Ireland and Apple – again!

The tax strategies of Apple get plenty of coverage in today’s papers.  This follows from an extensive report published by the Australian Financial Review yesterday.  There is no doubt that Apple aggressively manages its global tax affairs and while Ireland is a part of that it is by no means the most important part.

The first part is that corporation tax is not organised on the basis of the some form of “destination” principle like for VAT or sales taxes.  Under a such a system (or one based on formulary apportionment) some corporate income tax would be collected in the jurisdiction in which the products are sold.  There are many complaints from countries where companies like Apple have huge sales but pay very little corporation tax.  This is an argument against the system of corporation tax, not Irish corporation tax.

Corporation tax is based on a combination of the residence and source principles and tax treaties help manage the crossover of taxing rights via rules on double taxation.

Source refers to where the value added is created (albeit subject to shifting through transfer pricing) and residence refers to the domicile or location of the company.  In general, companies deemed resident in a country are taxed on all their net income regardless of where it is earned and non-resident companies are taxed only on their profits sourced within that country.

Apple has large sales in Australia but because corporation tax is only charged on the profits sourced there Apple is able to use transfer pricing to shift the profits out of Australia.  Apple can (legitimately) argue that very little value added is created in Australia and that all it does there is sell to customers.  In Australia, Apple is taking on limited risks, limited functions and has limited assets, thus the logic within transfer pricing principles would say that its return should also be limited.

An argument for corporation tax on the basis of customers needs a huge change in the international system of corporation tax.  It could be done but it is not in place now.

For a company like Apple the key elements of its operation to which added value can be attributed are research and development, intellectual property, manufacturing, distribution and retailing.  Under the current system Apple logically asserts that their added value does not come from their customers but principally from the creativity underpinning their products, which is captured through patents and copyrights.

So once Apple has attributed the value added to the intellectual property the next question is the residence of the company that owns the intellectual property.  As the IP is owned in that country all the net income earned by the IP will be taxed in that country.

And this is where Ireland comes in.  Or is it?

The company that owns Apple’s intellectual property (outside the US) in this case is Apple Sales International (ASI).  ASI is an Irish-incorporated company but incorporation played no role in the description above – residence did.

ASI is not an Irish-resident company.  It, for want of a better description, is like a company that was born here but now lives somewhere else.  Under Irish tax law the residence of some companies is evaluated on the basis of where they are managed and controlled.  ASI is one such company to which this test is applied.  Where is ASI managed and controlled?

Here is US Senator, Carl Levin (D) on ASI:

Prior to 2012, ASI, like AOI,  had no employees and carried out its operations through the action of a U.S.-based board of directors, most of whom were Apple Inc. employees in California. Of ASI’s 33 board meetings from May 2006 to March 2012, all 33 took place in California.

In short, these companies’ decision-makers, board meetings, assets, asset managers, and key accounting records are all in the United States. Their activities are entirely controlled by Apple Inc. in the United States.

Here is an extract from the questioning of Apple executives at the Senate hearing last May:

Senator LEVIN. Mr. Bullock, does Apple Inc. own directly or indirectly AOI, AOE, and ASI?
Mr. BULLOCK. Yes, Apple Inc. owns directly or indirectly AOI, AOE, and ASI.
Senator LEVIN. All right. So all those companies in Ireland are owned by Apple effectively. Is that correct?
Mr. BULLOCK. They are all legally owned by Apple Inc., yes.

