters, facility letters, personal guarantees, calculation of Reasonable Living Expenses, re-calculating mortgage payments, cash flow modelling etc. The ideal professional to see is an experienced Personal Insolvency Practitioner (PIP).
However, even selecting a PIP can be problematical, as some PIPs are only authorised to do Personal Insolvency Arrangements (PIAs) or Debt Settlement Agreements (DSAs) and are prohibited from doing “informal” deals, which might be more suitable. Over 90% of the settlements that we achieve are done by “informal” deals. “Informal” simply means that there is no court involvement (unlike PIAs DSAs), and are therefore considerably cheaper to achieve with less publicity. Our ability to proceed with a PIA/DSA enables us to persuade the banks in many cases that an informal deal is better. Accordingly, it is important that the borrower selects a PIP that has the full armoury of solutions, rather than have solutions dictated by the PIP’s regulatory limitations.
The power of PIA’s to keep people in their family homes is tremendous. A PIA can reduce the mortgage down to the market value of the house, reduce the interest rate and extend the term of the mortgage. For obvious reasons PIA’s are not popular with the funds and the banks. There is now extensive case law where the High Court has acknowledged that the one of the primary purposes of the Personal Insolvency Act 2012 is to keep people in their family homes.
A second issue that many borrowers face is that they seek expert advice too late, and before they know it Receivers have been appointed or Re-possession proceedings have commenced.The earlier advice is sought, the more options can be generated.
Issues to consider in dealing with a vulture fund
- If a borrower knows that he is going to fall into financial difficulty he should immediately seek professional advice. Advance planning can be very helpful. It is vital that the borrower fully engages with the fund, and trIes to stay within the MARP process where applicable. The advisor should review all of the necessary loan documentation including the Letter of Offer and the mortgage itself. The advisor should carry out property searches and review if the charges have been properly registered.
- In many cases the borrower will not have retained copies of letters of offer etc. In such cases the borrower should submit a Data Subject Access Request to the original lender so that the advisor has full access to all relevant documents.
- One of the challenges facing the funds is that the original lender may have “lost” key documents and thus the lending files are incomplete. As there has been some recent notable High Court judgments involving funds who made poor decisions (e.g. invalidly appointing Receivers) based on incomplete documentation the funds are more likely to proceed cautiously in such cases going forward.
- The borrower may feel that if his loan was previously restructured that the fund may not be able to appoint a Receiver provided he keeps up the current payments under the re-structuring. However, this may not be the case, as the fund may claim that they are entitled to appoint a Receiver “at any time” given that the loan had previously gone into default.
- I have lost count of the number of clients that believed they had a “verbal” agreement with their bank as to how their loan was to be handled, and that the fund is obliged to honour the verbal agreement. Unfortunately, in the vast majority of cases, verbal agreements have no value. For the reasons why see the following link: https://www.linkedin.com/pulse/why-bankers-verbal-agreement-worth-paper-written-jim-stafford/
- I have also lost count of the number of clients who wish to settle for the amount that the fund paid for the loan. That is not going to happen. The amount that the fund paid for the loan is academic: The fund will try and recover as much as they can.
- When the borrower is notified of a pending loan sale by his bank and is informed that a business overdraft is to be also transferred, he should consider making an appeal through the Credit Review Office in order to retain the business overdraft. (The vulture fund will not provide overdraft facilities.)
- Assess whether the fund is a “short term” fund (i.e. expects to realise all loans within 5 years) or if it is “long term” fund (i.e. expects to stick with the term of the existing mortgages.) “Short term” funds are more inclined to provide prompt debt forgiveness, and are more interested in “lump sum” settlements as opposed to, say, monthly payments over 5 years.
- Explore possible “issues” attaching to any charged property, such as existing leases, rights of way, percolation areas, fire safety certs, planning, easements, rights of residence etc
- Obtain an auctioneer’s valuation for the property.
- Obtain expert advice on tax planning opportunities. In some cases, second mortgages may have been taken out on properties with a low CGT base cost, and thus there will be a CGT liability when the property is sold. If the borrower has CGT losses available elsewhere, then the fund will be receptive to a proposal where those losses could be utilised.
- The interest rates on the loans should be carefully reviewed to check if the loans are eligible for the Tracker Redress scheme. For further guidance on the Tracker Redress scheme please see the following link: https://www.frielstafford.ie/compensation-for-tracker-interest-claims/
- Past bank statements should also be reviewed to check if “surcharge” interest has been applied. “Surcharge” interest may only be applied in certain limited cases. In most cases, the rates of surcharge interest applied constitute “penalty” interest and are unenforceable under Irish law.
- Seek expert advice on any “old” unsecured loans or Personal Guarantees. In some of these cases, the funds may be unable to issue proceedings on such debt due to the Statute of Limitations. Accordingly, it could be vital that the Statute is not “extended” by acknowledging the debt in writing. See attached link on PG’s: https://www.linkedin.com/pulse/statute-limitations-starting-kick-personal-guarantees-jim-stafford/
- Many of the recent tranches of loans sold are secured on the family home. It may be possible to reduce the mortgage on the family home to its market value, using section 115A of the Personal Insolvency Act 2012. (Section 115A can, in certain circumstances, block a fund’s Veto in a PIA.) A mortgage on the family home that is also cross-secured on buy-to-lets can “block” the appointment of a Receiver to other secured property. By definition, many of the family home loans being sold are eligible for Section 115A as they were either in arrears or had been re-structured at the “relevant” date i.e. 1 January 2015.
