Caroline Lennon-Nally once vowed that she would never resort to mortgage-to-rent (MTR), a state-backed debt-relief scheme that allows distressed borrowers to remain in their homes by swapping ownership for a long-term tenancy.
“I would rather burn [my home] than rent it back off the banks,” she declared during media interviews in 2011. “I have put huge amounts of my own money into this house. I worked my whole life for it.”
For a brief moment she became the public face of a hitherto hidden problem: public servants with jobs for life who could not afford their mortgages following a succession of crisis-era pay cuts and tax hikes.
Eight years on, Lennon-Nally appears to have changed her mind. She resurfaced last week as one of six directors of Home Options, a not-for-profit company that claims to have a more palatable alternative to the accepted narrative that the only way of ridding Ireland of its legacy of toxic mortgage debt is to sell the loans to vulture funds.
The idea is to tap into ethical funding from America and elsewhere to provide a private version of the state’s MTR scheme that will allow households to buy back their properties at a discount in the future as their finances improve. Rather than being consigned to rent for the remainder of their days, Home Options offers them a second chance at homeownership — a feature likely to have influenced Lennon-Nally’s U-turn.
“There is a fairer way,” said Michael Durkan, another Home Options director, whose day job involves producing and directing theatrical Irish dance shows.
“The politicians have failed us, so we’ve taken matters into our own hands and come up with our own solutions . . . We’ve access to the same resources and expertise as the vulture funds.”
The launch comes as banks are preparing at least three batches of distressed mortgages for sale before the end of this year, according to Link Asset Services, an Australian outsourcing specialist that has taken over the management of many of the portfolios that Irish banks have already sold to vulture funds.
Ulster Bank will be next out of the traps with plans to offload about 3,500 mortgages, on which €900m is owed. Arizun Group, another provider of owner-turned-tenant debt packages, estimates up to €7.8bn owed on 40,000 distressed Irish mortgages could be up for grabs. Some are still on the banks’ books while the remainder have already been sold to vulture funds, which are now trying to exit their investments by reselling the loans to other distressed-debt specialists.
The impetus for all these transactions comes from European banking watchdogs, which are demanding that lenders finally draw a line under their legacy of bad loans. While the three Irish-owned banks have more than halved non- performing exposures to 8% of their loan books in the three years to the end of 2018, regulators want this reduced to under 5%. This is why Link sees Ireland as “the gift that keeps giving”.
Yet the Central Bank of Ireland sounded a note of caution last week, warning that vulture funds could quickly lose their appetite for the risks involved in turning around soured Irish mortgages as the global economic outlook becomes more uncertain. Even if investor interest were to hold up, the Central Bank said its research “suggests that many non- performing loans still on bank balance sheets may be difficult to cure”.
The aspect of loan sales that sparks most public anger — the ability to dispose of loans without borrowers’ consent — is what makes them attractive to banks. Packaging thousands of loans into a single job lot is a much quicker way of getting them off the banks’ books than alternatives such as restructuring and MTR, which require the agreement of each borrower before they can proceed.
Home Options aims to combine the best of both: offering banks a quick fix by taking entire portfolios off their hands and then offering debt forgiveness to the borrowers involved if they agree to surrender ownership in exchange for a long-term tenancy.
While it is vague on details, it is understood that Home Options is already in talks with AIB and plans to bid for the portfolio that Ulster Bank is bringing to market. This risks dragging it into a bidding war with vulture funds such as Cerberus Capital Management, the most active buyer of distressed Irish mortgages.
Home Options is betting that its ethical credentials and not-for-profit ethos will give it the edge over the vulture funds, making it a more politically acceptable alternative for a banking industry that is still largely state-owned.
Lacking the nakedly commercial focus of the vulture funds, Home Options will be able to offer more upside to its owners-turned-renters, especially when it comes to the terms under which they can buy back their homes in the future.
This will give it a clear edge when dealing with the banks, according to Ben Hoey, a former banker whose company, Quartech Solutions, will provide funding and asset management for the mortgages that Home Options plans to acquire.
“We’ll be able to match the [vulture] funds on price while at the same time helping banks protect their reputations and franchises,” he said.
“There’s a weight of money — billions of euros — available from US pension funds and other ethical investors if we can show that our proposition has a social dimension. We can offer debtors a clear plan under which they will one day own their properties again.”
Buying entire portfolios with the hope of converting the households involved from owners to tenants is a risky proposition, according to Arizun founder John McDaniel. He believes that up to 20% of loans in any portfolio are owned by strategic defaulters who lack the will, rather than the ability, to pay what they owe. They are unlikely to co-operate with any debt deal they are offered, no matter how sweet the terms.
“If Home Options has a magic bullet for dealing with people who are gaming the system, then more power to them,” McDaniel said. “They can’t do a deal without the agreement of the guy living in the house.”
Despite its ethical credentials, Home Options will not be a soft touch, according to Hoey. “If debtors don’t accept any of the solutions on offer, we will enforce against them,” he said.
Home Options and Arizun are targeting what they believe is a large gap in the market left by the state’s MTR scheme, which is open only to households with incomes of less than €25,000-€35,000 after tax, depending on where they live. Apart from excluding many struggling families on income grounds, the state scheme is also mired in bureaucracy. Just 445 mortgage-to-rent cases have completed since 2012.
Yet households that exceed the MTR income limits should have the resources to reach a restructuring deal that is less drastic than surrendering ownership of their homes, according to Paul Cunningham, chief executive of Home for Life, an MTR provider funded by AIB.
“If you can afford to pay a market rent, you can afford to make a substantial payment on your mortgage,” he said. “Why would your bank sell your mortgage in these circumstances?”
Ulster Bank faces similar questions as details emerge about the latest portfolio it is putting up for sale. While the loans involved have accumulated an average of more than two years of arrears, this problem could have arisen any time in the past six years, according to consumer advocate Brendan Burgess of Askaboutmoney.com.
“Ulster Bank’s previous loan sales were justified because they involved customers who were paying nothing and not engaging,” he said.
“The current portfolio includes people who are paying their mortgages. These loans should not be sold because the arrears could be sorted out by extending the mortgage term or reducing the rate of interest. The loans may be non-performing under the nonsensical definitions used by banking regulators, but they are sustainable.”
Ulster Bank said the portfolio was being sold only after an extensive trawl of all its problem mortgages to find alternative solutions. The portfolio includes only loans that are unsustainable or in which the borrower has failed to co-operate, according to the institution.
As more mortgages come to the market, questions about the merits — financial and otherwise — of what the banks are doing will only intensify.