Senator LEVIN. All right. Now, relative to ASI, Mr. Bullock, is ASI functionally managed and controlled in the United States?
Mr. BULLOCK. As a practical matter, applying the Irish legal standard of central management and control, I believe that it is centrally managed and controlled from the United States.
Senator LEVIN. And does Apple agree that it is functionally managed and controlled in the United States?
Mr. BULLOCK. Under Irish law——
Senator LEVIN. No. Under our law, do you believe that?
Mr. BULLOCK. I do not believe that central management and control is a legal term under U.S. tax law.
Senator LEVIN. All right. Do you believe it is functionally managed and controlled in the United States?
Mr. BULLOCK. Yes.
Senator LEVIN. Mr. Cook, do you agree?
Mr. COOK. We have significant employees in Ireland. We have about 4,000. And so there is a significant amount of decisions and leadership and negotiations that go on in Ireland. But some of the most strategic ones do take place in the United States.
Senator LEVIN. Would you agree on balance that ASI is functionally managed and controlled in the United States?
Mr. COOK. From a practical matter. I do not know the legal definition of the word.
Senator LEVIN. As a practical matter, you would agree that it is functionally managed and controlled in the United States?
Mr. COOK. Yes, Senator.

[If you want to watch this exchange, and the executives squirm a bit, go to around 02:40:00 of the video of the hearing. The full exchange on this issue lasts until around 02:49:30.]

Today we have reports in The Irish Times here and the Irish Examiner here making various claims about Ireland’s role in Apple’s tax strategies.  The most important detail is that ASI is not resident in Ireland.

The report in the Irish Examiner begins:

More than $AUD8.9bn (€5.8bn) in profits have flown from Apple’s Australian operations in the past 10 years to Apple’s Cork subsidiary, it has emerged.

ASI is not Cork-based; it is based in Cupertino, California.  The report subsequently says:

Certain Apple companies registered in Ireland pay no tax in the country due to a loophole in both the Irish and US tax codes.

There is no loophole allowing certain companies to “pay no tax” here.  It is a standard rule.  In fact, in the OECD’s Model Tax Treaty the tie-break rule for determining the residence of a company is the test of management and control, which is what is applied by Ireland. 

In The Irish Times report it says:

According to accounts obtained by The Irish Times for one of those unlimited companies, Apple Sales International (ASI), the consumer electronics giant cut its Irish tax bill by more than €850 million between 2004 and 2008, using an unexplained “lower rate”.

ASI provides “sales and marketing services” to Apple subsidiaries around the world that sell iPods and iPads. Between 2004 and 2008, it reported profits before tax totalling $7.11 billion on sales of more than $29 billion.

The accounts for those years state the corporation tax that would be due using Ireland’s 12.5 per cent rate – €890 million over the five years. But they also show how much corporation tax ASI actually paid to Irish authorities – just €36 million.

As ASI is not resident here, it only has to pay corporation in Ireland here on profits actually sourced here.  ASI generates most of its profits from the intellectual property it holds and that is not located here.  It is located in Cupertino, California.  These profits that ASI accumulates are managed by Braeburn Capital in Reno, Nevada and the money is deposited in New York banks.  The money never even passed through Ireland.

Tax of €36 million on the profits indicated suggests a tax rate of 0.1%.  A useful description that shows how such a low tax rate can be achieved was provided in a post from last May.  None of this is news but it is deemed worthy of front-page coverage today.

So there is just one question that remains. Where is ASI resident?  That is in the United States surely.  Almost everything to do with ASI happens in the United States.  Everything that is, except its incorporation.  ASI is an Irish-incorporated or registered company.

Under US rules, the test of incorporation is used to determine the residence of a company.  ASI is not incorporated in the US therefore is not deemed to be US-resident.  Sen. Carl Levin again

Apple is exploiting an absurdity, one that we have not seen other companies use. The absurdity need not continue. Although the United States generally looks to where an entity is incorporated to determine its tax residency, it is possible to penetrate an entity’s corporate structure for tax purposes, and collect U.S. taxes on its income, if the entity is controlled by its U.S. parent to such a degree that the shell entity is nothing more than an “instrumentality” of its parent, a sham that should be treated as the parent itself rather than as a separate legal entity. AOI, AOE and ASI all sure seem to fit that description.

