When Carly and Brian Bailey were notified by Ulster Bank that their mortgage had been sold to Promontoria, an entity owned by Cerberus Capital Management, in 2014, they spent hours reading over the document, but couldn’t understand what exactly it meant.

A few months later, a letter from Promontoria informed them that their mortgage wasn’t sustainable. It said they needed to take action: voluntary surrender or repossession.

The couple had finished building a house in Carly’s native County Cavan in the Irish region of Ulster back in 2007, a more affordable alternative to living in Dublin. They had a EUR 212,000 mortgage, with an LTV of around 70%. Brian had worked in the construction industry his whole life, while Carly was a sales executive in the tourism industry. They wanted to start a family.

“We were working normal jobs,” said Carly. “We were living very ordinary lives like everyone else.”

But following the financial crisis, Brian lost his job in 2008, and since then struggled to find stable work in the field. At first, they sought help from family, but fell into arrears in 2010. With the arrival of their daughter soon after, they spiralled deeper into financial hardship, as high childcare costs meant Carly was unable to work full-time.

Ulster Bank did not offer them long-term restructuring options, according to Carly. Eventually, the bank informed them in 2013 that they were not offering any further short-term arrangements. They felt they had no choice but to sell.

Asked for a response, Ulster Bank told Debtwire that they cannot comment on individual customers.

By the time they received the notice from Promontoria in 2014, they had a second child, a son. The family had been struggling for over five years.

After selling their home for EUR 150,000, they were able to pay EUR 140,000 back to the fund after fees, but they still had an additional debt of EUR 60,000.

“Cerberus is a responsible, long-term investor,” said a spokesperson for Cerberus. “Consensual resolutions are achieved by our loan servicing affiliates in the vast majority of cases and it is only as a measure of last resort that those affiliates would commence enforcement proceedings.”

Thousands of similar cases

Thousands of families in Ireland have found themselves in the same position as the Baileys since the crisis. 3,142 homes were repossessed and 6,365 voluntarily surrendered between July 2009 and March 2019, according to data from the Central Bank of Ireland (CBI).

Now, more than 10 years since the crisis began, 62,834 primary mortgage accounts are in arrears, according to CBI data. Of these, 27,979 families are over two years behind on their payments. The CBI estimated that roughly half of those leaving so-called long-term arrears were losing their homes, by voluntary or involuntary loss of ownership.

The situation is igniting political tensions in Ireland, sparking a wave of demands for protectionist housing policy.

“A tsunami is coming. You must remember that these are people and there will be massive human carnage,” said David Hall, chief executive of the Irish Mortgage Holders Organisation (IMHO), a non-profit group.

Irish retails banks have succeeded in dramatically reducing their non-performing loan stockpile, from EUR 85bn in 2013 to EUR 22.4bn as at the end of September 2018, but the NPL ratio of 10.4% remained substantially above the target ECB rate of 5%, according to the CBI. Having dealt with the commercial real estate stock primarily through the sale of loans portfolios, residential loans dominate the remainder of the NPLs, making up 69% as of 2017.

The sale of non-performing mortgages to vulture funds accelerated in 2018, with the volume of non-performing home mortgages held by non-bank entities jumping from EUR 3.1bn to EUR 4.2bn year-on-year to 1Q19, according to the CBI.

In January 2019, the controversial No Consent, No Sale Bill, which would mean prohibitive barriers to the sale and securitisation of residential loans, passed its first reading in Parliament.

The bill seeks to pass into law a voluntary CBI code, introduced in 1989, that states that “a loan secured by the mortgage of residential property may not be transferred without the written consent of the borrower”. In its current iteration, this would retroactively apply to mortgage contracts already made.

In his speech proposing the bill, Pearse Doherty, finance spokesperson of Sinn Féin, cited Permanent TSB’s NPL securitisation Glenbeigh Securities 2018-1 as a “new low”. The EUR 1.3bn securitisation included 6,272 mortgages. The holders of 4,000 of these had already agreed new payment plans with the bank.

The bill is opposed by the government and is reliant on the support of the minority parties currently supporting the ruling party in house. It is undergoing legislative scrutiny and possible amendment, but many consider a general election a possibility before it passes.

