Head of Irish High Court Edmund Honohan says the landscape has dramatically changed in three specific areas.
If you’ve invested in distressed Irish home loans, it’s probably time to withdraw your money. In fact, never mind what your 401K broker or hedge fund prospectus said about risk; for “YOU CAN’T LOSE,” now read “YOU CAN’T WIN.”
Most US investors thought that the deal was a “slam dunk”. Lots of empty houses with the keys in the mailbox. As you are about to find out, that was never the case. In Ireland, mortgagors in arrears stay put. Even the word “foreclosure” has been removed from the heavily regulated process of “repossession”. Maybe your SPV never got the memo?
It is also quite clearly in your interest to check out how highly leveraged your SPV is. Check out whether the purchase of the loan portfolio from the loan originator was even partially own funded by the vendor. These are not just amber lights; they are bright red warnings that cannot be ignored.
Look at it this way, most of the thousands of homeowners first defaulted in 2008 but are still in their homes 12 years later. This is clearly not the outcome that the so-called vulture funds were expecting. In fact, far from it. Curiously there are hundreds of court Repossession Orders which have been allowed to lapse.
And there is worse in store. Your investment is more like a convertible bond. You may be left as an owner “in name only” if the mortgagor secures the right to continue in occupation as a life tenant. The Mortgage to Rent (US equivalent: “Deed for Lease”) debt resolution is the top choice of Irish politicians and government.
The Irish Celtic Tiger credit tsunami essentially enabled sub-prime borrowers to buy at hugely inflated prices. But even if they are currently performing as agreed (often in a post-default “restructure”), they were always sub-prime, by any measure. That was why they’ve been sold on to your SPV by the loan originating Irish high street banks at a heavy discount.
Part of the folio may be designated as being “restructured”. Check. It usually means an unaffordable balloon payment down the road, but don’t expect to get the house keys even then because Irish insolvency laws have been changed. The insolvent can often persuade the courts to leave him or her in the homeplace, secured creditor’s claim notwithstanding, and as with any insolvency, a massive debt write-off.
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In an interview with the Master of the Irish High Court [Edmund Honohan], IrishCentral asked for his take on these types of investment and their now unexpected near junk bond status. Honohan is the quasi-judicial figure for court applications in Dublin and has a fierce reputation amongst lawyers acting for banks, and vulture funds, by questioning a bank’s evidence and drilling down into debtors difficulties.
He says that the landscape has dramatically changed, and for this article, he lists the changes under these headings: New regulation; new legislation; the European Union context and finally the political mood in Ireland.
Irish law - shifting sands
The Master recounts how one very disappointed plaintiff’s lawyer in his court complained that “it was like the first World War for mortgagees as they were told that it would be all over by Christmas but were still here fighting years later.”
The basic mortgage law was still intact, he had said, however official Ireland has placed brakes and hurdles to be overcome by lenders even when the arrears position is clear. Post-crash, there was an immediate one-year moratorium. Then came the Regulator imposed “Code for Conduct” for the management of mortgages in arrears, however, this had voluntary not legal status, that is, until the government legislated it, even applying it to servicers of non-performing loan portfolios owned by off-shore funds who had bought them from the loan originating Irish high street banks.
After that, there was a long drawn out hiatus caused by a legislative drafting oversight in the 2009 Act that suited the banks anyway, because they were initially inclined to hold off on enforcement while the government was working on a mortgage-to-rent package, similar to the one supported by Fannie Mae. At the same time, the personal insolvency rules were being overhauled. New legislation even created a three-month window for borrowers to exit repossession lists and instead commence insolvency applications under the new rules.
More bad news for the portfolio owners was a tweaking of the insolvency legislation which allowed the Court to overrule a secured creditor’s veto on a bankruptcy scheme. This opened the possibility of the homeowner holding on to the house and in recent times, hundreds of millions have been written off by the Courts in these veto overrule cases.
And the Bankruptcy judge has recently openly suggested a further tweaking of the legislation to allow the court to approve schemes which convert the secured creditor’s cash entitlement into a share of the equity, making co-owners of the secured creditor and the insolvent, but home retaining, debtor.
The latest legislative intervention in this area provides that even a non-insolvent borrower might persuade a court not to grant possession but instead to weigh the merits of his counter-proposal. The legislation is so inexactly drawn that it is expected that the repossession courts, and then the appeal courts, will be tied up for a long time before any clear guidelines emerge. It’s a non-bankruptcy solution smorgasbord for the non-insolvent, with no “repossession” at the top of the menu.
It should come as no surprise, then, that the Irish Chief Justice has recently called for more readily available Legal Aid for defendants in housing cases. The courts strive to apply strictures of the European Convention of Human Rights in regard to a fair hearing with effective participation.
