Joe Brennan: Ireland’s bankers and bailout
masters are pressing the government to make it easier to seize
homes bought as investments to rent out, as defaults on the loans
surge after Western Europe’s worst real-estate collapse.
The International Monetary Fund, the European Commission
and the European Central Bank, the so-called Troika that rescued
Ireland in 2010, want the state to tackle a legal loophole
impeding lenders from foreclosing on loans taken out before
2009, according to three people familiar with the matter, who
asked not to be named as final decisions haven’t been made.
The Irish government’s effort to overcome legal and
cultural obstacles to foreclosures is growing more urgent as
delinquencies on rental properties grow, making it harder for
banks to increase lending, and slowing the recovery. At Allied
Irish Banks Plc (ALBK), the biggest mortgage lender, more than a third
of its loan book for so-called buy-to-let properties is in
trouble after home prices fell by half and unemployment tripled
since 2007 amid the worst recession in the country’s modern
history.
“A well-functioning repossession framework is important to
maintain debt service discipline and to underpin the willingness
of banks to lend, which is crucial for Ireland’s economic
recovery,” Craig Beaumont, the IMF mission chief for Ireland,
said 'in an e-mail response' to questions.
Before December 2009, lenders used a 1964 law as the basis
to repossess homes. This was repealed and replaced in 2009,
which due to a drafting oversight, applied only to loans taken
out after Dec. 1 2009.
Justice Rules
The flaw became apparent in a July 2011 case overseen by
Justice Elizabeth Dunne. She ruled a lender wasn’t entitled to
repossess a home used for security on a defaulting 93,000-euro
($114,410) loan because demand for repossession and repayment
was made in July 2010. She said another lender was entitled to
repossession on a defaulting 209,000-euro loan taken out in 2007
because it demanded repossession and repayment in September
2009.
The Justice Ministry said in an e-mailed response to
questions that the “complex and related issues raised in this
case continue to be the subject of discussions within the
department and within the office of the Attorney General.”
The government is considering introducing new laws to fix
the loophole, according to two of the people.
Buy-to-let investments took off during Ireland’s decade-
long real estate boom, and now account for about a fifth of the
130 billion euro mortgage market. Values have collapsed since
the bubble burst in 2008, with figures signaling they’re faring
much worse than owner-occupier loans.
New Irish mortgages issued in the second quarter fell 16
percent from a year earlier, the Irish Banking Federation said
today. Banks made 135 investment mortgages in the period,
plunging from 7,083 six years earlier, the Dublin-based
organization said.
Famine Memories
Resistance to evictions and repossessions is at least
partly linked to the country’s history, in particular the
Great Famine, which saw thousands of families thrown off the
land in the period around 1850. Later, around 1880, when Ireland
was controlled by Britain, the so-called Land League’s
resistance to evictions during rent strikes often ended in
violence against landlords and their agents.
More recently, opposition to repossessions stems at least
in part from the banks’ reliance on taxpayer support to avoid
collapse in the wake of the 2008 collapse. In all, the state has
injected or pledged about 64 billion euros to banks, and five of
the six largest domestic lenders are now in government hands.
State-owned Allied Irish, the country’s largest mortgage
lender, said last month that payments on 37 percent of its Irish
buy-to-let mortgage holdings are at least three months behind,
compared with about 13 percent for its owner-occupier loans.
Mortgage Arrears
Arrears in Bank of Ireland’s buy-to-let portfolio rose to
21 percent at the end of June from 17 percent, the lender said
on Aug. 10. Some 9 percent of the bank’s Irish owner-occupier
mortgage book was at least three months in arrears, up from 7
percent in December, the bank said.
“Many of the buy-to-let properties are in the hands of
doctors, accountants, bankers and other professions,” said
Stephen Kinsella, an economics lecturer at the University of
Limerick. Buy-to-let is “a massive house of cards built around
middle- to upper-middle-class Ireland.”
There’s no evidence of mass repossessions. While there are
no overall statistics on foreclosed buy-to-let properties, Irish
banks held just 961 owner-occupied homes, equivalent to 0.12
percent of loans in arrears at the end of March, according to
the Central Bank. Bank of Ireland said last week it had held
about 137 Irish buy-to let properties at the end of June.
‘Huge Fear’
“There is a huge fear among lenders in what is a post-
famine, post-colonial Ireland of being seen to be acting like
the Big Bad Bank Plc coming in and turfing people out of their
properties,” said Bill Holohan, senior partner of Holohan
solicitors in Cork and Dublin and co-author of ‘Bankruptcy Law
and Practice.” Images associated with famine evictions in the
19th century “are ingrained deep in the Irish psyche,” he
said.
Policy makers and banks are starting to draw a distinction
between owner-occupier homes and buy-to-let properties. Central
Bank Governor Patrick Honohan said in March “it’s past time”
for banks to repossess such properties.
“Three years ago, we believe banks had limited appetite to
repossess troubled buy-to-let properties,” said Michael
Greaney, associate director in Fitch Ratings mortgage-backed
securities unit. “Over the last year, there seems to have been
a change in attitude and banks are willing to use the
repossession route if necessary and are pursuing buy-to-let
arrears cases more actively.”
‘Legal Flaw’
The “legal flaw” is impeding lenders from repossessing
properties, John Reynolds, head of KBC’s Irish unit and
president of the Irish Banking Federation, has said.
“While repossessions remain the last and least desirable
resort for KBC Ireland, there are cases where customers won’t
work with KBC,” Reynolds said in June, adding he was
disappointed that the legal impediment hadn’t been addressed.
“As a last resort, we need to be in a position to repossess.”
The IMF, the European Commission and the ECB, which rescued
Ireland two years ago as its banking system came close to
collapse are pushing for a solution.
Moves to plug the gap in the law will test banks’ appetite
to foreclose on loans and crystallize losses.
Stress Tests
Ireland’s four state-guaranteed banks that remain open for
business were ordered last year to raise 24 billion euros,
mostly from the state, following stress tests.
Banks are “terrified” that wholesale repossessions and
sales would crash the market again, just as there are signs of
stabilization in Dublin real estate, Bill Holohan said. Home
prices in Dublin, which have dropped 57 percent from their 2007
peak, rose in three out of the first six months of this year,
according to the country’s statistics office.
Banks are finding strategies to cope with the surge in
defaults in the buy-to-let sector. Bank of Ireland has, for
example, appointed 540 rent receivers to ensure landlords aren’t
hiding income.
“We’ve been taking action in dealing with rent diversion
which has been a feature particularly in the more troublesome
book, ” Bank of Ireland Chief Executive Officer Richie Boucher
told reporters last week. “Clearly we would hope that the Judge
Dunne decision would be dealt with.”
banzai7
At time point 3:25 - "Crooked banks around the world would gladly give a loan today so if you ever miss a payment they can take your home away." Lupe Fiasco
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