(this article originally appeared in the Sunday Business Post on the 8th of September 2013)
The term ‘strategic default’ lacks a definition. Because of this, any debate that incorporates this term is, in part, pointless. Discussing something so undefined can only end in disagreement if the topic is entirely subjective. There are those who refuse to accept it exists, just as there were those who once refused to believe the world is round. Many continue to insist that, in pretty much all circumstances, borrowers are innocent.
They aren’t, just as the banks are not innocent either. As a day-to-day practitioner, I know that strategic default is real. I have seen it, dealt with it, made money on the back of advising people doing it and continue to do so. People hire guys like me to push back against banks like ours.
Some attempt must be made to determine what does and doesn’t constitute a strategic default. A failure to do so means we face a double dilemma. The first is to turn the national debate into one focused on the wrongdoers who are, as we all accept, the thin end of the wedge. The second is that those who deserve sympathy and more comprehensive engagement will not get it, because the agenda is preoccupied elsewhere. That collateral damage is wrong in every way.
So what is a strategic defaulter? It isn’t just some nasty once-rich developer or landlord squirrelling away money. At its most basic, it is where people have the means to pay a loan but they don’t do that. To go too far beyond that basic precept is to enter the land of comparative morality and individual consumption choice, where any action can be justified by appealing to a person’s emotive responses. This normally goes hand-in-hand with the type of reasoning where two wrongs equal a right, because of how deplorably the banks behaved.
This must stop. Two wrongs don’t make a right, even when it comes to our disgraced banking system.
We have contract law in this country and it’s honoured in our legal framework and via the courts. A defaulter – rightly or wrongly – is breaking their contract and, if they don’t pay while having the means to do so, it falls into the definition of strategic default.
The counter-argument is predictable. Borrowers have needs, other things occurring that stop them from paying and endless obstructions in their way. This is true, but if those other things matter as much as we are told they do, then weigh that against the corresponding request to keep the property. One side of the equation has to give, because that’s life in a world constrained by limited resources – otherwise it’s just a request for a transfer of wealth to the middle class.
To look closer at the issue, I spoke to executives at several banks. First, asking ‘what is strategic default?’, Stephen Bell of Ulster Bank, who appeared before this week’s Oireachtas Finance Committee, said that it’s “where people can evidently pay but don’t, or they are paying zero but when they engage you see repayment capacity. Sometimes, it’s a refusal to rationalise lifestyle and other debts versus the mortgage”.
He said: “This isn’t confined to any group. You see it in low-, middle- and high-income borrowers”.
Their aim is to re-establish a payment pattern and then look for a resolution. Bell said that it was hard to reconcile the 4.5 per cent of arrears that are 90 days plus in the North, with the 20 per cent plus in the South. He noticed such a pattern upon joining the bank in April of 2012.
Jeremy Masding, chief executive of PTSB, said it’s where “a person makes a conscious choice to pay unsecured debt or not prioritise the mortgage”. He said that their strategic cases were at least in “double-digits” as a percentage of total defaulters. AIB’s David Duffy’s definition was similar. Richie Boucher of Bank of Ireland couldn’t comment as he was en route to the US.
Brendan O’Connor, head of the financial resolutions group in AIB, said that the “one thing they want to stress is engagement with the bank”. This may be difficult given that, out of 40,000 arrears cases, only 20,000 have actually filled in a Standard Financial Statement (SFS). This is the foundation document on resolving arrears – and a full 50 per cent haven’t even done them.
AIB went so far as to offer long-term solutions to 1,400 customers on a non-SFS basis, a shot in the dark by any account, and only 700 replied. Of the 700, less than 20 actually needed a split mortgage or extensive forbearance outside of the normal ‘off the shelf’ solutions.
People said AIB’s figures lacked credibility, but they were based on a granular examination of 16,000 SFS, which delivered the highest detail. It sounds more like righteous denial to argue otherwise.
PTSB have a similar problem, as only 80 per cent have filled in their SFS, but some are 24 months old at this point, which means their ability to resolve them is difficult. Despite this, they lead the field in terms of Keane Recommendation solutions having offered over 3,500 split mortgages. In other words, those who engage actually do get good outcomes.
