Irish Banks Chasing Defaulters Who Sleep Well at Night

At the headquarters of Allied Irish Banks Plc in Dublin’s embassy belt, Chief Executive Officer David Duffy is taking aim at borrowers who refuse to repay their home loans.

Strategic defaulters, homeowners who can pay but won’t, account for 20 percent of Allied Irish’s home-loan arrears, the nation’s biggest mortgage lender said on Aug. 1. The bank is fighting back after the government, responding to surging loan delinquencies in the wake of Western Europe’s worst real-estate collapse, made home repossessions easier.

“I want to get past that group as fast as possible because they’re not the people lying awake at night in deep distress,” said Duffy in an interview.

The decision to go after strategic defaulters is raising suspicions in a country where about a quarter of all mortgages are in trouble and foreclosures have traditionally been a taboo topic. Jack O’Connor, head of Irish labor union SIPTU, said earlier this month that Duffy is laying the groundwork for a wave of home seizures.

“He had set it up that all those people that are going to be evicted were all strategic defaulters,” O’Connor said at the MacGill Summer School in Glenties in northwest Ireland, on Aug.

2. “That’s about inoculating our society against the injustice, the horrific injustice that is entailed in that.”

The Irish government committed 64 billion euros ($85 billion) to save its banks after they went on a lending spree that fuelled a decade-long property boom that collapsed in 2008. Five of the country’s six main domestic banks were taken over by the state.

‘Creeping Default’

A total of 12.3 percent of private mortgages were at least 90 days in arrears in the first quarter, up from 11.9 percent at the end of December, according to data compiled by Ireland’s central bank. Almost 20 percent of all buy-to-let properties -- homes purchased for the purpose of renting them out -- are in arrears, up from 18.9 percent. By value, 25 percent of mortgages are in arrears or have had their terms modified.

“The best way to describe it is a creeping default,” said Ross Maguire, a Dublin-based attorney who represents debtors facing home repossession. “The most difficult repayment to miss is your first mortgage repayment; if there isn’t a response to that, it’s easier to miss the second time or make a reduced payment.”

Missed Payments

While other bankers have said more people are deliberately skipping mortgage payments to settle other loans, Duffy is the first to put a figure on it.

Richie Boucher, CEO of Bank of Ireland Plc, said in an Aug. 2 interview with Newstalk Radio in Dublin that his company “wouldn’t recognize” Allied Irish’s estimate for the proportion of strategic defaulters.

Still, he said there are also signs of the practice in his business. Bank of Ireland, the country’s largest lender, has appointed receivers to oversee collection of rent from 1,250 buy-to-let properties to ensure cash isn’t diverted away from mortgage payments, he said.

Bank of Ireland, the only major Irish lender that’s no longer controlled by the government, has advanced 84 percent in Dublin trading this year. Earlier this month, the bank said it’s getting closer to becoming profitable amid declining bad loan losses and widening lending margins.

At Royal Bank of Scotland Group Plc’s Ulster Bank, about a third of borrowers in arrears are paying nothing, Stephen Bell, chief risk officer, said on a call with analysts last month.

Legal Loophole

The fact that banks are often reluctant to repossess homes may be encouraging mortgage borrowers to pay off other debts first. At the end of March, the banks held almost 1,400 foreclosed homes in a country where there are about 916,000 mortgages. In part, that’s because of a legal loophole which meant that banks couldn’t seize homes unless demand for full repayment had been made before December 2009.

Fitch last week downgraded six tranches from 14 Irish residential mortgage-backed securities transactions, saying the fact that homes are rarely repossessed helped to drive up arrears. Dublin-based EBS Ltd, now merged with Allied Irish, originated one of the tranches that was downgraded. Ulster Bank bought back 1.5 billion euros of residential mortgage backed securities in June at discounts of up to 55 percent of par value.

“People naturally default to paying where they were getting most pressure,” said Duffy, 51. “And with that being a lease or car, they tended to believe that those were the priorities and that it was OK, or discretionary, not to pay your mortgage.”

Misplaced Optimism?

As lawmakers over the past year debated a new insolvency law that would provide for easier debt forgiveness, many borrowers may have believed salvation was on the horizon, said Bell at Ulster Bank.

“We saw in the media reasonably broad coverage of the debt forgiveness agenda, where I think it was assumed that the act would wave a magic wand and make all this nasty stuff go away,” Bell said.

Some lenders also have spoken openly about taking bigger debt write-offs, potentially encouraging some borrowers to default in the hope of winning relief.

“There’s an element of Irish society -- or any society -- that will totally take advantage of things if it’s for free,” said Karl Deeter, the compliance manager at Dublin-based Irish Mortgage Brokers.

New Code

The banks are now seeking to roll back the tide after the government introduced a new law last month to fix the loophole hampering repossessions. In addition, a new code has been introduced that allows bankers to contact defaulters more than three times a month, ending a previous restriction. The new rules also eased a previous moratorium on banks triggering repossession as early as eight months after a borrower goes into arrears.

“The new code should accelerate discussion of arrears problems between borrowers and lenders, and limit the risk that the prospect of debt relief reduces willingness to pay,” said Fitch.

Borrowers are also becoming increasingly aware that insolvency isn’t pain-free. Borrowers struggling to meet their repayments may be banned from taking vacations and face limits on how much they can spend on food under guidelines published by the country’s insolvency service.

A tougher approach may be paying off. A year ago, 60 percent of Ulster Bank’s borrowers in arrears were paying nothing, a figure which has fallen by almost half, according to Bell. Permanent TSB Group Holdings Plc reduced the arrears level in its Fastnet 8 RMBS to 16 percent from 18.5 percent in the first quarter, Fitch said.

Back at Allied Irish headquarters in south Dublin, Duffy has fired off thousands of letters to defaulters who have so far ignored the bank’s efforts to reach them, threatening legal action that could ultimately lead to repossession.

“There is no rent-free option available anymore,” said Duffy at Allied Irish. “And that needs to be understood.”