- Try and determine if the borrower can re-finance the loans. If the properties are in negative equity the vulture fund might accept a re-financing amount equal to the market value of the property. One of the big issues is trying to pay a loan down over 15 years, which is the maximum term the banks will provide. Accordingly, in many cases, “new” monies from family members or friends may need to be introduced.
- The big difference between dealing with the funds and the banks is that the funds have no moral hang ups about debt forgiveness, and thus they are faster decision makers. Whilst a prompt decision maker can be helpful in some circumstances, it can also mean that the funds are much faster in appointing Receivers and initiating legal proceedings.
- Carefully consider if the borrower has any other debt owed to other financial institutions. If so, the vulture fund might do the borrower a favour and participate in a PIA/DSA and assist in “cramming” down all of the other debts. See such a case study on the following link. https://www.linkedin.com/pulse/how-vulture-fund-saved-family-home-jim-stafford/
- If other creditors are about to obtain judgment and register Judgment mortgages, it may be critical to instruct a PIP to obtain a Protective Certificate as soon as possible. Even if a Judgment Mortgage is registered, it can be “lifted” if a Protective Certificate is obtained within 3 months from date of registration.
- Finally, when the time comes, submit a proposal to the fund. The settlement offer should address all issues with the mortgage, rights of way etc.
- If it is not possible to reach a deal or do a PIA, then the borrower might consider the Mortgage to Rent scheme (MTR) i.e. allow the home to be sold and then rent it back. The MTR option is less attractive to investors in rural areas, as the rent achievable would not be attractive enough, and thus borrowers living in some rural arrears will not be able to avail of MTR. In addition, the current valuation caps on MTR houses means that the scheme will not be available for many people. To qualify for MTR the value of the house must not be more than €395,000 in the areas of Dublin, Kildare, Meath, Louth, Cork & Galway, with a limit of €305,000 for elsewhere. The caps on apartments are €310,000 and €220,000 respectively.There are also income limits of between €25,000 and €35,000. Further information is avialable at www.mortgagetorent.ie
- If it is not possible to do a PIA then the borrower might have to defend any re-possession proceedings in the courts. Our general experience is that if borrowers can demonstrate to the court that they can meet all interest payments and make a contribution to capital that the courts are slow to issue a repossession order. We have also found that there can be a dramatic difference between how different courts can treat cases: So keeping a family home can be a geographic lottery. (What some advisors do not know is that a PIA can still be done after a re-possession order has been granted, provided the family are still living in the home. In such cases, it is possible that the fund would only receive a very modest dividend on its legal costs.)
- The borrower should not be necessarily be afraid of the fund obtaining judgment. Indeed, one advantage of a court judgment is that interest now only accumulates at 2% per annum. The reality is that the borrower’s credit rating is probably impaired already. Judgments are costly and difficult to enforce. For an understanding of how difficult it is to enforce a judgment mortgage on a family home, see the following link https://www.linkedin.com/pulse/judgment-mortgages-family-homes-have-little-value-jim-stafford/
- One option to consider is bankruptcy, particularly if the borrower is expecting a significant inheritance in the future.
- Keep an eye on possible new legislation which is likely to be of more benefit to the home owner than the funds. It is expected that the current €3 million cap on PIA’s will finally be lifted.
- Keep an eye on High Court/Court of Appeal judgements, as case law is constantly evolving. Some forthcoming judgments will be “fund” specific, such as the Tanager/Kane case, while other cases (such as the case deciding whether a PG has to be”properly sealed” in order for the PG to have a 12 year Statute of Limitation period as opposed to a 6 year period) will have universal applicability.
- Some clients are unable to finance expensive legal action against Funds, However, our experience is that the Financial Services Pensions Ombudsman can be a very effective way to seek compensation if the funds breach any of the Codes of Conduct issued by the Central Bank. The FSPO are very knowledgeable about all aspects of mortgages and carry out impartial investigations. Debtors are not exposed to any award of costs if they make a complaint to the FSPO. The FSPO website, www.fspo.ie has a very searchable database of decisions. However, it should be noted that, just like Court proceedings, many complaints to the FSPO are resolved before the FSPO has to make a formal determination on them. (The banks or the funds are not keen to allow determinations to be published in respect of certain complaints.)
Are there other steps that a borrower could take in dealing with a vulture fund? Each case depends on its particular facts and circumstances, but there are some tactics that might be applicable. However, it would not be appropriate to discuss such tactics in blog.
If you have clients. friends, colleagues or family members who require expert advice on dealing with vulture funds, please ask them to contact us and we can advise them on their options for an initial fee of €400 (inclusive of VAT.) Our telephone number is 01 661 4066 and key email addresses are below:
PS: This blog was updated 9th February 2022