AIB homes deal: a new dawn for struggling borrowers or unfair help?
The new mortgage-to-rent scheme provides the bank with a new tool to deal with difficult, politically-sensitive cases
David Hall has a simple answer to those who criticise his new deal with AIB that attempts to keep struggling borrowers in their homes: "Even Jesus Christ couldn't restructure these mortgages."
Embattled homeowners who have spent years avoiding the bank may come to view Hall's new housing organisation iCare as divine intervention. Others will argue it is little more than pious charity for unrepentant sinners.
But Hall has little interest in such arguments. He is already thinking about how he will entice other banks to follow AIB's lead and sign up for similar mortgage-to-rent schemes.
The not-for-profit iCare mortgage to rent scheme - which will also be available to EBS and Haven customers - is a three-way agreement between the bank, Hall's Irish Mortgage Holders Association (which will act on behalf of the homeowner) and iCare.
The IMHA will use its powers, as a housing association registered by the government's Housing Agency, to buy the home from the bank at an agreed price and charge the person an affordable, sustainable rent.
The scheme is only open to people who qualify for social housing due to their low income and they will have to undergo an affordability test by the bank. They will then become a long-term tenant of iCare, enjoying all the rights that any other social housing or housing association tenant enjoys - not least continuity of tenure. The homeowner loses the property, but all their mortgage debt is written-off in return. The initial €100m required for the scheme is to be financed by the bank.
"I think the numbers that will be dealt with through this type of scheme will settle around 7,500 mortgages, which is about 50,000 people. My own view is there are about 2,000 mortgages in AIB. But they don't yet have an actual figure because a significant percentage of people haven't engaged with them and there is no data on them."
Hall is confident his deal with AIB is just a first step and that the entire proposition can be extended. Indeed, last Friday it was reported that Permanent TSB looked set to launch its own mortgage-to-rent scheme for 2,000 struggling homeowners, led by investment firm Merrion Capital.
"I think most people in society, in government and latterly the banks, know there's no use hanging around," said Hall. "There's going to be a 'come to Jesus' moment in relation to dealing with mortgage arrears that have not been dealt with properly. There needs to be a realisation that this involves people who don't have any money and therefore this requires the writing-off of debt. The bank will have to pay, yes, but it saves the State, and arranges an orderly transition for these people - leaving all other options open versus the chaos that otherwise lies ahead."
Hall has also had tentative conversations with other banks and intends going back to them now the AIB scheme is over the line. An extensive business model and financials were worked out for iCare in conjunction with Grant Thornton, "so we will be having that conversation with other banks now and let's see where it leads us," he said.
"It would be reprehensible for any court or county registrar to issue any repossession order for any house that is eligible for mortgage to rent. That would make no sense."
An informal stay on moving against someone's private dwelling home (PDH) has been in place for some time, said one AIB source.
"If some guy who appears to have a certain lifestyle and has a big house in Howth or Blackrock or Dalkey or whatever, we go after him. But the ordinary Joe Soap, absolutely not. This puts in place a solution to that problem."
At its height, AIB's non-performing loans topped €29bn, a figure that has now fallen to below €8bn. It has taken almost a decade, since the State implemented its bank guarantee in 2009, to unwind much of this messy problem - including striking deals with about 40,000 mortgage customers - and it is expected that much of the remaining non-performing loans will be offloaded largely through loan sales and some litigation.
"iCare is a way of dealing with PDH's that are politically sensitive and can't be included in these loan sales," said the source. "Make no mistake, the bank is not doing this purely through a love of social housing. Ultimately, this is about quelling non-performing loans the bank wasn't previously able to address, because of the negative PR connotations and because of the huge cost of going legal on these things."
Despite some negative reaction to the AIB announcement, most analysts and economists spoken to by this newspaper believe the scheme is largely positive. "This is certainly a positive development and it may well be used as a template to clone," said Darren McKinley, senior Irish equity analyst with Merrion Capital.
He points out that groups such as iCare take on non-performing mortgages with a very different goal than the private-equity firms that have previously bought them in the hope of extracting as much value from them as possible.
"This model solves the issue of the non-performing loan for the bank, because it has already provisioned against that asset so is well placed to sell-on the loan at a discount."
Private-equity firms, on the other hand, have targets to meet in terms of obtaining value for their money, and are focused on their bottom line. So when they become involved it is much harder to find a solution that does not end in people being put out of their home.
It also makes sense from a business point of view for the bank, because it will have to manage fewer assets, said McKinley.
"Over the last few years the banks have had two focuses: the asset management of those non-performing loans, and the getting on with the normal business of a bank, which is lending into the economy. Reducing the number of assets they are managing allows them to double-down on their efforts to grow into the economy. That is a big positive."
This positive impact can be felt within the bank, for example, by the fact that staff can be redeployed from looking after difficult mortgage cases to developing productive relationships with SMEs. "If this goes well there will be a lot of interest in rolling it out further," said McKinley.
He believes the key to the success of the scheme will be getting the balance between charging participants too high or too low a rent to stay in the house. If the rent is too low then - despite the fact that it is a not-for-profit venture - the return on investment will be considered too little for further expansion.
"But," said McKinley, " if the people couldn't afford to pay the mortgage, are they going to be able to pay something approaching a market rent, given that rents have risen so high?"
