Philanthropic banks? Hardly…

The banks do manage to get some positive PR even in the current anti-banking environment. Yesterday’s Independent carried a story by Charlie Weston about banks stating that they will give a ‘cut price rate’ to borrowers who lose their homes.

This hinges on the difference between secured and unsecured lending rates, typically an unsecured loan (where the bank holds no asset which backs it up) will attract rates of 10% and more, but mortgages can be as low as 1.5% depending on what rate you got at the outset.

AIB and EBS are going to let borrowers who hand back their home pay back any outstanding balance at their mortgage rate. What we don’t seem to know (because through non-disclosure agreements or absence of short-sales) is whether this would have been the case anyway.

There is certainly a legal challenge in the making for seeking that a loan which becomes unsecured having been secured remains on similar conditions that would have existed had it been performing. There is (was) penalty interest on mortgages that are not paid, but we know of no ‘shortfall’ specifics (in loan offers which are the founding document of the debt) which would govern this so it would appear that perhaps this is a case of banks stating what would happen anyway.

And from the banks perspective this is perhaps the only hope they have of getting repaid, if they were to raise the rate it could negate the borrowers ability to service the loan, and would increase the odds of a level of resentment that leads to a further loss.

From an accounting perspective the loss would be provisioned for so if the borrower pays back anything it could have potential upside for the lender. The point here being that the banks are playing ‘Mr. Good Guy’ when in fact all this does is keep the situation in their favour as it is a better outcome than an outright ‘write-down’.

We’ll query this further with the lenders and publish anything we hear back, but having a cheaper debt overhang is nowhere near as good as the bank taking losses that it would normally be destined to realise and for borrowers to move on.

The key thing that isn’t being mentioned here? Is that unsecured debt can be handled via a DSA (debt settlement arrangement) which would give the borrower a non-insolvency route to burning the bank, so the magic is to keep the borrower on the hook with this promise of a ‘great rate’ but really all they are doing is dragging out a loss that they will have to nurse for a long time when it should be written off.

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