Cathal and Cathy Dunne, like tens of thousands of others during the recession, fell into dire money problems and struggled to repay their mortgage. To find a solution, they decided to engage with their bank, Permanent TSB.
The couple, now in their early 40s, have five children, four of whom are still in school. Cathal had to take a pay-cut in his role as an office clerk, while Cathy was made redundant when the company where she worked closed down.
By the time a deal was struck with their bank in January 2015, the couple from Dungarvan in Co Waterford were not the only party to the agreement with a major financial headache.
Permanent TSB, the country's biggest mortgage lender during the credit-crazed years of the Celtic Tiger, was still struggling to recover after collapsing into State hands. In 2015, four years after the bank's effective nationalisation, a whopping 25 per cent of Permanent TSB's loan book was still non-performing. That stands at 28 per cent today. The Dunnes' mortgage, despite repeated attempts by the couple and their insolvency advisers to fix in and out of court, remains bad.
It is expected to be among the 14,000 home loans and 4,000 buy-to-let landlord mortgages that Permanent TSB now is being forced to offload to fix the bank in a highly contested sale that has caused a political storm.
The planned sale of the €3.7 billion “Project Glas” loan portfolio – one of the biggest books of home loans to be sold since the financial crash – has generated public outrage over the likelihood that the loans will end up in the hands of a so-called vulture fund.
These foreign investment funds are not regulated and not covered by consumer protection rules covering struggling mortgage holders, so people like the Dunnes would have fewer options available to them to resolve their financial situation if a vulture fund owned their loan.
Restructuring deals
Worse still is that up to €700 million of the loans being sold are to borrowers who, unlike the Dunnes, are able to meet the new terms of similar restructuring deals Permanent TSB has agreed.
These “treated” loans were included in the sale, market analysts say, to sweeten the loan portfolio to prospective buyers.
For vulture funds, who like to see returns in as little as three to five years, long-term restructures stretching out to between 20 and 29 years may stand in the way of profits and it is not guaranteed that these arrangements will remain in place if a fund swoops.
Permanent TSB’s treatment of the Dunnes’ mortgage is typical of the wider problems at the bank.
The lender’s solution for the Waterford couple and their unsustainable mortgage was to kick the can down the road. The problem with the rescue plan was that the can was far too big and the road far too long.
More affordable payment
Their mortgage was €385,000 but the home was only worth €230,000. Permanent TSB decided to split the mortgage and only charge the Dunnes on €141,000 of the mortgage, proposing a more affordable €527 monthly repayment.
The remaining €244,000 of the mortgage, amounting to 63 per cent of the overall loan, would be set aside or “warehoused”. The bank agreed that it would charge no interest on this part of the loan for 29 years, until the end of the mortgage term, to be dealt with then from the sale of the property or with a lump sum.
The restructuring came undone when even the new, lower repayments left the couple unable to service their unsecured debt (credit card and other debt). Pressure from those creditors forced the couple to seek protection from the Insolvency Service of Ireland and reach for a statutory financial rescue plan.
In that formal process of applying for a deal, Permanent TSB challenged a proposal from the couple’s personal insolvency practitioner to prevent the bank reviewing their finances regularly, to see if they could afford to transfer more debt from the warehoused portion to the main mortgage over the duration of the mortgage term.
The case eventually went to Ms Justice Marie Baker, the High Court judge whose landmark rulings are laying the foundations for a functioning insolvency regime that could resolve tens of thousands of unaffordable mortgages.
The judge shot down the proposed personal insolvency arrangement (PIA) because Permanent TSB was restricted from reviewing its loan based on the couple’s future finances and because it was “vague,” “uncertain” and “unnecessary”.
Significantly, Ms Justice Baker pointedly spelt out in her 23-page judgment of February 2017 that the personal insolvency law, passed five years earlier, allowed for a write-down of mortgage debt.
While the judgment may have been a loss for the Dunnes, it paved the way for big victories by others.
