Friday, September 27, 2013

Anatomy of a Repossession Case

For the past few years the escalating mortgage crisis has been analysed using aggregate figures for mortgage arrears published by the Financial Regulator’s Office in the Central Bank.  The latest figures show that there are around 80,000 households in mortgage arrears of 90 days or more. 

In virtually all cases we have no insight into the individual circumstances behind these figures but occasionally there is a specific case that catches media attention and provides a snapshot of the hidden details.  One such instance arose this week with the efforts of the Cork County Sheriff, Sinead McNamara, to effect a repossession order granted by the High Court for a home in Kanturk.

From the details the borrowers have provided to journalists and various media outlets we can try to piece together the anatomy of a particular repossession case.

The borrowers bought the house in April 2007 and took out a mortgage with Permanent TSB for €150,000.  They made payments on this loan and by 2009 the balance was reduced to €146,000.

In 2009, they remortgaged the house with Start Mortgages increasing the loan to €180,000 and used the extra €34,000 borrowed to pay business debts in the husband’s plumbing enterprise which had gotten into difficulty.

The borrowers have said that they made payments to Start Mortgages for 12-18 months but began to fall into arrears in 2010 and haven’t made any payment for "about two years”.   Start Mortgages issued legal proceedings against the borrower in December 2010, and a repossession order was made in March 2013, almost two and a half years after proceedings were issued.  The borrower did not attend court and the order was granted uncontested.  The order was renewed on May 22nd last.

At some point the borrower made an offer to Start Mortgages to pay €150 a month "as a feeler" but no payments were made.  A subsequent offer to repay €400 a month was made though it is not stated when this offer was made.  Again no actual payments were made.

The county sheriff issued a formal repossession notice two weeks ago and attempted to carry out the court order on Wednesday afternoon but left because of the presence of a group of protestors. 

If this is actually the reality of the situation then almost all of the evidence points to a repossession being the logical conclusion of this mortgage arrears case.  The mortgage is unsustainable and should be ended.

The borrower had a loan with a prime mortgage provider in PTSB.  They sought a remortgage to release equity from their home to pay some business debts.  Presumably because of problems with their credit history they could not get the remortgage with PTSB or another prime lender.

They turned to sub-prime lender Start Mortgages for the remortgage but this would undoubtedly have meant a higher interest rate.  If the interest rate on their existing borrowings went up by two percentage points that would have meant an increase in their interest bill of almost €3,000 for €146,000 they had already borrowed from PTSB but then remortgaged with Start Mortgages.

The purpose of the remortgage was to get an additional €34,000 to pay business debts but in order to get this money they had to accept a much higher interest rate on all their mortgage debt. 

Assuming an interest rate of 6% on the loan from Start Mortgages the interest cost of the extra money borrowed would have been around €2,000 per year.  This means the borrower signed up to pay an extra €5,000 a year in interest to borrow an extra €34,000, implying an effective interest rate on the additional borrowing of around 15%.

There was probably genuine intent when paying the business debts but the interest cost of doing was very large and the prolonged recession has undoubtedly hindered their ability to pay.   However, it is difficult to make a case that the mortgage lender should be the one left carrying the loss of the collapse of the plumbing business.

Start Mortgages was formed by four Irish business people in 2004 and ultimately came to be 100% owned by the South African bank, Investec through an initial investment in Start by the UK sub-prime lender, Kensington Mortgages, a subsidiary of Investec.

As it is foreign-owned Start Mortgages has received no money from the Irish government as part of the bank bailout and, because it is no longer lending in the Irish market, it is not subject to the Mortgage Arrears Resolution Targets (MART) set this year by the Central Bank.

The clearly stated objective of recently-appointed Start Mortgages CEO, Alan Casey, is to maximise the current value of the loan book from the legacy of the boom where over half of all loans are delinquent.  Start Mortgages is under no obligation to offer term extensions, split mortgages or reduced interest rates on its loans.  Of all the lenders with mortgage arrears, Start Mortgages has been the most aggressive in seeking repossession orders, but is doing so within the law. 

Start Mortgages signed a contract with the borrower and they are entitled to have the terms of the contract adhered to.  In this case there is nothing to indicate that Start Mortgages have broken any terms of the loan agreement.

The borrowers agreed to the loan from Start Mortgages in 2009 but it only took until December 2010 for Start to be a position to issue court proceedings.  Under the Code of Conduct on Mortgage Arrears that was in operation at the time lenders had to wait for 12 months after a loan fell into arrears before they could issue court proceedings.  All borrowers who cooperated with their lenders were entitled to this 12-month stay.

A borrower was deemed non-cooperative if they failed to make a disclosure of their financial position or failed to provide financial information sought by the lender or failed to respond to communication from the lender during a three-month period when full payments were not made.  The level of engagement from the borrower in order to be considered ‘cooperating’ was very low.