The bill has brought political opposition to funds to a head, pitting activists against Irish financial institutions and the government.

Support for the bill

A key defence of portfolio sales made by the Department of Finance is that all protections and possibilities for negotiation follow from the bank to fund. However, IMHO’s Hall said that the evidence he presented to the parliamentary committee in favour of the No Consent No Sale Bill demonstrates this to be “factually incorrect”.

In a letter addressed to one of Hall’s clients, Promontoria said that just the details of the loan, not others including repayment history and relevant engagement are passed to. This shows clear intent, according to Hall, that it is aiming for repossession rather than solution, as the historical records would give information relevant to a restructuring arrangement.

“The motive of the funds is self-professed – buy cheap, sell high and move onto the next debt crisis,” said Hall. “It’s not brain surgery.”

Proponents of the bill believe that the tax policies of successive governments have enabled the mass purchase of loans by funds.

What’s more, these funds have hardly contributed to the state coffers. Between 2014 and 2016, 24 Irish subsidiaries of funds paid EUR 20,000 of corporation tax in total despite controlling Irish distressed property assets worth almost EUR 20bn, according to an analysis from the University College Dublin.

The funds were registered under the tax neutral Irish Section 110 special purpose vehicle. In autumn 2016, the government closed the loophole for new registrations following criticism from the press. In March 2019, though, a UN Special Rapporteur on housing sent a letter to the Irish government accusing them of “preferential tax laws” to funds.

Funds collect vast profits from these sales with favourable tax, but according to David Hall, who has seen thousands of letters to those in arrears, these benefits are not passed to consumers.

After the Baileys had sold their house, Promontoria was still seeking the EUR 60,000 residual.

The IMHO lobbied the fund to reduce this to EUR 10,000, which the Baileys would be able to raise from family and friends, but the fund refused, and the Baileys entered bankruptcy in March 2018. Given that the residual was equivalent to a quarter of the debt, and the fund is likely to have purchased the portfolio at a much steeper discount, the math doesn’t add up, said Hall.

Mass investment from funds, which then go on to rent properties at substantially higher prices, has also contributed to the housing crisis, according to the UN report. In the week of 20-26 May 2019, there were over 10,000 people homeless across Ireland, a third of them children, according to the Department of Housing. This represents a 200% increase over four years. Given that the number of potential evictions dwarfs this, the banks are pursuing a dangerously short-term policy, said Brian Reilly, a businessman and co-founder of non-profit initiative Right2Homes.

Objections to bill

The governing party of Ireland, the Department of Finance, the Central Bank of Ireland and the European Central Bank (ECB) have all spoken against the bill and warned of financial consequences.

A primary issue raised against the “No Consent No Sale” bill is constitutionality. The attorney general of Ireland stated that it would constitute disproportionate interference with the rights of the loan owner, as all mortgage contracts have an explicit clause stipulating that the loan may be transferred. This criticism particularly applies to the retroactivity of the bill, as in its current form it rewrites contracts already made.

Ultimately, if banks contacted borrowers asking for consent, they would either not respond, or they would decline, said Maurice Crowley, director of policy and advocacy at the Banking & Payments Federation Ireland, a trade association representing Irish banks. This would “kill” the currently common practices of securitisation and portfolio sale.

“To say that it would be unhelpful for the banks is being polite,” he said. “Our position is we’d like to see the bill die. We don’t think it’s fixable.”

The code which the bill is based on is outdated, as at the time it was introduced, the transfer of loans by securitisation or sale was much less important, Philip Lane, Governor of the CBI told the parliamentary committee debating the bill. Securitisation and covered bonds are used by all Irish banks in order to raise liquidity.

Non-performing loan portfolio sale has been a key tool in reducing non-performing loans since the crisis and all three Irish pillar banks, Allied Irish Banks, Bank of Ireland and Permanent TSB still have NPL ratios greater than the recommended ECB target of 5%.

The ECB told the Irish Parliament in a statement regarding the bill that the restriction of securitisation and NPL reduction would decrease bank funding and increase costs. These impacts would be passed onto borrowers, inhibiting the availability of mortgage finance and increasing costs. The risk of an increase in NPLs would affect financial resilience, they also said.