In two subsequent contested cases, “JD” and “Callaghan”, Ms Justice Baker approved large loan write-downs to the current market value of the properties, keeping insolvent borrowers in their homes and creating sustainable mortgages.
People familiar with the insolvency deals being proposed through the courts say that a common thread runs through most cases involving Permanent TSB: the bank tends to suggest all sorts of splits and warehousing of mortgages, but not debt write-offs on home loans.
One recent email from Permanent TSB to an insolvency adviser assisting an insolvent borrower read: “Please be advised as I am sure you are aware, credit committee will not approve an upfront write-down.”
Now, under pressure from the European Central Bank for not dealing with a level of non-performing loans that are more than five times the EU average, Permanent TSB is offloading them rather than restructuring them.
‘Dirty work’ “It is a cop-out really to seek to outsource the most difficult loans and outsource their dirty work to a vulture fund,” said Fianna Fáil’s finance spokesman, Michael McGrath.
Permanent TSB has made “nowhere near enough” progress in reducing their non-performing loans, he said.
“Management have to accept responsibility for it,” said McGrath. He would prefer to see the loans worked out case by case, with restructurings, engagements and debt write-offs, and enforcement taken only as a last resort.
Permanent TSB, for its part, has said that €2 billion of the loans for sale belong to borrowers who have not engaged with the bank, in some cases for over seven years, and where the loans are on average more than 3.5 years in arrears.
But then these are some of the worst non-performing loans in the sector. The bank wrote many high loan-to-value mortgages – particularly on buy-to-lets – that still remain underwater even in a rising property market.
Minister for Finance Paschal Donohoe, while defending Permanent TSB's right to sell the loans and noting its obligation to the ECB, has said he would look at regulations to make sure borrowers are protected under vulture funds. Fianna Fáil wants new legislation to extend those protections to the borrowers.
Novel insolvency deals
But even without the same consumer protections afforded to bank customers, the situation facing many borrowers with Project Glas loans may inevitably push some to seek novel insolvency deals such as those signed off by Ms Justice Baker.
In other words, when it comes to debt write-downs, where Permanent TSB would not act, borrowers may have to.
Mitchell O’Brien, the Waterford insolvency practitioner who is advising the Dunnes, said that the PIA mechanism, enshrined in law, provides a better outcome for both the bank and the borrower than loan book sales.
“Once you borrow from one of the Irish banks, they want to own the relationship until they get the money, you bankrupt yourself, or they sell the loan,” he said.
The effectiveness of the insolvency regime, even over aggressive vulture funds looking for a short-order return, could be seen in a High Court ruling on Monday.
Co Meath businessman Thomas Carolan (50), a director of a PVC window and door manufacturer, beat a challenge from vulture fund Promontoria Oyster and managed to have about €7 million in unsecured debt written off and still hang on to the family home.
Better still for Carolan, the PIA signed off by Ms Justice Baker, wrote down the €481,857 mortgage on his home to the market value of the property, €217,500 and fixed the interest rate at 1.25 per cent for the lifetime of the 21-year loan.
“I honestly think there just needs to be a couple of big wins to get huge public attention,” said Keith Farry, who represented Carolan, of the potential for debt write-downs being noticed more widely and more insolvency deals being agreed.
Farry is one of a new breed of young barristers working on PIA cases in Baker's Court 11 at the Four Courts and in busy circuit courts for insolvency applications in Trim, Tullamore and Cork. The lawyers are building up heads of expertise in this new area of law. (One insolvency adviser jokingly called them "the baristas" owing to the permanent coffee cups in hand.)
It just needs "the Gerald Kean effect," says Farry, referring to the celebrity Dublin lawyer.
Given Permanent TSB’s likely upcoming sale of a massive portfolio of bad loans, there could be more time required for personal insolvency applications and less time for coffee.
As for the Dunnes, Mitchell believes they will see their Permanent TSB mortgage sold in Project Glas, but he is preparing a new PIA application to write down the value of the mortgage to the current value of their home.
“The sale will go through and ultimately personal insolvency practitioners will pick up the pieces,” he said.
