Banks to take stake in homes to resolve debt cases
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.