The “absurdity” he is talking about is not in Irish tax law; it is in US tax law.  The “absurdity” allows a company that carries out all its operations in the US not be taxed there solely because it is incorporated somewhere else. Sen. Levin calls it a “sham”:

Our legal system has a preference to respect the corporate form. But the facts here present this issue:  Are these offshore corporations so totally controlled by Apple Inc. that their identity as separate companies is a sham and a mere instrumentality of the parent, and if so, whether Apple’s claim that AOI and ASI owe no U.S. taxes is a sham as well.

Apple is exploiting a gap between tax codes rather than within them.  Ireland uses the test of management and control to determine ASI’s residency.  As it is managed and controlled in the US it is not resident here.  The US uses the test of incorporation to determine ASI’s residency.  As it is incorporated in Ireland it is not resident there. 

It seemed incredible at the time but ASI was tax resident nowhere.  The “lower rate” that The Irish Times refer to is that tax rate that applies to “stateless income”, i.e. zero.  It is not a rate that is applied by either country [there are no “special” rates in Ireland – well not now anyway; see here and here] it is a rate created by claiming the company is resident nowhere.  That is wrong.

Either or both of Ireland and the US could have moved against this.  Ireland did with the announcement in last October’s budget that Irish-incorporated companies that are not judged to be resident here under the test of management and control must state to the Revenue Commissioners where they are actually resident or they will be deemed to be resident here.  It closed the loophole between the Irish and US tax systems.

The US could have moved in a number of ways.  Apple is, after all, a US company. 

• The US could follow Sen. Levin’s approach and judge ASI to be an instrumentality of the parent and therefore taxable in the US through its parent. 
• The US could apply the test of management of control to companies operating there. 
• The US could amend Subpart F of the US tax code and limit Apple’s ability to defer the tax due on this income.  [It is commonly said that Apple avoids tax using this scheme but the actual effect is to defer the payment of the 35% US corporation tax due on the profits.  Though this deferral can be indefinite if the money is not transferred to a US-resident company.]
• And finally the US could examine the cost-sharing agreement between Apple and ASI that transfers the global rights of the intellectual property to ASI.  After all, another possible source of the value added is not the intellectual property but the R&D that resulted in the design of the products in the first place. 

But it was Ireland that moved.

Will it make any differences to Apple’s tax bills?  Probably not.  There are lots of provisions in the US tax code that will allow it to continue to defer its US taxes – the “check the box” provision, the “look-through” rule and the “same country” exemption will achieve the same result.  Apple will have to adjust its tax strategy if it wants to maintain the zero rate that it achieved on the “stateless income” until repatriation but that can be achieved by shifting the profits to Bermuda where the rate of corporation tax is … … … zero. 

The dance between companies and countries continues but there is no sign that the countries have cornered them.  There are a lot of eyes on Pascal Saint Amans but apart from an increase in transparency it is still not clear what the OECD BEPS project will actually deliver.  It will not be a shift to a destination-style system of corporation tax based on customers but some system of formulary apportionment is possible (though not in the near term).  The dance will continue for a good while yet.

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Arrears Capitalisation

Among several interesting developments in the mortgage arrears update from the Central Bank released yesterday is the emergence of ‘arrears capitalisation’ as the most used restructure on the loans covered in the statistics.

Here is a summary of the year-end positions for the type of restructures used since 2010. 

Over the past year the proportion of arrears capitalisation in the restructure figures has increased from 12.2 per cent to 22.0 per cent.  The largest drop is for interest-only restructures (prior to 2013 interest only agreements were not broken down by those < or > 1 year). 

One question that arises is what exactly does arrears capitalisation mean and what has happened to the 18,516 accounts to which it has been applied?

In their release the Central Bank (in footnote 2) say :

Arrears capitalisation is an arrangement whereby some or all of the outstanding arrears are added to the remaining principal balance, to be repaid over the life of the mortgage.

