The world’s largest credit rating agency, Standard & Poor’s (S&P) Global, said the Tullamore Circuit Court decision could leave the likes of Pepper unable to service mortgage loans.
In response to the Tullamore ruling, the rating agency issued a note to investors in pools of mortgages sold by banks to vulture funds.
It said the ruling will encourage other “mortgage inmates” to seek similar deals.
Judge Mary O’Malley Costello, sitting in Tullamore Circuit Court, approved a personal insolvency arrangement (PIA) that will force mortgage manager Pepper to award a borrower couple a rate of 2.5 percent, fixed for 25 years.
Pepper opposed the move.
S&P Global said in its investor note: “If this decision serves as a precedent and forces third-party managers to provide flat rates to PIA applicants, managers may not be able to effectively service loan pools supporting Irish re-performing securitisations. “
The note essentially says that forcing mortgage lenders to offer low fixed rates for long periods of time will destroy the loan-selling business model in this country.
That model involves banks selling pools of non-performing mortgages to vultures, with the administration of the mortgages handled by credit service companies.
The S&P note said: “A regional Irish circuit court recently approved a Personal Insolvency Arrangement (PIA) that included a provision for the borrowers to offer a 2.5 percent fixed rate mortgage for 25 years. Re-performing loan managers do not provide fixed rate products and borrowers cannot resort to refinancing elsewhere given their past arrears.”
S&P analyst Darrell Purcell argues that vultures and the credit bureaus cannot afford to offer low fixed rates because of their borrowing costs.
He said: “Lower fixed rates for borrowers in Irish high-performing pools could lead to both liquidity problems and interest rate risk from a lack of hedging.”
Up to 40,000 borrowers are stuck with vulture funds and unable to move their mortgages because of past credit problems.
If they were also able to get low fixed rates from the funds, that would give them a lifeline to restructure their debts and keep up payments on their homes.
But it would also likely force the vultures into a forced sale of their mortgage portfolios and destroy the business of paying off these loans for the likes of Pepper, Mars Capital and Start.
S&P said in its note, “While adoption of PIAs is relatively low, this ruling may encourage certain borrowers to take advantage of this option regardless of the legal uncertainties.”
This is despite vulture funds reportedly buying distressed mortgage books at discounts of up to 50 percent.
Lawyer Keith Farry BL had asked Pepper in Tullamore court what was paid for the loan and what the borrowing costs were, but this information was not provided.
The Tullamore ruling does not set a legal precedent, but there has been a similar case in the Supreme Court, which does set a precedent.
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%.