Given that Start Mortgages were able to issue legal proceedings in December 2010 it is clear that the borrowers were not cooperating unless they began to default on the loan almost as soon as it was drawn down.

As an aside it should be noted that this mortgage was not subject to the lacuna in the law that resulted from the ‘Dunne Judgement’.  This ruling prevented repossession orders being issued against mortgages issued before 1st January 2009 if the proceedings had not been issued before that date.  As the mortgage in question here was issued after 1st January 2009 it was not subject to this ruling.

There is little to suggest that the cooperation from the borrower improved after court proceedings were issued.  The borrower made an offer to repay €150 a month which wouldn’t even come near to covering the interest on a debt of €180,000, but has acknowledged that this offer was made “as a feeler”.

At an interest rate of 6%, the annual interest bill on an loan of €180,000 would be €10,800 a year or €900 a month.  With a payment of €150 a month the loan balance would increase each year by €8,000.  To actually repay the mortgage over a 20-year term a monthly payment of around €1,300 is required. 

It seems that no payment has been made on the mortgage for “about two years” and possibly since the repossession proceedings were issued in December 2010.  An improved offer of €400 a month was made but absent any actual repayment the offer does not mean a whole lot.

But even a payment of €400 a month would not make this loan sustainable.  If the interest rate was zero it would take nearly 40 years to repay €180,000 at €400 a month.  Lenders to not give money with zero interest and particularly not sub-prime mortgage lenders.

No landlord would be expected to accept a payment that was a third of the agreed rent and such offers made by tenant are unlikely to get the support of protest groups. Tenants who fail to pay their rent have their tenancy agreement terminated.

The proposed €400 payment would be less than half the interest amount at a rate of 6%.  Any credible offer has to get close to covering the interest and offer a possibility of the capital being repaid.  If €400 was paid on a €180,000 loan at 6% each month the balance would go from €180,000 to €210,000 after four years.   

The repayment offers made by the borrower in this case would not be considered credible by any lender and particularly not one that is as aggressive as Start Mortgages.  The optimum solution in this instance is for Start Mortgages to take possession of the house and offset its value against the outstanding loan.  If there is any shortfall, agreement should be reached to write this off in a short period of time.

If €400 per month is the most that the borrower can offer then there is no prospect of making a loan with a €900 monthly interest bill sustainable and it should be ended.  A situation where somebody has spent three years in a house without paying anything and with little prospect of getting back on track cannot continue.  The family will have to move to suitable accommodation that they can afford.

Repossession must be the last resort with any mortgage arrears case.  In the majority of cases it will be possible to get borrowers on sustainable repayments through term extensions, split mortgages and interest-rate reductions that allow the loan to be repaid. 

However, there will be a minority of cases where the numbers just don’t stack up.  This is an example where that is clearly the case.  If the term was set at 30 years and the interest put at 3.5%, a loan of €180,000 could be repaid with monthly repayments of €800.  That is still twice what the borrowers have offered. With nothing paid for the past few years the accumulated interest has probably already pushed the outstanding amount close to €200,000 meaning an even larger payment would be required.

By thinking that a partial interest payment is credible the borrower is ignoring the reality that this will just see them smothered under an ever-growing mountain of debt.  They need to get rid of the debt and make a fresh start.  This will mean conceding possession of their home.  This is a traumatic event and the use of a €110,000 deposit and the time of purchase makes the loss appear even greater. 

Start Mortgages will also incur a loss from their lending as the repossessed property will only provide a partial repayment of the debt.  They should not be allowed to pursue any shortfall indefinitely.  They lent money to someone who can’t pay it back and have to accept the losses resulting from that.

How many of the arrears households are in the same situation as this?  It is impossible to know.  It is definitely in the thousands.  Many will be with lenders who are not as aggressive as Start Mortgages who have a myopic perspective of trying to disengage from Ireland.   Start Mortgages are willing to absorb the upfront cost of repossession rather than adopt a wait and see strategy.

Other lenders will take a more long-term perspective and will be more amenable to split mortgages and interest-rate reductions.  But these are not useful options in cases such as this where the borrower can only afford a monthly payment that is less than half of the monthly interest. 

When the repayment potential is low and there is little prospect of an improvement the mortgage should be ended with all sides accepting a share of the costs that such an outcome entails.  The costs of allowing an unsustainable mortgage to continue will be even greater.


  1. At last a logical argument on reposessions. This couple were the victims of bad lending but have to realise that they cannot hang on to their home. They cannot afford it. Would they expect any other company to bear the cost of something they cannot afford? Bank are no different. There is no deal they can make with the bank that makes any financial sense. Through my work I have seen some ridiculous lending by the banks but letting people believe they can hang on their homes whatever the numbers say is dishonest.