However, this does not reflect what happens.  Arrears capitalisation does not add any of the arrears to the balance; it sets the arrears to zero and recalibrates the payment based on the principal outstanding and the term remaining on the loan at the time of the restructure.

This new payment will be higher than the payment set out under the original payment but this is not because arrears are added to the balance.  The new payment will be higher because a greater principal amount and more interest needs to be repaid over the remaining term of the loan.  This is undoubtedly because the borrower missed payments and went into arrears but the higher payment can be calculated automatically and is not the result of any arrears being “added on”.

Consider a 20-year, €200,000 mortgage at 4% fixed interest which is five years into its term.  The monthly repayment is €1,212 and after five years the balance should be reduced to €163,800. 

Assume that in year 4 the borrower missed 12 full payments in a row and then resumed making the “full” payments of €1,212 in year five.  The borrower is 12 x €1,212 = €14,544 in arrears and the balance owing at the end of year five will be approximately €179,250.

At the end of the third year the balance would have reduced to €179,180.  During the fourth year of no payments the interest will be added as per usual and with no offsetting payments this will bring the balance up to around €186,400 at the end of year 4.  The resumption of the monthly payments of €1,212 for a year will reduce the balance to €179,250 at the end of year 5.

The borrower owes €179,250 and has arrears of €14,544.  It should be noted that the amount of arrears has nothing to do with the amount owed.  They are calculated separately.  The amount owed is the principal plus daily interest (added monthly) less any repayments made.  The arrears are the amounts of missed repayments relative to those set out in the original contract.

So what to do with the €14,544 of arrears?  The borrower has failed on a necessary contractual obligation so they need to make good the shortfall.

One option is for the borrower to pay €14,544 in a lump sum and have that amount offset against the balance immediately clearing their arrears.  The amount owing would drop to €164,706 (close to where it should be under the original contract) and the borrower could continue making the monthly €1,212 payments to repay the loan over the original 20-year term.

A second option is to repay the arrears, or catch up on their contractual obligation, in instalments.  If the borrower paid an additional €500 per month on top of the €1,212 payment they would have the arrears of €14,544 cleared in 29 months and would be roughly back on track and could again continue with the original €1,212 payment for the remaining 12.5 years or so.

The concept of arrears capitalisation is similar to this but it has the borrower catch up with the repayments right at the end of the original  term so is based on time rather than some monthly overpayment amount on the arrears. 

In our case the borrower owes €179,250 after five years of the original 20-year term.   At the 4% interest rate this cannot be repaid with monthly repayments of €1,212 over the remaining 15 years.  In fact if the borrower continues to make these monthly repayments there will still be around €41,000 owing at the end of original 20-year term.

An alternative is to recalibrate the repayment so that the €179,250 owing at the end of year five is repaid over the remaining 15 years of the mortgage.  To do this at the 4% interest rate would require a monthly repayment of €1,326.  If the borrower makes this monthly repayment to this level the full amount owing will be repaid over the original 20 term of the loan set out in the original contract.

The monthly payment has increased but it is not because any “arrears are added to the remaining principal balance”.  The arrears figure was not used to calculate the new repayment.  The arrears figure is a memo item that reflects the level of missed repayments and, by itself, does not feed into the principal, interest and repayment calculations on the loan.

The new repayment figure is higher because the borrower has borrowed more money for longer than originally intended.  The borrower owes more interest.

Instead of having the balance down to €163,800 by the end of year five; the balance was only reduced to €179,250.  Obviously the difference is because of missed payments (and a small amount of interest on interest) but regardless of the level of arrears the amount owing will be automatically calculated - interest is usually calculated on the closing balance each day and added monthly or quarterly.

Arrears capitalisation is simply recalibrating the monthly repayment so that the balance owing is repaid over the remaining term of the loan.  It also involves setting the arrears to zero as the contractual obligations have changed rather than having them cleared by a once-off or temporary overpayment.