The Master says that a recent Supreme Court judgment ruling out enforcement of claims which have been “trafficked” by the original claimant into the hedge fund or CDO environment hasn’t yet played out in the repossession courts even though some funds have now begun to cash in the portfolios of secured debt. It remains the case, nevertheless, that the courts are in two minds as to use of hearsay and/or inference when the original mortgagee bank is not in court to prove the underlying facts. A particular difficulty is where that bank’s paperwork is demonstrably defective and, no matter how thorough the SPV’s due diligence had been at the date of purchase, is surprising how many files are woefully incomplete. Irish banks did a lot of business on a personal recommendation basis. Check out Irish Nationwide.
Also look up Anglo Irish Bank. Even NAMA [Ireland’s post-crash bad loans’ banks] has recently been caught out by the Irish Parliament’s auditor watchdog for some transactions with irregular paperwork. Now that we mention it, US investors may also like to remember the Irish connection with Long Term Capital Management?
The European Union dimension
Master Honohan also reports that all consumer contracts are now subject to EU Law. In particular, summary judgment for a plaintiff in possession proceedings cannot proceed without the Court itself examining the underlying context and deed of mortgage, even if the defendant hasn’t raised an issue concerning unfair terms and conditions.
For example, a recent Spanish case involving Bankia SA and ruled on by the European Court of Justice in Luxembourg, involved the Spanish Courts being told that in the event that the interest rate formula was unclear for the average consumer, the local courts could rewrite the terms or dilute it as it thought fit.
In regard to the cohort of loans that are still performing but have already been restructured by the lender on new terms, the 2014 Directive on Credit Agreements for Consumers appears to have created a new level of Brussels-based bureaucracy as to credit ratings, and credit metadata generally. The application of unfair restructured contract terms in dealing with then particularly vulnerable consumers may yet emerge as another mis-selling scandal when these terms and conditions come up for review.
Master Honohan further suggests that US funds may now fall foul of the new Brussels’ enthusiasm for re-visiting taxation by Member States of profits which have been “shifted” to low tax havens. As an example of these new measures, Amazon are being currently pursued for €250 million due since 2003.
The 2014 Directive requiring the Member States to plug all gaps in their corporate anti-avoidance provisions, in particular, to eliminate aggressive tax avoidance practices, will likely now impact on taxable profit assessments in Ireland.
Ireland is being watched by Brussels. Recently we were heavily fined for tardy incorporation of the Fourth Money Laundering Directive. Also in the background is the controversial issue of Fiscal State Aid. What should make funds sit up and take notice is that up to ten years of back taxes are recoverable if Brussels finds that any selective tax measure impacts on intra-community trade. The Master suggests that the 2009 Italian case of Fineco is worth more than a second glance. The US funds and SPVs may yet be facing a significant bill.
Political winds of change
Even before the global Coronavirus pandemic, Irish politicians were uncomfortable with visiting on homeowners the consequences of a long-term debt accrual, which had resulted from, amongst other things, the burden of a bank bail-out and the post-crash recession which triggered most, if not all, mortgage arrears cases. However, as we now know, this was not necessarily the homeowner’s fault. They had been encouraged by the State and banks to purchase homes and other property at absolute top dollar prices.
Just as public health is the second (after security) objective of good government, the common good of an optimal economy demands a society-wide structure governing credit and debt. The Coronavirus debt will be socialized. There is no possibility of pro-creditor legislative change in the foreseeable future, and Irish politicians are acutely aware of that.
Progressive taxation and, probably, inflation, will repair the damage for the average citizen and there will be no real-time evictions for the indebted, only a re-writing of the balance sheets of both debtor and creditor, with the latter to be significantly less liquid. There is already talk of a drop in house prices of 20% next year.
In the recent election in Ireland, politicians of the right of the centre saw their cards being marked. There is new transparency about capitalism and a clearer grasp of the benefits and costs of capital inflows from abroad. We are now a very cautious race. Once bitten…
Meanwhile, in the UK, the now derided Labour election manifesto of a multi-billion pound austerity cure has now, after Coronavirus, been adopted and increased by the Tory government of Boris Johnston. It’s an exercise in sovereignty.
Mr. Honohan comments that there is no political sympathy here for what is known as US vulture funds, and no possibility of another bail-out by the State. Ironically, their best bet would be a sale back to the originating Irish banks for their off-balance-sheet SIVs, at the right price. GM now has junk bond rating and President Trump may repeat Obama’s bailout. If your SPV is already the beneficiary of Fed liquidity, the game is over.
* Liam Deegan interview for Irish Central with Edmund Honohan, Master of the High Court.