How does a mortgage holder get a writedown when banks sell their loan?

Tonight on RTE’s Primetime they are going to cover the dilemma some IBRC mortgage holders (residential mortgage holders from both Irish Nationwide and Anglo) face when their loans are sold.

If the loans have a discount limit set on them as the commercial loans do then there will be little or no appetite for them because as it stands estimates are that 50% of the former INBS loan book are impaired in some way.

The  sale will probably proceed but it’s a question of who the buyer may be. The IBRC loan assets are being independently valued and then offered for sale through a competitive auction process.

Loan assets may only be sold for bids that exceed these independent valuations. All but a very small number of loans are being offered for sale as part of larger portfolios of loans.  

Successful bids must exceed the independent valuation, this is in effect a restriction on any discount. We have found no difference in the sale process as between IBRC mortgage loan assets and other IBRC loan assets.

The values that the loans clear at are important. We saw already how Pepper who bought the now defunct GE Money loan book have offered discounts to borrowers. First we’ll say why they do it and secondly how they do it.

Why the do it? Because it works, Blackstone have stated this is the best method, and academic research from the USA supports this.

How they do it? They buy a loan (for instance) at 50c on the euro, the current borrower is then offered a deal of a 30% writedown in return for making payments or selling the property at a certain price.

If the person then starts making payments the lender gets 70c back plus interest for something they paid 50c for. That’s a 40% capital uplift and a cashflow to go with it.

An issue that is trickier to explain is what some of the downsides are, the first downside is that the new buyer can manipulate rates against the consumer as almost every lender has already done. This is something that no regulator is able to control and other than the single incidence when AIB complied with Enda Kenny’s request to lower rates has it occurred.

The second is regulatory oversight and what goes with it. Regulatory oversight is in the main down to who the buyer is, if it’s a buyer from Ireland who is regulated then the regulation (code of conduct on mortgage arrears etc.) will stay pretty much the same.

If it is bought by an entity regulated in Europe then they will still fall under the code of business rules, any servicer who is based in the state will also fall under these rules if the owner is regulated.

The two issues which may not get mentioned (as they are mildly technical) are what happens in the case of a non-EU buyer who isn’t regulated becomes an owner and if NAMA become the owner. In the first instance a vulture fund could come in and the Central Bank would have little they could do to protect consumers.

In the case of NAMA the Department of Finance have indicated that NAMA is likely to apply ‘best practice’ (translation the CCMA) but that doesn’t mean people have recourse to the Financial Ombudsman, a point that has largely been overlooked in the debate to date.

This is because of NAMA decide to follow the rules it doesn’t grant them jurisdiction under the FSO, the FSO obtains jurisdiction via regulation of the entity and this puts aspects of the mortgage arrears resolution in jeopardy.

Why? Becuase one of the steps in the resolution if a person wants to complain is recourse to the FSO (as per section 51 of the CCMA), that recourse may not exist depending on who the buyer is and there is little that any authority can do about this prior to the sale.

The answer is that any provider, servicer, or owner of regulated products should be regulated but that isn’t the case, sadly we have one set of rules for regulated entities and almost no rules for the other and there are big risks where people can fall into areas of no jurisdiction and no protection.

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