It is also possible to combine the arrears capitalisation with other restructures, primarily term extensions.  In the above example it would be possible to keep the repayment at €1,212 and instead repay the loan over 17 years instead of the remaining 15.

The borrower loses nothing from the arrangement.  It is a win-win for the borrower.  There is nothing added to their loan balance and their credit record will be restored faster with the arrears cleared. 

Here is a summary of the case outlined here: balance owing

1. Draw down mortgage at outset: €200,000
2. Make agreed €1,212 payments for 3 years: €179,180
3. Make no payment for a year: €186,400
4. Make €1,212 payments for a year: €179,250
5. Reset the arrears to zero and fully repay the loan with a recalibrated payment of €1,326 for 15 years: €ZERO

If the borrower had stuck to the original repayment schedule the full amount repaid over 20 years (240 months) would have been:

€1,212 * 240 = €290,880

As a result of the missed payments and the recalibration at the end of year five the amount to be repaid over the 240 months will actually be:

(€1,212 * 36) + (€0 * 12) + (€1,212 * 12) + (€1,326 * 180) = €296,856

If the arrears capitalisation is combined with a two-year term extension the total repayments are:

(€1,212 * 36) + (€0 * 12) + (€1,212 * 12) + (€1,212 * 204) = €305,424

In the latter two cases the borrower has to repay more but it is not because any arrears were ever added to their balance it was because they had borrowed money for longer and dditional interest is added in the standard way that interest is calculated.

The description of “arrears capitalisation” is a bit of a misnomer.  It is possible that “arrears amortisation” might be a better description as the borrower has agreed to catch up on their repayments over the remaining term of the loan.

So why is this approach proving so popular now?  If the borrower can stick to the recalibrated payment it has the advantage of returning the loan to the performing category and removes the loan from the arrears statistics.  Are the borrowers meeting the new repayments.  Some are, but many aren’t.

The Central Bank provided a new table of the “success” of each type of restructure.  For the main restructures used on PDH accounts “arrears capitalisation” is the least successful – less than 60 per cent of borrowers are sticking to the new terms.

The restructure that is the most popular is also the one that has the lowest success rate.  In saying that if 57.9 per cent of the 18,516 accounts to which arrears capitalisation was applied are cured that is over 10,700 accounts that are back “on track”.  This depends on what ‘meeting the terms of the arrangement’ actually means which is unclear.

Of course, there are 42.1 per cent who are not meeting the new terms.  There is some underlying reason why they fell into arrears in the first place.  Unless that was temporary in nature and the borrower’s repayment capacity has been restored they will not be able to meet the new repayment, which will almost certainly be higher (depending on interest rate movements for tracker and SVR mortgages).

In many cases the reduction in repayment capacity is enduring so a restructure to reduce the monthly repayment is necessary and split mortgages which can achieve this are now being rolled out at an accelerated rate.  There still is a long way to go.  The majority of accounts in arrears have yet to restructured.

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The CB’s Mortgage Arrears Statistics: Useless?

Yesterday’s release of the Q4 arrears statistics had a stinger that potential mortally undermines the credibility of the figures.  It appeared in the very first paragraph (emphasis mine).

The number of mortgage accounts for principal dwelling houses (PDH) in arrears, fell for the second consecutive quarter in Q4 2013. A total of 136,564 (17.9 per cent) of accounts were in arrears at end Q4 2013, a decline of 3.3 per cent relative to end-Q3, although the size of the decline was impacted by asset sales over the quarter.  

In the Q3 figures there were 141,269 PDH accounts in arrears so the Q4 figures indicate a drop of around 4,700 in the number of accounts in arrears.  That would be good news if it were true but the end of the paragraph tells us that “asset sales” impacted the size of the decline.

It turns out that a bank (well a former bank actually) sold mortgages and such sold mortgages are not reported for the purposes of the Central Bank’s arrears statistics.

