Banks to take stake in homes to re­solve debt cases

The Pak Banker - - FRONT PAGE - NEW YORK -AFP

Banks will be pressed to take stakes in fam­ily homes next year in swaps for mort­gage debt as part of a push to re­solve some of the most dis­tressed per­sonal in­sol­vency cases. The first cases in­volv­ing the use of so-called debt-for-eq­uity swaps are ex­pected to be de­cided by the courts in 2018 as the lit­tle­known mea­sure within ex­ist­ing per­sonal in­sol­vency leg­is­la­tion is used to solve some of the worst mort­gage ar­rears cases where loans have not been paid for years. The ex­pec­ta­tion is that a test case rul­ing by the High Court might open the flood­gates for sim­i­lar ar­range­ments to be agreed.

One debt-for-eq­uity pro­posal in­volv­ing a Water­ford cou­ple in ill-health is be­fore the Cir­cuit Court. The case could pro­ceed to a prece­dent-set­ting rul­ing in the High Court if the lower court re­jects the pro­posal. Swap­ping debt for a share in a busi­ness is com­mon in cor­po­rate in­sol­ven­cies but is a new phe­nom­e­non in the case of home mort­gages and per­sonal in­sol­ven­cies, de­spite be­ing avail­able un­der the Per­sonal In­sol­vency Act 2012.

It in­volves an in­sol­vent bor­rower re­tain­ing a share in a home equal to the amount they can pay ev­ery month and hand­ing over the re­main­ing share to the bank to cover the part of the mort­gage they can­not pay. The bank can only re­coup its money when the debtor de­cides to sell the house or from the es­tate of the last sur­viv­ing co-bor­rower. It is seen by per­sonal in­sol­vency prac­ti­tion­ers who ad­vise clients in se­vere mort­gage ar­rears as a so­lu­tion in sit­u­a­tions where peo­ple can­not pay a mort­gage to cover the cur­rent mar­ket value of the prop­erty, do not have enough in­come or are too old to cover the full term of a mort­gage. Two firms that process many per­sonal in­sol­vency ar­range­ments - fi­nan­cial res­cues in­volv­ing the re­struc­tur­ing of a mort­gage - are seek­ing debt-for-eq­uity swaps on be­half of in­sol­vent in­di­vid­u­als. There were 31,624 mort­gages in ar­rears of 720 days or more, cov­er­ing mort­gage debt of €7.1 bil­lion and ar­rears of €2.5 bil­lion at the end of Septem­ber, ac­cord­ing to the lat­est Cen­tral Bank data.

Dun­gar­van-based per­sonal in­sol­vency prac­ti­tioner Mitchell O'Brien is pur­su­ing a debt-for-eq­uity so­lu­tion in the case of the Water­ford cou­ple and an­other in­firm cou­ple from Wex­ford.

In the Wex­ford case, the cou­ple owe a mort­gage of €188,000 on a prop­erty with a mar­ket value of €95,000. They can only af­ford monthly pay­ments of €348, a sum that would cover €51,800 of the mort­gage. Mr O'Brien has pro­posed a swap that would see the cou­ple take a 28 per cent share of the house cov­er­ing the part of the mort­gage they can af­ford and the lender tak­ing the re­main­ing 72 per cent stake.

"This so­lu­tion is used in cor­po­rate in­sol­vency across the world ev­ery day. Those cor­po­rate boys wouldn't be do­ing it if there wasn't some­thing in it for the debtor and the cred­i­tor," said Mr O'Brien.

"The beauty of it is that it is called out in the leg­is­la­tion. We don't need a change in leg­is­la­tion. It re­ally is a so­lu­tion whose time has come." Daragh Duffy, a di­rec­tor of Done­gal-based McCam­bridge Duffy in­sol­vency prac­ti­tion­ers, said that his firm was preparing five or six debt-for-eq­uity swap pro­pos­als for clients. "These would al­low you to keep debtors in their fam­ily home but also en­sure that the bank isn't los­ing out," said Mr Duffy. "They are be­ing given an eq­uity share in the prop­erty but if there is any up­lift in the prop­erty they also get a share of that up­lift. There will def­i­nitely be debt-for-eq­uity swaps in 2018." Banks are gen­er­ally re­luc­tant to con­sider swaps in per­sonal in­sol­vency cases be­cause it raises le­gal, reg­u­la­tory and ac­count­ing is­sues by tak­ing stakes in homes of the bor­row­ers on to their books.

One source work­ing in the area of per­sonal in­sol­vency said the pos­si­bil­ity of a debt-for-eq­uity swap, while not a pre­ferred op­tion for banks, might en­cour­age lenders to ac­cept an al­ter­na­tive fi­nan­cial so­lu­tion such as a write-down of debt or a mort­gageto-rent deal where debtors switch to rent­ing their home. "The banks see the up­side but they are still try­ing to see the con­cept of the prod­uct be­cause it is new to them," said Mr Duffy.

Newspapers in English

Newspapers from Pakistan

© PressReader. All rights reserved.