Former PTSB boss David Guinane, who has now left the bank, said he saw strategic default as early as 2009 but that, back then, it tended to be due to a resistance to adjust lifestyles rather than representing outright default. There was also a lot of talk of debt forgiveness and an uncertain banking future that had an effect.
He thinks that going the legal route has to be an option when all else fails. At a minimum, it delivers an endgame for both bank and borrower because, sadly, some mortgages are not sustainable for either party. He foresees some 12,500 to 15,000 voluntary sales and repossessions across the country. His frankness was a far cry from some of the gilded language at the Oireachtas.
All bankers agree that mortgages must be backed by consequences if a person doesn’t pay, and say they will do all they can to help those in genuine distress. But non-communication between bank and borrower masks both the sincere and the insincere.
It is becoming clear that the Financial Regulator made things worse with a ban on repossessions and a ‘three call’ restriction (restricting the number of times a bank could ring a mortgage holder), all of which was made worse by the Judge Dunne interpretation of the 2009 Conveyancing Act.
Banks cannot get into the hard work of genuine restructures if the borrower hasn’t even filled in the SFS, which is at the root of the process. Talk of ‘strategic default’ will also give them the moral high ground to avoid doing so and cause needless financial attrition to thousands of vulnerable borrowers who deserve our collective support.
Proceedings for repossession should mean just that. There is a contemptible side game at play in some cases, where the repossession orders are only being sought to use as a future claim on the borrower (for the next 12 years) even though the bank don’t want the property. In fact, they want to use the threat in order to squeeze every penny they can from the debtor, rather than actually taking the property and settling the score.
The Central Bank have come out of this looking bad, and rightly so. They are the ones who alone set up the rules on the arrears target and, in those rules, they allowed legal action to qualify as a solution. This gives nothing short of both an explicit and tacit approval to bankers to go legal – and say it’s an answer when we know that isn’t what any right-thinking person means by a ‘solution’.
In part, this is because short-term resolutions that may not work were disallowed, which meant that bankers had to pull the trigger in many instances. If the Central Bank created the target, set the deadlines and made up the rules, why are only the banks coming out of this badly? They are only doing what they were told to do.
Arrears: the figures in full
6,000 mortgages 2.5 to 3 years behind and not engaging
16,000 Standard Financial Statements (SFS) analysed to collate ‘strategic figures’
50 per cent of arrears cases haven’t yet filled in an SFS, the founding document of resolutions
2,000 re-engagements after legal threats
2,000 arrears cases have money on deposit greater than arrears
1,000 buy-to-let mortgages with nothing paid in last six months or more
4,000 accounts where customer could pay full mortgage from net disposable income allowing for living expenses (insolvency guidelines plus 20 per cent on top) but do not
35 per cent of arrears cases either not engaging with bank or making zero payments
States that arrears decoupled from unemployment as a driver of it in 2011
4,354 legal threats sent to people’s primary homes resulted in about 1,000 borrowers re-engaging
18,025 mortgages 90 days or more in arrears out of 122,831 mortgages. 15,328 are primary homes, meaning threats were sent to 28 per cent of home loan arrears cases, resulting in a roughly 25 per cent level of re-engagement
By July 2013, almost 2,600 mortgage accounts had made no payment at all. Ulster Bank systems not cross-referenced to give a full view, meaning a client could (if undisclosed) have a large deposit with the bank that they are not aware of in dealing with arrears
Strategic defaults in ‘double-digits’ as a percentage of all defaulters
25,000 mortgages in arrears
20 per cent of customers have not filled in an SFS and, of the remaining 80 per cent, many are outdated (12 months old or more)
3,500 split mortgages offered to engaging customers in need
26 per cent offered sustainable solutions
2,000 formal legal proceedings issued
Only 13 mortgage-to-rent solutions done or offered to date
€27 billion in all residential lending outstanding; €4.3 billion is the amount of that in negative equity, or 16 per cent (bearing in mind that half of the loan book is in the UK)
198,000 mortgage accounts to 160,000 customers, 62 per cent of which are trackers
€1.4 billion in provisions against the €28 billion in lending, not factoring in for standard credit losses
British experience shows that 70 per cent of customers re-engaged when threatened legally
Karl Deeter is a financial adviser and analyst at Irish Mortgage Brokers