Sunday 20 January 2019

PTSB loan sale will ensure this summer is a political scorcher

Solidarity TDs and activists hold a protest in opposition to the mortgage book sale outside the Grafton Street branch of Permanent TSB. Photo: PA
Solidarity TDs and activists hold a protest in opposition to the mortgage book sale outside the Grafton Street branch of Permanent TSB. Photo: PA
Richard Curran

Richard Curran

The political row brewing over the controversial sale by PTSB of nearly €4bn worth of troubled mortgages is just the beginning. What happens with PTSB will probably be the template for other mortgage loan sales from other banks.

PTSB has stirred up a hornets' nest by deciding to press ahead with the loan sale on foot of pressure from the ECB for all banks with high levels of non-performing loans to clean up their balance sheets. The figures published by PTSB last week on the make-up of the loan book shed only some light on the stories behind the mortgages.

Of the €3.7bn, around €1bn relates to investment properties. A further €2bn is made up of private dwelling homes of customers who have either not engaged with the bank, have failed to adhere to the terms of a restructuring or have, what the bank says are unsustainable mortgages.

Another unspecified amount, but presumably around €700m, relates to private dwellings where forbearance measures are in place.

Some customers have not engaged with the bank for over seven years and on average the loans are 3.5 years in arrears, according to PTSB. It said many have made no payments at all for years.

This certainly depicts a pretty hopeless situation but, unfortunately, the bank did not give a precise breakdown of how much of the €2bn relates to mortgages in which categories. How many have had nothing paid or there has been no engagement?

And how much of it relates to restructured deals that have not worked?

This would have been useful because it would have provided a clearer sense of how many people are not engaging at all, versus how many are trying but not succeeding to meet their obligations.

Surely, it would not have been commercially sensitive for PTSB to have been more specific with this breakdown.

It would also have provided some insight into the kind of 'solutions' PTSB was arriving at for troubled mortgage holders. In other banks, the percentage of customers meeting the terms of restructured loans is pretty high. Here, it hasn't really been specified.

Did PTSB reach new terms with customers that were too tough on them and have not succeeded in many cases?

Unfortunately, this level of scrutiny of how PTSB has handled its non-performing loans, does not change the reality of the situation for the bank.

Around 28pc of its loan book is non-performing and that is not sustainable for a bank - especially one which has the ECB applying pressure on it to sort out the problem. And don't forget the €2bn bailout by the state, which would of course at some point like its money back.

This highly sensitive issue is now purely political. Critics of the sale say it is a recipe for massive home repossessions. That is debatable depending on the buyers of the loans and their plans. Some may want to cut deals. Others may want to sit back, do little and flip the loans on.

But, yes, others may well want to move on repossessions and then sell on the houses in a buoyant market at a profit. There is no easy alternative if PTSB is to continue and the State is ever to get its €2bn back.

It has been suggested that PTSB should work through these loans. This would involve continuing with a charade with those who won't even engage with the bank, while probably taking sizeable further impairment charges on the loans, a decade after the crash.

Fianna Fail isn't saying not to go ahead with the sale, but to wait until greater protections can be put in place which would regulate the behaviour of so-called vulture funds and protect the customers involved.

It looks like a sensible approach if you accept there are gaping legislative holes in the protection that already exists and they can be filled by workable solutions.

Plugging any gaps might be more difficult than it sounds. Finance Minister Paschal Donohoe seems determined that the sale should go ahead but seems open to the idea of plugging regulatory gaps.

It isn't at all clear whether those gaps can be plugged in full, without complex regulatory changes that could virtually guarantee that practically nobody loses their home - even if they haven't made a payment in years.

The sale process will progress slowly but nobody will buy anything until they see where the political compromise rests on this one. AIB and others may then follow suit with loan sales based on that new arrangement.

The stronger the new regulation, the less the bank will receive for the loans.

Ten years after the crash, PTSB is weighed down by the scale of the mess of its past.

But equally, many people have been in a kind of financial limbo around the future of their unsustainable mortgages for years.

The emphasis in the recession was to keep people in their homes. The ECB is calling a halt to this suspension of reality for some people.

We may get a scorcher of a summer this year - a political one.

Brexit will make us all pay

Thanks to Brexit, we will end up paying more for practically everything. That is one obvious conclusion from the Copenhagen Economics report on Brexit and trade.

Forget about exports for one moment.

Around 40pc of what Irish retailers import from places other than the UK comes through the UK on its way here. Around 53pc of exports outside the UK use the same land bridge across Britain to get to their destination.

Unless there is a sizeable retreat from its red line issues on Brexit, the British government will end up negotiating some kind of Free Trade Agreement with the EU. That means customs checks, additional costs associated with that and delays across that land bridge.

This will impact directly on the price of what you buy in Irish shops. We can explore alternative trade routes in and out of the country using Irish ports and avoiding Britain, but that won't work for perishable goods like food for example. It takes too long.

And by the way, Copenhagen Economics reckons growth in real wages will be held back in the years to come because of Brexit.

So get ready to pay more for goods with less than would have been the case without the UK's divorce from the EU.

Noonan's missed €600m stamp duty opportunity

Finance minister Paschal Donohoe surprised the property suits last October when he tripled stamp duty from 2pc to 6pc. It had been slashed from 9pc to 2pc by then finance minister Michael Noonan in 2011.

Donohoe aims to bring in an extra €375m with the measure. The market suggests he will do at least that.

Property investors were spooked and more than a little upset on budget day. Green Reit cut its net asset value by around €59m, while Hibernia Reit took a hit of €53m.

But the higher duty has not deterred investors from doing deals. Green Reit's shares are trading higher than they were in October.

And during the week it announced that NAV per share was up 1.6pc to 168.3c after paying a 5c dividend and despite the stamp duty hit.

Core Industrials Reit plans to float and is eyeing €220m of acquisitions. Green Reit said profits from projects like One Molesworth Street offset the impact of the stamp duty rise.

So, if the Exchequer can collect €375m from higher stamp duty without seriously undermining the sector, then how much could Michael Noonan have collected for the Exchequer if he had jacked up stamp duty sooner?

The answer is between €500m and €600m over a two-year period. That is financial cream that has gone elsewhere.

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