  2. From Brendan Burgess

    Hi Séamus

    I am delighted to see such analysis of this case, and had considered doing it myself.

    A few specific issues.

    I have seen a few Start Mortgages and the interest rate was around 5%. I remember at one stage, they were actually charging less than ptsb who had hiked their SVR up to 6.25%. I haven't seen a Start Mortgage recently, but there is a belief out there that the sub-primes all charge outrageous rates such as 10%. In fact, the interest differential on this case may not be high at all.

    If these guys had stayed with ptsb, I doubt if they would have paid anything, anyway. ptsb would be initiating the legal action now, having been stopped from doing so by the Dunne judgment.

    Everyone should pay something towards their rent or their mortgage. The MIS rules say that couples must pay €30 a week towards their mortgage even if they are on social welfare.

    If someone is paying nothing for two years, they are strategic defaulters. There is no other word for it.

    They didn't even bother showing up in court for the hearings. What is Start Mortgages expected to do?

    The media coverage I have seen has been shocking. Has anyone else even asked the questions you have asked? They may have, but I haven't seen it.

    But the biggest disgrace of all I Micheál Martin calling on the Taoiseach to get involved. Micheál Martin should be calling this one as it is. Pure strategic default and they should lose their home.

    1. Hi Brendan,

      A 5% interest rate would change the figures slightly although the overall conclusion would remain the same.

      If the interest rate was set at 5% then a €180,000 loan over a 35-year term would have a monthly payment of just over €900. This would fit with the figures in the reports on the case. However, the 5% rate would mean that the monthly interest charge would still be around €750 a month - still well above the €400 offer.

      The interest differential on the remortgage depends a great deal on the interest rate on the original PTSB loan. As you point out if this was an SVR loan then the differential may not have been very large and the additional interest cost would not have been significant. It is also possible that the borrowers had a tracker rate loan with PTSB but this element is not covered in any of the reports.

  3. @Seamus
    Your analysis does not indicate what the house would be expected to fetch on the open market. The reality is that the house bought in April 2007, would be unlikely to fetch 50% of that price today, approx €75,000.
    A €400 per month payment, that was reportedly offered, would probably pay a €75000 mortgage. So why did Start not agree to the €400 per month payment, on the proviso that they took possession of the house and that the €400 monthly would be a rental payment?
    Start will never recover at least half of this loan, regardless of who occupies the house.
    I would disagree with the comment of Brendan Burgess that this is a case of strategic default. It is not. The fact is that the current owner cannot and probably never will in a position to pay a mortgage pf €180,000, and what was probably a reasonable offer was not pursued by Start.
    The actions of people deep in debt with, in many cases life savings gone and business failed and potentially nowhere to live, should be viewed not as strategic default but in the context of a as desperate attempt to keep a roof over their heads.
    That they have acted as they have, is hardly reason that they lose the roof over their heads, where people who owed and owe billions, are fighting 'to keep their lavish mansions', according to |Jim Stafford, who fights on their behalf.

    The real solution here is, as it is throughout the country, is for the bank to take full ownership of the house with a leaseback arrangement for a minimum of 20 years, at a monthly rental of €400 or thereabouts.

    Policies, for owner/ occupier dwellings, designed to do otherwise will backfire badly, and incur further costs to society, and to the Irish taxpayer, over and above the solution proposed above.

    1. Hi Joseph,

      Neither the original purchase price nor the current value have been provided. The reports indicate that they took out a €150k mortgage with PTSB and used a €110k deposit when they bought the house in 2007 but it is not clear that all the deposit when to the vendor. A current value of €75k could be right [annual rent of €5k x 15 = €75k] but we don't really know.

      Start Mortgages have shown not inclination that they want to be become a landlord. If they accepted €400 per month as a rental payment there is nothing to stop the family moving out after the required notice period. A leaseback arrangement on a residential property for 20 years is not feasible.

      One arrangement that may work is for Start to take possession of the house and then sell it to a voluntary housing association at the current market value (say €75k) and if the housing association is willing to take on this case, they can rent it to the household (for say €400 per month). Such mortgage-to-rent schemes were part of the Keane proposal but they have not been rolled out to a significant degree. A lack of repossessions and restricted access to funding for the housing associations seem to be part of the cause.

      You are right that a €400/month payment would service a mortgage of €75,000 (over 30 years at a 5% interest rate). There is no impediment to Start reducing the loan balance to €75,000 and resetting the loan agreement. The loss is likely to be comparable to pursuing the repossession (assuming the shortfall is written off). But Start are not viewing this case in isolation; they are considering their entire loan book. It is likely that resetting this loan to the current value would see a drop in the monthly payments being received from their other loans.

      I don't think €400/month was a "reasonable offer" to Start. Not on a loan that is now likely to be in excess of €200,000. If Start did accept the €400/month payment under some arrangement then the benefits to the borrower would be three-fold.