It seems the mortgages were a collection of non-performing loans that originated with the now-defunct Bank of Scotland (Ireland) which were sold to a company called Tanager Ltd.  Here is an extract from a December 2013 stock mark announcement from UK bank Llyods (the owner of BOSI):

LLOYDS BANKING GROUP ANNOUNCES THE SALE OF A PORTFOLIO OF IRISH RETAIL MORTGAGES

Lloyds Banking Group plc (the Group) announces today that it has agreed the sale of a portfolio of non-performing Irish retail mortgages (the Portfolio) to Tanager Limited, an entity affiliated with Apollo Global Management, LLC (NYSE:APO), for a cash consideration of £257 million.  The transaction is part of the Group's continued non-core asset reduction programme.

The gross assets subject to the transaction are £610 million.  The Portfolio generated losses of £33 million in the year to 31 December 2012.  The sale proceeds will be used for general corporate purposes and the transaction, although capital accretive, is not expected to have a material impact on the Group, due to existing provisions taken against these assets.

The key points are the gross amount of the loans at £610 million (around €725 million @ €1 = £0.84), that they were sold at a discount of 58 per cent and, most crucially for our purposes here, that the loans were non-performing.  In the Q3 mortgage arrears figure of 141,269 these non-performing loans were included; in the Q4 mortgage arrears figure of 136,564 they were excluded.

If we assume a (high) average mortgage account size of €250,000 then the sale would have involved around 3,000 accounts.  These are non-performing which could relate high LTVs, borrower risks but probably means arrears and the loans could also be spread across PDH and BTL accounts.

Nearly two-thirds of the reduction in the number of PDH accounts in arrears could be because of this sale.  This was the first time that such asset sales were mentioned in the Central Bank’s arrears releases and it is only the Q4 2013 figures (so far) that have been affected by this.

The fact that sold mortgages are excluded from the Central Bank’s arrears figures hugely undermines the value of the series.  The assumption would have been, for me anyway, that the series included all mortgages that originated in Ireland.  For example, when BOSI actually closed in Ireland back in December 2010 and transferred the servicing of its mortgages and other loans to Certus they remained in the CB’s arrears statistics.  There have also been a large amount of mortgages securitised in recent years and they remained in the statistics (though much of this was for self-held bonds).

Differences between the amounts covered in the Mortgage Arrears Statistics and the Credit, Money and Banking Statistics indicated that there was different coverage between the two, i.e. that the arrears statistics were at the level of the borrowers and the banking statistics and the level of the institutions.  For example, Table 18 of the Credit, Money and Banking Statistics show that at the end of September 2013 Irish-Resident Credit Institutions had €95.5 billion of PDH mortgages (€63.9 billion on balance sheet from Table 18.1 and €31.5 billion securitised but serviced by them from Table 18.2).  The Mortgages Arrears statistics cover €108.5 billion.  This €13 billion difference cemented a view that the arrears statistics were more than just banking statistics, or at least were different.

If mortgages can be excluded from the Arrears Statistics just because they are sold it is not clear what value is in the series.  It undermines future attempts to update analysis such as this which used the historical series (which was not affected by such asset sales) to assess the level of aggregate repayments being made on Irish mortgages.  The problem of omitted mortgages will be further exacerbated by subsequent sales such as the impending sale of the INBS mortgage book and possible further sales by BOSI and maybe by Danske. 

Unless the impact of these transactions is explicitly included in the arrears figures produced by the Central Bank it is likely it will be very difficult to tell anything from forthcoming releases.  The Central Bank will know but will they tell us?

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Employment as a Leading Indicator

The labour market results from the Quarterly National Household Survey continue to be impressively positive.  There is no doubt that this is a good thing, but the overall impact of the improvements remains uncertain.  The employment gains are not be reflected in other data series: household disposable income, exchequer income tax returns, core retail sales etc. 

