Opinion

Vulture funds are part of the solution, not the problem

Today, across Ireland, deals are being done by such funds that allow people to move on

File photograph: iStock

Ross Maguire
Fri May 12 2017 - 01:02

Welcome to the world of funds.

In the US there is a developed system of investment managers who invest money across a range of assets to ensure a return. When you put €100 into a pension, or when you pay car insurance, the money must go somewhere, and usually it is into these funds.

One of the assets they invest in is "distressed debt", there is plenty such debt in Ireland. Since 2012 funds have been acquiring distressed debt in Ireland; these are the "vulture funds" that some populist politicians and commentators would have us dread.

People who are in debt, whether to banks or to funds, are protected

When Michael Noonan referred to the role of a vulture as cleaning up dead animals littered across the landscape, people wrongly, although perhaps intentionally, juxtaposed this as vulture funds feeding on ordinary borrowers. This is nonsense. The vultures clean up our debt overhang and allow us to get on with life – and that is precisely what they are doing.

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People who are in debt, whether to banks or to funds, are protected.

Firstly they are protected by the contract itself, and this does not change when a loan is sold.

Secondly, any debt must be serviced by a licensed entity, which is bound by Central Bank codes. It is a criminal offence for a fund to instruct a servicer to operate other than in accordance with those codes.

Thirdly, every debtor can avail of the personal-insolvency system. This is a very powerful system, especially when it comes to family homes. A court now has power to direct a debt write-down where it is necessary to enable a home to be saved.

Fourthly, and perhaps most importantly, creditors do not want to enforce. They want to come to an arrangement. The funds are the very best to do deals and today, all across Ireland, deals are being done by funds allowing people to move on.

Homes are protected

Earlier this week, writing in this newspaper, Mick Wallace TD recorded a text sent to his NamaLeaks phone line where the texter complained that a fund was illegally trying to sell his mother's house without a court order.

It is not possible under Irish law to sell a “home” without a court order.

The innuendo is that a little old lady is being thrown out of her home by a fund, absent the involvement or protection of a court. This is false

It is possible to sell an investment property through the appointment of a receiver, which does not involve a court. A receiver can only be appointed where the loan is in default and where the fund has complied with the Central Bank codes, which are onerous. Receivers are generally appointed to investment properties when the owner is not paying the mortgage and often keeping the rents.

But the clear innuendo in the NamaLeaks text is that a little old lady is being thrown out of her home by a fund, absent the involvement or protection of a court. This is false.

We have repeatedly been warned of a tsunami of repossessions prompted by vulture funds. The opposite is the truth. There have been almost no repossessions. Of the 400 in the last quarter of 2016, the majority were abandoned properties and voluntary surrenders. If a fund was involved, the remaining debt will likely have been written off in full and in some cases the fund will even pay €5,000 towards moving costs.

Mortgage-to-rent is a solution for some whereby the home is sold to an approved housing body and the former borrower continues to occupy the home under a social-housing provision.

The funds, despite having a small share of distressed home loans, account for nearly 70 per cent of all mortgage-to-rents completed in the State. AIB has completed less than 1 per cent of the total.

Virus of sentimentality

Populism feeds on sentimentality. My concern is that sentimentality which, like a virus, attaches itself to the genuine empathy felt towards people in difficulty, will produce very unjust results. Let there be no doubt: there are large numbers of people who can pay but won’t pay. These people are not the victims and they do not deserve sympathy.

For the genuine cases the protections and restructuring options now exist, and funds are best-placed to work this through. Banks are not meant to be in this business, and leaving the loans on their balance sheets hurts us all, especially those future borrowers who will face punitive interest rates to pay for those who are gaming the system.

It is high time to get real. It can no longer be acceptable for an investor to pay himself from rents that are meant to be repaying debt and it is no longer acceptable for homeowners to refuse to pay what they can, just because it does not suit them to pay.

If an Irish bank were to announce the sale of distressed loans to a fund, there would be an outcry. But those who cry need to do their homework and look at the evidence. Sentimentality will just shift the bill to somebody else, and that somebody else is likely to be you.

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