      1. They would have lived in a house for two, maybe three, years without paying a penny.
      2. Their business debts from the plumbing enterprise would have been paid by somebody else.
      3. They get to stay in a house they bought in 2007 at a monthly cost based on 2013 prices.

      It seems the family want to stay in the home but a €400/month payment to Start will not lead to that. Start should repossession the home and if re-sale arrangement can be entered into the family can rent it at the going rate.

      The key issue is not who owns the home - if there is no prospect of the monthly payment rising to €800/month there is little chance of the mortgage being repaid. The key issue is what happens to the substantial shortfall. If the family's ability to repay is as indicated they should make a small payment against the shortfall for a fixed period, say three years, after which it should be written off.

      There are inevitable losses from lending money to people who can't pay it back but it is not clear why the three benefits above should go to the borrower in this situation.

  4. Hi Joseph

    These guys have paid nothing at all for two years. I have great sympathy for anyone who is in trouble. But, they should be paying something.

    If they have paid nothing for two years, why do you think that they would suddenly start paying €400 rent? It's very hard for a lender to get an order for repossession. I suspect that had they being paying €400 a month, Start would probably not have applied. If they had applied, and these guys bothered to show up in court, the judge probably would have made it very difficult for Start to repossess.

    As a society we have limited resources and we should devote those resources to those who need them and deserve them most. These guys deserve no sympathy at all. They have made no effort to pay anything because they believe that mob rule will allow them to continue to live in the house free of charge indefinitely. The tragedy is that they are probably right. This mob rule is ruining it for the vast majority of people who act responsibly.

  5. @Seamus
    Thanks for very detailed reply.
    I am not in favour of people living in accommodation paying nothing, whether they be tenants or owner occupiers.
    But in order to resolve the entire impasse, schemes like the Keane proposal you mention will have to be brought into play on a global basis.
    Who won or who lost over the past two or three years is not the key issue, nor do I think that the residual debt, post repossession, is the key issue any longer; as the residual debt then becomes unsecured, and both banks and debtors will have to sort it out. The debtors now having access to the PIA route if necessary.
    If we go back into history we find Gladstone coming up with the land purchase acts, declaring that 'my job is to pacify Ireland'. It is clear that the scale of this OO mortgage problem requires a much more radical global solution, along Gladstone lines, than the banks or indeed government is prepared to contemplate.
    As for the cost of such arrangements, if there are a lot of people out their paying nothing (did I hear a figure of nothing being paid on €6billion), with such a trend likely to increase, then frankly a compulsory owner to tenant arrangement should be legislated for, with the tenants paying rent equivalent to council rents. I take your point that a bank like Start might not want such an arrangement, but there is nothing to stop AIB/ TSB or BOI hiving off such properties into a an SPV, or the properties being bought from the banks. The purchase cost would not be cash, the banks would be paid with their own shares, at the book value of those shares, not the market value. [Bank financial statements are after all supposed to mean something].

    This country will have to get away from the idea of trying to turn high-value dead mortgages back into life, or trying to define who deserves sympathy or not, and instead come up with a solution that returns income on those properties, and is compatible with keeping families in homes, provided they are paying reasonable rents/mortgages for those homes. A good portion of the €200,000 loan balance above is a dead loan. It will not come back to life through repossession and eviction; but at the least 50% in value of each of such loans should be able to be made performing based on a sliding scale relative to the income of the tenant.
    Long drawn out antagonistic court processes will simply leave the creditors with empty dilapidated shells of buildings, that will be vandalised within weeks, and the State with the further cost of housing the evicted family. That cannot make financial sense for the country.
    That solution may work for bank in individual cases as a method 'pour encourager les autres', but would be socially and I suspect politically disastrous in Ireland, given the number of such cases.

    @Brendan Burgess
    "These guys deserve no sympathy at all. They have made no effort to pay anything because they believe that mob rule will allow them to continue to live in the house free of charge indefinitely. The tragedy is that they are probably right. This mob rule is ruining it for the vast majority of people who act responsibly."

    If one will never be in a position to discharge a debt and both the creditor and the debtor know this fully, it is incumbent on both to come to a solution.
    If I was waiting each day for a repossession letter because what was being demanded to avoid repossession and eviction was the payment in full of a mortgage of €800 per month plus arrears, why would I pay anything, unless I was able to pay the full amount demanded. The payment of a lesser amount yields nothing to me, not even perhaps the forbearance of the creditor. My fate is eviction, whether I pay nothing, €200, €400, €600, or €799 plus the arrears.
    What would a sensible person do in such circumstances, presuming they could not pay all the mortgage.

    The morality of the situation is not for me to decide. But a debtor in such circumstances will act in their own best interests.