Ireland’s bankers and bailout masters are pressing the government to make it easier to seize homes bought as investments to rent out, as defaults on the loans surge after Western Europe’s worst real-estate collapse.
The International Monetary Fund, the European Commission and the European Central Bank, the so-called Troika that rescued Ireland in 2010, want the state to tackle a legal loophole impeding lenders from foreclosing on loans taken out before 2009, according to three people familiar with the matter, who asked not to be named as final decisions haven’t been made.
The Irish government’s effort to overcome legal and cultural obstacles to foreclosures is growing more urgent as delinquencies on rental properties grow, making it harder for banks to increase lending, and slowing the recovery. At Allied Irish Banks Plc (ALBK), the biggest mortgage lender, more than a third of its loan book for so-called buy-to-let properties is in trouble after home prices fell by half and unemployment tripled since 2007 amid the worst recession in the country’s modern history.
“A well-functioning repossession framework is important to maintain debt service discipline and to underpin the willingness of banks to lend, which is crucial for Ireland’s economic recovery,” Craig Beaumont, the IMF mission chief for Ireland, said in an e-mail response to questions.
Before December 2009, lenders used a 1964 law as the basis to repossess homes. This was repealed and replaced in 2009, which due to a drafting oversight, applied only to loans taken out after Dec. 1 2009.
The flaw became apparent in a July 2011 case overseen by Justice Elizabeth Dunne. She ruled a lender wasn’t entitled to repossess a home used for security on a defaulting 93,000-euro ($114,410) loan because demand for repossession and repayment was made in July 2010. She said another lender was entitled to repossession on a defaulting 209,000-euro loan taken out in 2007 because it demanded repossession and repayment in September 2009.
The Justice Ministry said in an e-mailed response to questions that the “complex and related issues raised in this case continue to be the subject of discussions within the department and within the office of the Attorney General.”
The government is considering introducing new laws to fix the loophole, according to two of the people.
Buy-to-let investments took off during Ireland’s decade-long real estate boom, and now account for about a fifth of the 130 billion euro mortgage market. Values have collapsed since the bubble burst in 2008, with figures signaling they’re faring much worse than owner-occupier loans.
New Irish mortgages issued in the second quarter fell 16 percent from a year earlier, the Irish Banking Federation said today. Banks made 135 investment mortgages in the period, plunging from 7,083 six years earlier, the Dublin-based organization said.
Resistance to evictions and repossessions is at least partly linked to the country’s history, in particular the Great Famine, which saw thousands of families thrown off the land in the period around 1850. Later, around 1880, when Ireland was controlled by Britain, the so-called Land League’s resistance to evictions during rent strikes often ended in violence against landlords and their agents.
More recently, opposition to repossessions stems at least in part from the banks’ reliance on taxpayer support to avoid collapse in the wake of the 2008 collapse. In all, the state has injected or pledged about 64 billion euros to banks, and five of the six largest domestic lenders are now in government hands.
State-owned Allied Irish, the country’s largest mortgage lender, said last month that payments on 37 percent of its Irish buy-to-let mortgage holdings are at least three months behind, compared with about 13 percent for its owner-occupier loans.
Arrears in Bank of Ireland’s buy-to-let portfolio rose to 21 percent at the end of June from 17 percent, the lender said on Aug. 10. Some 9 percent of the bank’s Irish owner-occupier mortgage book was at least three months in arrears, up from 7 percent in December, the bank said.
“Many of the buy-to-let properties are in the hands of doctors, accountants, bankers and other professions,” said Stephen Kinsella, an economics lecturer at the University of Limerick. Buy-to-let is “a massive house of cards built around middle- to upper-middle-class Ireland.”
There’s no evidence of mass repossessions. While there are no overall statistics on foreclosed buy-to-let properties, Irish banks held just 961 owner-occupied homes, equivalent to 0.12 percent of loans in arrears at the end of March, according to the Central Bank. Bank of Ireland said last week it had held about 137 Irish buy-to let properties at the end of June.
“There is a huge fear among lenders in what is a post-famine, post-colonial Ireland of being seen to be acting like the Big Bad Bank Plc coming in and turfing people out of their properties,” said Bill Holohan, senior partner of Holohan solicitors in Cork and Dublin and co-author of ‘Bankruptcy Law and Practice.” Images associated with famine evictions in the 19th century “are ingrained deep in the Irish psyche,” he said.
Policy makers and banks are starting to draw a distinction between owner-occupier homes and buy-to-let properties. Central Bank Governor Patrick Honohan said in March “it’s past time” for banks to repossess such properties.
“Three years ago, we believe banks had limited appetite to repossess troubled buy-to-let properties,” said Michael Greaney, associate director in Fitch Ratings mortgage-backed securities unit. “Over the last year, there seems to have been a change in attitude and banks are willing to use the repossession route if necessary and are pursuing buy-to-let arrears cases more actively.”
The “legal flaw” is impeding lenders from repossessing properties, John Reynolds, head of KBC’s Irish unit and president of the Irish Banking Federation, has said.
“While repossessions remain the last and least desirable resort for KBC Ireland, there are cases where customers won’t work with KBC,” Reynolds said in June, adding he was disappointed that the legal impediment hadn’t been addressed. “As a last resort, we need to be in a position to repossess.”
The IMF, the European Commission and the ECB, which rescued Ireland two years ago as its banking system came close to collapse are pushing for a solution.
Moves to plug the gap in the law will test banks’ appetite to foreclose on loans and crystallize losses.
Ireland’s four state-guaranteed banks that remain open for business were ordered last year to raise 24 billion euros, mostly from the state, following stress tests.
Banks are “terrified” that wholesale repossessions and sales would crash the market again, just as there are signs of stabilization in Dublin real estate, Bill Holohan said. Home prices in Dublin, which have dropped 57 percent from their 2007 peak, rose in three out of the first six months of this year, according to the country’s statistics office.
Banks are finding strategies to cope with the surge in defaults in the buy-to-let sector. Bank of Ireland has, for example, appointed 540 rent receivers to ensure landlords aren’t hiding income.
“We’ve been taking action in dealing with rent diversion which has been a feature particularly in the more troublesome book, ” Bank of Ireland Chief Executive Officer Richie Boucher told reporters last week. “Clearly we would hope that the Judge Dunne decision would be dealt with.”
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