Banks should have agreed debt deals, says insolvency director

Banks would be under less pressure to sell large portfolios of bad mortgages had they dealt with distressed borrowers earlier, the head of the State’s personal insolvency service has said.

Lorcan O'Connor, director of the Insolvency Service of Ireland, said banks should have tried to resolve more of their non-performing loans through personal insolvency legislation after it was introduced in 2012.

He was speaking after Permanent TSB, which is 75 per cent State-owned, said it plans to sell about €3.7 billion worth of loans, including 14,000 owner-occupier home loans and 4,000 buy-to-let mortgages, amid pressure from the European Central Bank.

“We should have tried to deal with a lot more of the non-performing loans earlier and the personal insolvency legislation would have facilitated that had it been engaged with by all parties,” said Mr O’Connor.

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The insolvency regime permits the write-down of mortgage debts under a court-approved personal insolvency arrangements but this process has been bogged down by legal challenges from the banks.

The ECB is now directing banks to clean up their non-performing loans and this involves sales of large portfolios, said Mr O’Connor.

“That is simply because efforts to try to deal with larger number of cases weren’t taken in the last few years,” he said.

Protections

Taoiseach Leo Varadkar said on Tuesday that the Government planned to put in place protections to safeguard the mortgage holders. Fianna Fáil plans to table legislation to extend protections to home loan holders whose mortgages will be bought by vulture funds.

About 28 per cent of the loan book at Permanent TSB, once the country’s largest mortgage lender, are classified as non-performing. The likely buyers of the loans are so-called vulture funds from overseas that are unregulated and usually seek short-term solutions or deals, often involving the sale of the property.

Mr O’Connor said he was “very disappointed” with how banks had blocked the write-down of mortgages under personal insolvency arrangements on technical rather than commercial points.

“Banks have a right to challenge cases where they think they are being treated unfairly but do it on commercial grounds and have conviction in your numbers and don’t try to use technicalities to thwart the process,” he said.

Unsustainable mortgages

Permanent TSB said on Tuesday evening that of the €2.7 billion in home loans being sold in the “Project Glas” portfolio, €2 billion are owned by customers who have not engaged with the bank, whose mortgages are unsustainable and who have been unable to meet the terms of agreements put in place.

The average period of arrears is more than three and a half years, with some customers not engaging with the bank for as long as seven years.

Mitchell O’Brien, a Co Waterford-based personal insolvency practitioner who has helped near-bankrupt borrowers negotiate debt deals, said that if Permanent TSB had not blocked mortgage write-downs in personal insolvency arrangements, all of its non-performing loans could have been resolved in two to three years.

The ECB considers loans informally restructured by Permanent TSB as non-performing loans. This includes mortgages that are split and the unaffordable part of the loan “warehoused” for a period.

“Permanent TSB’s penchant for ‘split mortgages or warehousing’ has them in the position they now find themselves in, thinking the only way to resolve their non-performing loan crisis is a societally devastating sale of [up to 14,000] family home mortgage loans in arrears,” said Mr O’Brien.

Another debt adviser, Daragh Duffy of Donegal firm McCambridge Duffy, said mortgage holders found it very distressing dealing with vulture funds because they usually have a policy of “trying to realise the asset as quickly as possible, by whatever means possible” and do not offer the same solutions as high-street banks.

“That Permanent TSB would do this, when it is supposedly owned by the State, is quite something,” he said.