Vulture fund agents may be put out of business by court’s mortgage ruling, Standard & Poors Global warns

The world’s biggest credit ratings agency, Standard & Poor’s (S&P) Global, said the decision of Tullamore Circuit Court may leave the likes of Pepper unable to service mortgage loan portfolios.

In response to the Tullamore ruling, the ratings agency issued a note to investors in pools of mortgages sold by banks to vulture funds.

It said the ruling will encourage other “mortgage prisoners” to seek similar deals.

Judge Mary O’Malley Costello, sitting in Tullamore Circuit Court, approved a personal insolvency arrangement (PIA) that will force mortgage servicer Pepper to grant a borrower couple a rate of 2.5pc, fixed for 25 years.

Pepper had opposed the move.

S&P Global said in its investor note: “If this decision serves as a precedent, forcing third-party servicers to provide fixed rates to PIA applicants, servicers may be unable to effectively service loan pools backing Irish re-performing securitisations.”

The note is essentially saying that forcing mortgage credit servicer firms, to offer low fixed rates over long periods will destroy the loan-sale business model in this country.

That model involves banks selling pools of non-performing mortgages to vultures, with the administration of the mortgages handled by credit servicer firms.

The S&P note said: “A regional Irish circuit court recently approved a personal insolvency arrangement (PIA) that included a provision for the borrowers to be offered a 2.5pc fixed-rate mortgage for 25 years. Servicers of re-performing loans do not grant fixed-rate products and borrowers can’t resort to refinancing elsewhere given their past arrears history.”

S&P analyst Darrell Purcell maintains that vultures and the credit services cannot afford to offer low fixed rates due to their funding costs.

He said: “Lower fixed rates for borrowers in Irish re-performing pools could lead to both liquidity stresses and interest rate risk due to a lack of hedging.”

Up 40,000 borrowers are trapped with vulture funds and are unable to move their mortgages due to past credit issues.

If they also were able to get low fixed rates from the funds it would give them a lifeline to restructure their debts and keep up payments on their homes.

But it would also likely force the vultures into a fire sale of their mortgage portfolios and destroy the business of servicing these loans for the likes of Pepper, Mars Capital and Start.

S&P said in its note: “Whilst the uptake of PIAs has been relatively low, this ruling may encourage certain borrowers to avail of this option, regardless of the legal uncertainties.”

This is despite the fact that vulture funds are understood to have bought books of distressed mortgages at discounts of up to 50pc.

Barrister Keith Farry BL had asked Pepper in the Tullamore court what was paid for the loan, and the cost of funding it, but this information was not provided.

The Tullamore ruling does not set a legal precedent but there has been a similar case in the High Court, that does set a precedent.

Pepper had told the court it does not offer fixed rates, a situation that means thousands of its clients are stuck on tracker and variable rates, with some as high as 8pc and 9pc.