Economist Jim Power believes from the point of view of AIB, the new scheme is a good move because "it rids their balance sheet of a load of rubbish they would never be able to do anything with".
"In terms of the ongoing restructuring of the bank, it is a very positive move," said Power.
"If this goes well I think you are going to see a lot more of it. It is necessary because you cannot just go on indefinitely with this anvil hanging round the neck of the country. You have to address it. There is no perfect solution, but this seems like the least-worst option."
Power agrees AIB's move is a sign the banks are finally emerging from a very dark period and this is a "recognition that a policy of doing nothing is not going to work. It reflects the reality of AIB moving back into private ownership, and issues like that have to be addressed."
Investec financial analyst Owen Callan believes the key to the scheme is that it gives AIB a "cleaner, faster way to get rid of some of their most difficult loans".
This, he said, is particularly important for AIB because the bank is under scrutiny from the market since it has returned as a trade share.
Regulators are also keen for banks to get rid of non-performing loans and their legacy issues.
"There is no one golden solution for AIB but this gives, perhaps, an easier and more straightforward option to do that.
"It also will save on other costs, such as legal fees and the internal cost of working through these loans. That could be one of the biggest benefits for the bank."
During the AIB flotation, one of the key questions that hovered in the air was just how the bank would deal with its remaining problem loans once private sector investors came onboard.
At the time it was suggested the bank would need to move quite aggressively to sort them out. The recent deal is just one part of that process, said Callan.
"This plan is one more tool, particularly for the more politically-sensitive cases where they don't want to foreclose and evict people from their homes.
"Maybe it won't be quite as advantageous to the bank as if it had gone the foreclosure route and got the full market value for the house, but it certainly gives a more politically and socially-appealing solution without it becoming too much of a cost."
Indeed, Callan believes there is a possibility that if the bank can save on legal fees and other costs, it might even end up with the same overall value from many customers.
"It's good to see new initiatives and it's a shame it has taken 10 years, almost, for this kind of thing to come on stream," he said.
"We have had a big jump in property prices, a big jump in the economy and employment levels. So if you are still struggling at this stage you probably need some sort of a tool or structure like this to help you. It doesn't seem likely that you are suddenly going to find a job that is going to let you pay down a very large mortgage that maybe you took out in 2007."
But not everyone agrees. Last week consumer expert Brendan Burgess of Askaboutmoney.com came out strongly against it, describing it as "a kick in the teeth for people who have really tried and struggled to pay their mortgage" - as opposed to people who had not been paying their mortgage, who, he said, would be delighted with the scheme.
His viewpoint found much support on the airwaves and on social media.
Indeed, one commentator spoken to by this newspaper, who wished to remain anonymous, raised concerns over the fact that people who use the iCare scheme will be able to buy back their home at any stage in the future at the price iCare paid the bank - even if it was at a discount on the current market value.
"Imagine a situation where property prices went up another 30 or 40 pc - maybe a not-unlikely situation - and someone says 'great, I can buy it back for €200k, rather than the €300k it is now worth, and keep the €100k for myself.'
"It is questionable why that clause is in there without being index-linked or having a claw-back built in for the bank or the local authority. It's an odd one, because it gives all the benefit of the upside to the borrower."
The buyback clause has also raised eyebrows within the bank: "It does leave it open to us being hoodwinked; we would want to be very careful who we give admission to this process," said the source.
"It could be very attractive indeed for someone to go through this process and suddenly find a pot of gold allowing them to buy back their home for a song - and the bank may have no recourse at that stage."
Because of the number of people who may be eligible for this scheme it is inevitable that some will slip through the net, said the source.
"We are getting better at this. At times we will get people who say they haven't a penny and we agree a treatment strategy, but they try to maintain a certain lifestyle. We can test that by employing the services of a forensic expert or private investigator.
"That does happen, but it happens at a debt quantum. You are talking about the people who say they are broke but are living in a €1m-plus house and getting their nails done and heading off to Dublin Airport for their holidays.
"At the level of debt the people have who qualify for this scheme, I am not sure that level of scrutiny is manageable for everyone. But if you have suspicions or a case that is borderline, you won't leave it to chance."
Other analysts spoken to by this newspaper were largely unconcerned by the issue of so-called 'moral hazard'.
"I don't buy that argument," said Power. "I can see where the view is coming from, but at the end of the day these mortgages are held by people who are never going to get out of the mess. You can talk about moral hazard and the unfairness of it all, but the notion that these people should remain stuck in a totally unfeasible situation for years to come doesn't make any sense. So I think in terms of the restructuring of the banking sector and the whole housing and mortgage market here, it is a positive development."
Callan argues that a lot of the people who will avail of the scheme should never have been in a situation to buy a property in the first place.
"They had low-paying jobs and they were probably never going to be able to repay the mortgage," he said. "That's the bank's fault as much as anyone, so it makes sense to try and cope with it now through an amicable solution."
McKinley agrees: "Ultimately, the person who puts his hand in the fire gets his hand burned.
"But, look, there was fault everywhere - from the government to the Central Bank to the banks, to the mortgage advisers lending the money, to the person who borrowed the money."
In the end, he said, the bottom line is very simple: "Anything that reduces the risk of people being put out of their homes - which this clearly does - is a win for Ireland. Full stop."
Sunday Indo Business