Wednesday 20 June 2018

Q&A: Why has Permanent TSB decided to sell so many mortgages?

‘The Opposition wants all loan owners to be regulated. This may be easier said than done.’
‘The Opposition wants all loan owners to be regulated. This may be easier said than done.’

Gretchen Friemann

Permanent TSB is ploughing ahead with a €3.8bn sale of impaired home loans. We look at all your questions:

Why has Permanent TSB decided to sell so many mortgages?

Few expected the State-backed lender to press the nuclear button and offload €3.8bn worth of 'bad' mortgages in one fell swoop.

But Permanent TSB has been under pressure to offload its high stack of non-performing loans for some time and many in the industry argue the Department of Finance would have been aware for months the bank planned to make a move.

Its balance sheet remains heavily weighed down by non-perfoming loans (NPLs), which account for 28pc of its total loan book, by far the highest proportion among the Irish banks.

Predictably the decision has sparked a political backlash and allowed Fianna Fáil to portray itself as the party that protects vulnerable home owners, despite its pivotal role in the economic crisis.

What is Fianna Fáil trying to achieve?

The Opposition wants all loan owners to be regulated. This may be easier said than done.

What now then for the 18,000 home loans on the auction block and will the political outcry derail the process?

The short answer is no. Michael McGrath, Fianna Fáil's finance spokesperson, has gained political capital out of his campaign to strengthen protections for borrowers - but there is no sign the bank is suspending the sale.

In fact, quite the reverse. A statement issued by Permanent TSB yesterday indicated the show will roll on regardless.

However, the bank pointed out the courts do not process cases brought by distressed debt investors or vulture funds any differently to the way they treat the banks.

It also highlighted that the sale of some 14,000 mortgages tied to owner-occupier homes and a further 4,000 impaired buy-to-let loans may take months to finalise.

What is going to happen next?

Borrowers who are caught up in the sale will be notified 60 days or two months ahead of the loan transfer.

The bank's long list of reassurances also highlighted the regulated status of credit service funds which continue to manage the loans scooped up by the vultures. To ram its point home the bank highlighted that a third party entity may possess "greater flexibility to develop tailored solutions". In other words, the vultures may turn out to be better negotiators than the banks.

Are vulture funds likely to buy these loans?

Yes. Distressed debt investors are the logical acquirers. Mortgages that are in deep arrears are not attractive assets for the pillar banks and non-bank lenders are likely to concentrate on the buy-to-let portfolio.

In fact, if the political backlash ends up excluding the vulture funds from the purchase, which is unlikely, it's difficult to see who else would be a contender.

Deutsche and Goldman Sachs - both prolific investors in distressed debt - run subsidiary units in a similar fashion to the global funds that swooped in after the crash.

What is the scale of vulture fund activity here?

UCC economist Seamus Coffey points out "unregulated loan owners" started accumulating distressed owner-occupier mortgages years ago.

The volume of forced sales remains unclear both for the unregulated and regulated loan holders, ie the banks.

Will there be more home loan sales of this size?

Not necessarily as large as this, but few doubt the other banks will follow suit.

All the Irish lenders hold toxic residential mortgages on their books.

Ulster Bank is widely expected to carve out another portfolio for sale while AIB - which is already in the process of flogging commercial and buy-to-let mortgages to distressed debt investors via Project Redwood - still has some way to go to reduce its NPLs to levels in line with EU policy.

Bank of Ireland is less exposed than its rivals but still holds close to €8bn of non-performing exposures.

Irish Independent

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