To Sell or Not to Sell – PTSB should sell its Non-Performing Loans

PTSB is being damaged by the large volume of Non-Performing Loans (NPLs) on its balance sheet. The same must be true for AIB and other banks operating in the State.

There is a reason for this.

Regulators require banks to hold capital against NPLs meaning the banks are restrained in the amount of lending they can do once they hold volumes of NPLs.

Furthermore, the costs of servicing NPLs is substantial. For performing loans there is little a bank is required to do – but once a loan goes into default, costs shoot up as the process of fixing the loan or enforcement begins.

But despite all this another important factor must be considered.

Banks are not very good at dealing with NPLs. They are constrained in the deals they can do to avoid contagion – if I get a big write off why would my neighbour continue to pay? And chasing bad debts is not the business of a bank. The business of a bank is fundamentally to protect depositors’ funds and to lend those funds prudently into the economy and of course to manage the flow of money though the economy.

The choice facing PTSB is to continue as it goes – and suffer an ongoing dead weight of NPLs or to sell them on.

There are buyers of NPLs out there well established in the market. My view is that PTSB and AIB should go ahead that dispose of its NPLs as soon as possible leaving those institutions free to do what they are supposed to be doing.

The only reason the banks might not sell their NPLs is political. They are afraid of an adverse political reaction to such sales.

However, from what we see such concern is unfounded.

Borrowers remain fully protected and are often in a better position when their loan is acquired. This is because the new owners are motivated to do deals to move things on and are generally good at it.
Our experience is that funds are easier to deal with; far more responsive and are genuinely open to solutions. For example, the majority of Mortgage to Rent solutions (over 70%) have been put in place by non-bank lenders – AIB on the other hand is responsible for less than 2% of such solutions.

The Personal Insolvency system which has special protections built in to deal with family homes applies to banks and non-bank lenders equally. The law means that anybody who can afford a mortgage based on the current value of their property over the longest possible period and at the lowest possible interest rate is entitled to a deal which will keep them in their home.

All in all, we encourage Irish banks to sell their NPLs. It has been 10 years now – surely it is time to move on!

Payments Under Personal Insolvency

Some people express concern about entering an Insolvency Arrangement which will last for 6 years. During that period, the debtor will be subject to annual review, meaning that if household income increases there may be increased payments required towards the arrangement.

In those circumstances, the debtor feels that he is still under supervision and not free to start again.

While it is true that where a PIA or DSA provides for payments over 5 or 6 years there are annual reviews, the arrangement can define what will happen in the review.

For example, it could provide that the first increase does not alter the payments and thereafter, where income increases beyond an amount, an agreed portion of that increase will be used towards increased payments. We have seen cases where it has been agreed that an increase of up to €500 per month will not change the terms of the agreement and thereafter 50% of any increase will be used towards increased payments.

These types of arrangements give the debtor an incentive to increase income while at the same time being fair to creditors who have taken a large debt write down.

It is also the case that many people’s income is unlikely to change dramatically. In cases where people are in employment it is relatively easy to determine income into the future. In those circumstances, the debtor really sees the payments as an affordable loan payment which will end in a defined period of time.

All this being said, it is always better, where possible, to agree a lump sum amount so that the arrangement comes to an end quickly and the debtor is free to move on unhindered by past debts. The lump sum could be sourced from family or friends and could be repaid over time.

Where lump sum deals are involved it is generally expected that the monies are paid within 6 months of the arrangement coming into force. But once the payment is made the remaining debt is written off in full.

When determining the amount of the payments or the lump sum regard is had to the Insolvency Service’s guidelines on Reasonable Expenditure needs. Information on these amounts can be found on the ISI website.

The amount is dependent on the composition of the family but taking a family of 2 adults and 3 children the system would say that the minimum reasonable expenditure needs of the home are €2700 plus mortgage or rent costs. This would increase where extra costs are involved such as child care or medical expenses. Assuming mortgage costs for this family to be €1500 the after-tax income would need to be €4200 before any other debt is paid. Any amount over and above this would constitute the basis for calculation of payments.

Where anybody is in mortgage arrears of where debt presents a difficulty, they should meet with an expert and learn about the options that are available.