Damned if they do, damned if they don’t: should banks sell their bad mortgages?

Damned if they do and damned if they don't. That's the way Irish banks view the furore about their planned sales of nonperforming mortgage loans – about €3.7 billion at Permanent TSB, in the Project Glas portfolio, and about €3.5 billion at AIB, in Project Redwood.

Pressing ahead will result in tens of thousands of mortgage holders having their loans transferred into the ownership of so-called vulture funds, and risk a public backlash. Doing nothing will incur the wrath of the European Central Bank, which has decided it is time to take a big stick to the lingering problem of nonperforming loans across Europe. About 28 per cent of Permanent TSB's loans are classed as nonperforming.

The banks have decided to press ahead – little surprise, perhaps, given their already low standing with the Irish public after their behaviour in the tracker-mortgage scandal. But a failure to act could result in the ECB imposing higher provisioning and capital requirements on the Irish banks. This would effectively devalue them, as more of their capital would be trapped.

According to Permanent TSB, some mortgage holders have not engaged with the bank for more than seven years, which is hard to believe

This would be bad news for taxpayers, who own 75 per cent of Permanent TSB and 72 per cent of Allied Irish Banks and want their money back from the pair’s original €25 billion bailout.

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If nothing else the storm over the portfolio sales has forced Permanent TSB to provide a level of detail about the loans at issue that banks would never otherwise publish. We now know that about 18,000 properties are included in Project Glas, of which 14,000 are private homes. Just under €2 billion of the value of the portfolio being sold comprises owner-occupiers who have not engaged with the bank.

According to Permanent TSB, some of these account holders have not engaged with the bank for more than seven years, which is hard to believe. And, on average, the loans are more than three and a half years in arrears. “Many have made no payments at all for years,” the bank said, without providing a precise number.

It also noted that, unlike the bank, “third-party funds have greater flexibility to develop tailored solutions for individual home owners”. The only thing they don’t offer are split mortgages.

In a clever political move, Fianna Fáil’s finance spokesman, Michael McGrath, has taken up the cudgel as consumer champion. He has framed the Government as the bad guy for allowing these two State-controlled banks to throw thousands of mortgage holders to the wolves.

McGrath has worked the finance brief assiduously since Fianna Fáil was forced into opposition in the wake of the 2011 general election. On Tuesday he moved a Bill to prevent unregulated funds from acquiring portfolios from banks until they are directly regulated by the Central Bank of Ireland. This was a power that the Central Bank had suggested to the Government in 2015, when legislation was framed for credit-servicing firms – the groups that administer the loans on behalf of private-equity owners. McGrath plans to have it debated next week, during Fianna Fáil's Private Members' time.

Taoiseach Leo Varadkar was asked about the issue by the Fianna Fáil leader, Micheál Martin, during Leaders' Questions yesterday, and he was conciliatory in his replies. The Taoiseach told the Dáil that the portfolio sales had not been completed and that they might not result in the loans being sold to an unregulated entity.

He added that the banks would have to consult the Minister before agreeing any deal, and said the Government would put in place the “necessary protections that might be required” to protect mortgage holders in the event of their loans’ being sold to an unregulated private-equity owner.

Although he hadn’t seen the wording of the Bill being proposed by McGrath, the Taoiseach said he had asked the Minister for Finance to meet the Cork TD this week, to discuss the details.

Fianna Fáil doesn't need Government support to get its Bill through. There are enough votes on the Opposition benches to achieve this

Given the current composition of the Dáil, Fianna Fáil doesn’t need Government support to get its Bill through. There are enough votes on the Opposition benches to achieve this. But the Government can delay and frustrate. Martin urged the Taoiseach to support it through committee stage, so that it might become law before any loan sales by Permanent TSB or AIB.

This might be wishful thinking. About two years ago McGrath proposed legislation to allow the Central Bank to force banks to cut standard variable rates at a time when Irish loan holders were being gouged on interest rates relative to their European peers. The Bill was eventually voted through the Dáil over the opposition of Michael Noonan, who was minister for finance at the time, the Central Bank of Ireland and even the European Central Bank.

Yet it has still to become law. In January, after advice from the Attorney General that the Bill might be unconstitutional, Fianna Fáil accepted a proposal to hire consultants to assess the impact of the legislation. McGrath and his party accepted that proposal and are now focusing their energies on trying to prohibit banks from offering cashback deals as part of their mortgage offers.

A similar timeline for McGrath’s latest Bill would come too late for Permanent TSB and AIB account holders. That shouldn’t worry McGrath too much, given the political capital he has already earned from the saga.

[ @CiaranHancock1 ]