Sunday 21 December 2014

Don't fear being taken under a vulture's wing

Whoever buys Irish Nationwide loans could give borrowers better deal

Thomas Molloy, Group Business Editor

Published 16/02/2014 | 02:30

The former Irish Nationwide headquarters in Dublin
The former Irish Nationwide headquarters in Dublin

VULTURES get a bad press but they are an essential part of the ecosystem.

In India, where pesticides have poisoned and killed many native vultures, dead cattle and dogs now rot in the streets spreading illness because there are not enough of these noble birds to pick the carcasses clean.

Here in Ireland, vulture funds also have a role to play in our financial ecosystem when a company or bank dies. Borrowers who took out mortgages from the former Irish Nationwide are understandably worried about what will happen to their loans if they are sold to vulture capital funds, but that worry could well be misplaced.

In fact, borrowers may wind up much better off than those who have mortgages with moribund State-owned banks who are proving so reluctant to do deals with mortgage borrowers in distress.

Much has been made of the possibility that any organisation buying the Irish Nationwide loans in one swoop won't have to subscribe to the code of practice that applies to the main lenders.

This would indeed be a problem if the code of practice had teeth, but the reality is that the code is a weak document that only delays the inevitable, often doing nothing more than prolonging an individual's unhappiness. Besides, anybody buying the loans knows that the courts here take a dim view of any organisation that does not sign up to the code.

The code is, in short, a red herring. The real question is what happens to the interest rate charged on loans and to the loans themselves.

The simple answer is that we don't know yet, because we don't know who will buy the loans and what their modus operandi will be.

What we do know is that vulture funds often offer great deals to those who took out loans and can no longer repay them. They can do this because they are not emotionally committed to the old loan. Every time a bank manager writes down a loan, he or she is admitting that they made a mistake and waving goodbye to cash on the balance sheet. That's not an easy thing to do all day long and is one of the reasons why it is not happening very much.

The situation is completely different for vulture funds that have bought loans cheaply. They can write down the notional value of loans happy in the knowledge that they are still making a profit. Every writedown is a sign of success rather than failure.

Whoever buys the Irish Nationwide loans may well have a business model that depends on reaching speedy deals with as many customers as possible. That would be great news for the customers who can afford to do a deal.

Those who can't should always remember that they are free to negotiate a new mortgage elsewhere and transfer to that lender. We may be more likely to get divorced than change our bank here in Ireland, but this is sheer laziness. Those who fear any new owner of Irish Nationwide loans will arbitrarily hike interest rates should try their luck with the State-controlled banks.

That may well be the best option for some, but there will be many in the State-owned banks who wish they could go the other way as they pay interest rates on mortgages that hover somewhere between 4.5 per cent and 5 per cent or roughly 20 times what it costs to borrow the money from the European Central Bank these days.

Sunday Independent

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