In the standard discussion of recessions it is put forward that improvements in unemployment/employment lag behind a general upturn in the economy by two or more quarters.  Ireland seems to be an unusual case where we are seeing employment improvements first.

The annual change in the number of people employed paints a very positive picture in recent quarters.

In percentage terms, employment is growing at close to rates, which unsurprisingly, have not been seen since 2006 and 2007.  But overall conditions are not like they were then.  Here are the annual percentage changes in total employment and aggregate wages received by households.

Employment growth has been positive in annual terms for more than a year.  Growth in aggregate (nominal) wages remains absent, though the series only goes as far as Q3 2013 and recent data are subject to revision.

The pattern of household disposable income reflects the above changes in wages received.  Here is the level of household disposable income for the past eight years.  The point of note here is the absence of any notable upturn in 2013 (during which employment was growing).

Of course, even if aggregate wages were increasing the impact on disposable income would be offset by certain tax increases.  However, if we are looking for labour market improvements it might be useful to just look at income tax.  Cumulative income tax by month does not show any improvement in 2013 relative to 2012.

Finally, core retail sales could be used a positive affirmation of the labour market statistics.  It is not much but a pattern of rising core retail sales since the spring of 2013 is discernible.

However, the increase is driven by volume (+2.7 per cent in the year to January) as opposed to value (+0.9 per cent on the year).  We might be buying more but we are not really spending more (the motor trades excepted).

Of course, a drag on household spending continues to be the debt overhang that many households are carrying.  The household sector continues to deleverage relatively rapidly.

Since peaking at nearly €204 billion at the end of 2008 the total loan liabilities had declined to €168 billion by the third quarter of 2013.

It would be useful to dig further into the QNHS figures but some re-classification problems mean that many of the sub-trend categories cannot be interpreted as actual changes.  The CSO highlight this in relation to employment in the Agriculture, Food and Forestry sector (+26,800 but due more to statistical reclassifications than increased activity).  This also has knock-on consequences for divisions into categories such as employee or self-employed, the patterns of which could be useful for explaining the wage, income and tax trends shown above.

So we are left with a position where labour market statistics are very positive – total employment up 3.3 per cent to the end of 2013 – but this is not reflected elsewhere.  In nominal terms aggregate wages, income tax revenues, disposable income and consumption expenditure are all not doing much better than remaining static.

The increases in employment are undoubtedly positive but it is unusual that they are leading wage, income and consumption increases.  It is not clear where these aggregates are currently heading but if the employment increases continue they will also start to rise.  Surely?

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INBS Mortgages and the CCMA

There has been a lot of noise about the INBS mortgage book which is being sold as part of the liquidation of the IBRC.  The last insight provided in the performance of these mortgages was in the IBRC Interim Report for June 2012.  Page 72 contains this table on INBS’s mortgages.

Only 41 per cent by loan amount are neither past due or impaired.  For owner-occupied mortgages 48 per cent of loans were performing while for the buy-to-lets only 18 per cent of loans were performing.  There is delinquency on a huge scale in the INBS mortgages. 

Of the mortgages around 90 per cent were SVR loans with the remaining 10 per cent on fixed rates of various durations.  INBS issued close to no tracker-rate mortgages (trackers make up less than 0.1 per cent of the mortgages).

Much has been made of the issue of whether the INBS mortgage holders will be protected by the provisions of the Mortgage Arrears Resolution Process (MARP).  This is the IBRC MARP policy document.

Under the Code of Conduct on Mortgage Arrears (CCMA) borrowers who are “not co-operating” will be “outside of the MARP and the protections of
the MARP will no longer apply” and the lender “may commence legal proceedings for repossession of the property immediately after classifying the borrower as not cooperating”.  The CCMA definition of “not co-operating” is below the fold. 

It is not clear what responsibility the new owners have to comply with the CCMA/MARP but it is probably the case that very large number of INBS mortgage holders were not covered by the MARP provisions at the start of the IBRC liquidation to begin with.

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