It’s silly to protest against the sale of non-performing loans (NPLs) by banks to so-called vulture funds when the State, the legal system, the culture all but forbids eviction or at least makes it such a legally and financially onerous route for banks to go down.
Mainstream lenders can’t be expected to sit on these loans indefinitely without recourse to the underlying asset because the country is haunted by some post-Famine spectre of eviction. It’s called secured lending for a reason.
Ask yourself why lenders such as Ulster Bank and KBC were so keen to exit Europe’s fastest-growing economy.
By the same token, it’s silly for ministers for finance and regulators to repeatedly insist that borrowers will be treated equally or won’t suffer financially from having their loans transferred to these third-party funds. This is patently rubbish and the new interest rate environment proves it.
These entities have entirely different funding models. They can’t borrow as cheaply as banks. Conventional lenders are also profiting from low-paying current or demand accounts which keep their funding rates low. So, when the European Central Bank (ECB) raises rates, funds need to reprice their assets more quickly than banks, in other words hike rates faster.
Irish banks have passed on some but not all of the ECB rate hikes. Bank of Ireland and Permanent TSB, for instance, have not passed on any of the increases to variable rate customers. You might argue that’s because their variable rates were artificially high to begin with.
AIB’s variable rates have been raised but they were lower initially. Variable rates at the State’s three pillar banks are currently trending at between 3.2 per cent and 4.5 per cent.
The pass-through to customers from non-bank lenders has been more aggressive. In some cases, borrowers have been hit with the full amount of ECB rate increases.
Pepper Finance, the mortgage services provider used by several investment funds, has passed on the full extent of recent rate increases to most of the 21,000 standard variable rate (SVR) customers. The move has pushed some Pepper loan rates up to 8 per cent, well above the State average.
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According to the company, the average SVR on Pepper-serviced loans was 5.9 per cent at the end of March. “You should note that not all the increases are being passed on to all books. In some cases the full increase was passed on and in some it was passed on in part, but no increases have been passed on since February,” a spokesman said.
Start Mortgages says it has not increased its variable rates since January. “To date Start Mortgages has increased variable rates by less than 2 per cent,” a spokesman said. It didn’t provide an average SVR.
Back in 2019, the then deputy governor of the Central Bank, Ed Sibley, and the then assistant secretary in, the Department of Finance, Gary Tobin, were asked during an Oireachtas finance committee hearing whether they would prefer their own mortgages to be held by a vulture fund or a mainstream bank.
The assistant secretary said he “would have no particular preference” while the deputy governor sidestepped the question, saying he understood the concerns but advised borrowers, particular ones in distress, to engage with their lender.
The same question was later posed to then minister for finance Paschal Donohoe, who insisted the current code of conduct, in relation to how mortgage holders are treated, travelled with the loan and therefore protected “everyone equally”.
“I would be happy for my mortgage to be held by anybody that supplies mortgages in the country at the moment,” he said, adding that the “evidence shows that protections are in place and that citizens are treated equally”.
Ask anyone who was once with a mainstream bank and has had their loan transferred to a fund if it’s a matter of indifference to them which provider they’re with and you’re likely to get a sharp response.
The industry will push against this narrative, insisting that this is a secondary banking market, involving predominantly distressed borrowers.
However, consumer advocate Brendan Burgess says “it’s not practice of mainstream banks to charge a higher rate to customers in arrears”.
In any case, many of the loans sold post-2017 weren’t in arrears. Industry advocates will also claim, as Banking and Payments Federation Ireland chief executive Brian Hayes did on RTÉ radio last week, that some of the high 8 to 9 per cent SVR rates relate to split mortgages and other resolution deals and that these funds are playing a vital role in trying to restructure debt.
The code of conduct for providers, the protections afforded borrowers might be the same but that’s cold comfort, and almost immaterial, for someone who has seen their variable rate jacked up to 8 per cent.
The first sign that these new rates are causing financial distress among non-bank customers is highlighted in the Central Bank’s latest mortgage arrears data.
According to the regulator, the number of borrowers in short-term arrears with banks rose by 6 per cent to 11,458 last year but those in short-term arrears with non-banks, which includes credit servicing firms, rose by 51 per cent to 5,786.
Minister for Finance Michael McGrath wrote to the Central Bank in January, expressing concern about premium pricing by non-bank mortgage providers. The Central Bank estimates that about 38,000 borrowers are stuck in overpriced mortgages but can’t move back to mainstream banks.
NPLs have been a problem for banks and we’ve invited third-party funds in to clean up the mess. That’s makes sense, but we shouldn’t kid ourselves about the consequences.