Spokespersons for the two largest parties, Fine Gael and Fianna Fáil, said on 9 July at a parliamentary committee meeting that an independent impact assessment should be carried out before the bill progresses to the third stage due to potential interference with bank credit. Pearse Doherty accused them of “stalling” the bill. The committee is expected to reach a decision on 11 July.

“As the law currently stands, borrowers should have the same regulatory protections if their mortgage is sold,” said Conor Houlihan, who leads the finance practice of DLA Piper’s Dublin office.

Last November, the CBI concluded that the Code of Conduct on Mortgage Arrears (CCMA) was working effectively for borrowers who engage with the process. They found “no material breaches” of the code, though there were some “non-material” breaches, including failures to inform borrowers of support options adequately, and to contact them within a designated time frame.

Consumer protections in Ireland are robust, said Houlihan, and the courts tend to be sympathetic towards borrowers in repossession cases.

A new bill which requires courts to take into account a wide range of factors when repossessing a home, including personal circumstances, passed all stages of the parliamentary approval process on 2 July. The Land and Conveyancing Law Reform (Amendment) Bill 2019 is expected to pass into law in autumn.

“There’s clearly distress – no-one’s denying that,” said Houlihan. “But it’s wrong to suggest that the Irish Law doesn’t offer protection to borrowers whose loans are held by non-banks.”

Ongoing sales

In 2018, the sale of residential portfolios to funds accelerated. A total volume of EUR 11bn changed hands, according to the Debtwire NPL Database. Among these sales was Ulster Bank’s EUR 1.4bn Project Scariff, which included 2,300 owner-occupied mortgages.

At the end of March 2019, non-bank entities held EUR 7bn residential NPLs, including buy-to-lets and primary dwelling homes, compared with EUR 5.9bn still on banks’ balance sheets, according to the CBI. By contrast, just a year prior, at end of March 2018, almost twice as many were in banks, EUR 9.5bn, as in non-bank entities, EUR 4.7bn.

All three pillar banks have said they may sell mortgages to reach the 5% ECB target this year. As of year-end 2018, Allied Irish Banks had an NPE ratio of 9.6%, Bank of Ireland 6.3%, and Permanent TSB had an NPL ratio of 10%.

In early July 2019, Ulster Bank said it would sell a EUR 900m residential NPL portfolio, with the confirmation that this includes EUR 810m of owner-occupied loans sparking fresh controversy in the Irish press. The Irish Mirror called Ulster Bank’s management “ruthless” “for caving into the vulture funds again”.

“The PDH loans have been assigned to this portfolio following a concentration of effort with customers in difficulty to ensure that they were given every opportunity to agree a sustainable solution and to remain in a home that they can afford,” said a spokesperson for Ulster Bank in a statement. “For all of these customers, the continued extension of forbearance cannot unfortunately be maintained. Not all mortgages, PDH or BTL, are sustainable and we are obliged to reduce the level of non-performing loans on our balance sheet.”

Currently, the volume of owner-occupied non-performing mortgages by banks and non-bank entities is roughly equal, EUR 4.5bn and EUR 4.2bn. The earliest legislation that the No Consent No Bill could pass into law is in autumn, following a parliamentary recess in summer.

Given the speed at which banks have transferred residential mortgages in the last year, activists believe that the current moment may be the final opportunity to prevent the transfer of loans to funds. 14,862 mortgages in long-term arrears are still sitting on bank balance sheets as of end 1Q2019, according to the CBI.

Forever renting

Since declaring bankruptcy in 2018, the Baileys have been living in a rented house in Dublin with their two children, now aged eight and nine. Having completed a law and political science degree at Trinity College, Carly is now a councillor campaigning on housing issues, including in favour of the No Consent, No Sale Bill. But the incident will mark her family’s records.

“We’ll likely be renting for the rest of our lives – I worry about affording it when I retire,” she said. “I have nothing to leave my kids.”

by Amy Finch

Amy Finch Data Journalist Debtwire

Amy is a data journalist for Debtwire. She covers the sale of NPLs and non-core loans, with a focus on Southern Europe NPLs as well as Irish/UK markets and unsecured loans.