Minister Michael McGrath reacted after the Irish Independent reported on Wednesday about a court decision that forced mortgage lender Pepper to pay a borrower pair interest at 2.5 per cent, fixed for 25 years.
“I welcome the verdict,” he told reporters Wednesday after his department released an options document on a new sovereign wealth fund.
“I believe that loan owners and mortgage lenders should offer fixed rate options to their borrowers. Pepper does not offer flat rate product solutions.
“I think for some customers the certainty of knowing how much they will be paying over the next few years is very valuable, so I am happy with the verdict
“Hopefully we will see more such results in the future.”
A leading mortgage manager acting on behalf of vulture funds has been forced by a court to give a cheap long-term fixed rate to a borrower pair.
The court ruling has huge implications for the thousands of “mortgage prisoners” whose loans have been sold to vulture funds and whose funds are managed by credit managers.
Tullamore Circuit Court approved a formal personal insolvency settlement that will force mortgage manager Pepper to pay a borrower pair a rate of 2.5 percent, fixed for 25 years.
Such a low rate, in such a long term, is not available in the market.
The scandal of vulture funds treatment of mortgage holders
Pepper had told the court it doesn’t offer fixed rates, a situation that means thousands of its customers are locked into tracker and variable rates, with some as high as 8% and 9%.
Insolvency experts said the court’s ruling meant the refusal of vulture funds and mortgage managers to offer flat rates to “mortgage prisoners” would now backfire on them.
This was because thousands of stuck borrowers, hit hard by skyrocketing rates, would now likely seek personal insolvency arrangements (PIA) to force funds to give them similarly low fixed rates over long periods.
Pepper Finance, which manages 60,000 mortgages sold to vultures by the banks, had argued in the case last Friday that it would be “fundamentally unfair” for the court to force it to offer the fixed rate.
It had rejected a PIA for a Laois couple prepared by John Lupton, a personal insolvency practitioner (PIP). But the proposed PIA was appealed to the court to overturn the lender’s veto.
Pepper insisted it doesn’t offer flat rates to the homeowners whose mortgages it services. Attorney Keith Farry BL, representing the PIP and the borrowers, persuaded Circuit Court Judge Mary O’Malley Costello to approve the PIA with the low fixed rate over 25 years.
Pepper had vehemently opposed the customer being charged a flat rate, especially for such a long period of time.
Clearly, Pepper is managing the mortgage on behalf of a vulture fund that ultimately owns it. The fund was not identified in court.
Mr Farry, instructed by attorney Joe Gavin, of Anthony Joyce Solicitors, told the court that Pepper had rejected a PIA filed for a Garrett and Tonia O’Reilly of Castlegrogan, Errill, Co Laois.
The court ruled that the 2.5% for 25 years was not unfairly disadvantageous to Pepper.
Pepper told the court it does not issue flat rates and would have to create a custom product if it lost the case.
Mr Lupton argued that if the rate was unfair, the creditor should provide figures and show what he paid for the loan so that he could calculate the profit and return for the fund.
This has not been disclosed to the court. Pepper could not prove or show that the 2.5% rate. was unfair for 25 years, lawyer Farry argued.
In an affidavit, Seamus Dowling, head of primary services at Pepper Finance Corporation, said: “With all due respect, I say and believe that 25-year fixed rates are practically unheard of in the Irish market and that it is fundamentally unfair to let the machinery of personal insolvency to force such a rate on Pepper.
“Pepper does not currently offer fixed rates to its customers. The PIA therefore requires the implementation of a tailor-made product for these debtors.”
About 100,000 mortgages have been sold to vulture funds, 38,000 of which are highly vulnerable to rising ECB interest rates.
Many commentators suggest that this will cause another rise in arrears, with some of those who have previously restructured running into trouble again.
The funds and the managers do not offer fixed rates. This means that many are tracker and floating rate, and most rate hikes from the European Central Bank have been passed on to borrowers paying rates between 8 and 9 percent.
Fixed rates of up to half of these rates are available at regular banks, but most borrowers are unable to switch due to past credit problems or because they don’t meet the criteria for the major banks.
Attorney Anthony Joyce said: “This case shows that the courts can force fixed rates through the neck of funds.
“Their refusal to offer flat rates will eventually backfire on them as more people will now seek personal insolvency settlement.”
Mitchell O’Brien, the leading personal insolvency expert, said the court’s ruling showed that it would not unfairly disadvantage a fund to force it to offer a flat rate.
Mr. O’Brien encouraged all borrowers in arrears and struggling with interest rates to contact a PIP.
Pepper had no comment when contacted.
However, he warned that mortgage rates could rise in the future as banks respond to increasing demands to raise deposit and savings rates.
Ireland’s major retail banks have not fully passed on the 3.75 percent rate hike to borrowers since the European Central Bank began rate hikes last July.
But neither have they raised the deposit rate. The ECB’s deposit rate for eurozone banks rose to 3.25 percent last week, but savings and deposits at Irish banks earn well below 1 percent in most cases.
“I do not and, rightly so, cannot interfere with commercial prices,” said Mr. McGrath.
“The banks have to weigh up what is also in the interest of their mortgage holders and savers.
“If we see higher deposit rates, it will likely result in even higher mortgage rates.”
He said the major retail banks — two of which, AIB and Permanent TSB, are still majority-owned by the state — must play a role in making it easier for customers to switch from so-called vulture funds.
“There are a lot of clients in the non-banking sector right now, who have good loans that are fully repaid, or maybe on their way to being healed,” he said.
“I believe that the major retail banks should be welcoming and open to customers moving from the non-bank sector back to the mainstream retail banking sector where they may get a better deal.
“It’s up to them to decide. It’s a commercial matter. But I do believe that the banking sector can play a role in supporting those customers in the near future.”
Meanwhile Mr. McGrath that more “pressure” should be put on supermarkets to be more transparent about food prices.
He made the remarks ahead of a meeting today of large and small food retailers at the Department of Enterprise to discuss ongoing food price inflation.
Grocery and food prices are currently rising at about double the rate of overall inflation.
“I think it’s important that the industry takes into account the inflationary environment in which they operate and also takes into account their pricing policy,” he said.
“I think it is important that we put pressure on the sector. There is certainly strong competition there.
‘I don’t think they help themselves. If you see one of them make a move on a certain product, like milk for example, and within hours they all make the same move.
“That doesn’t send a good signal about the competitive health of the sector. There must be real competition.”