Irish company Arizun believes it has come up with a solution to the problem of long-term mortgage arrears, one that will keep distressed borrowers in their homes while allowing banks cleanse their balance sheets of these troubled loans without going down the repossession route. A seeming win-win for both sides.
The company’s new “Stay in your Home” scheme, launched on Wednesday with €100 million in funding from UK investment fund LCM Partners, is aimed at middle-income earners, who find themselves deep in arrears, but who don’t qualify for the Government support. These people are understood to account for the bulk of the 28,000 mortgages currently in long-term arrears, two years or more.
So how would it work?
It would see the borrowers surrender ownership of the home in exchange for having their borrowings written off and a guaranteed lease at what the company calls a reasonable market rate. So essentially a sale and leaseback arrangement. Within the first six years of their tenancy, they would also be given the option of repurchasing their home. Obviously this type solution would involve Arizun buying the loan off the bank presumably at a discount and the bank writing off the outstanding arrears.
But will the banks go for it?
Arizun says it has held talks with lenders here regarding its plan and has received positive feedback. "We have been in touch with some of the banks and have met with a positive response. Arizun will buy the mortgage from the bank and write off the mortgage debt plus arrears," Arizun director Cathal O'Leary told The Irish Times.
Responding to the company’s announcement, AIB said: “Supporting customers in difficulty remains a key priority for AIB and we continue to consider all existing and emerging options regarding this, for example the iCare mortgage-to-rent scheme.”
“A key element of any resolution for our customers is that the solutions are sustainable and based on affordability,” a spokesman said, noting the bank had reduced its non performing exposures (NPEs) from €31 billion in 2013 to €7.2 billion at September, 2018.
“It’s important to note that about 90 per cent of this reduction has been achieved through working with customers on a case by case basis with a view to reaching sustainable solutions, some of which have involved significant debt write-off,” he added.
How will distressed borrowers be able to pay a market rents?
Consumer advocate Brendan Burgess makes the point that if someone can afford to pay the market rent on their home, then they're probably in a position to come to some arrangement with the bank directly. " So they should not be selling their house to rent it back as market rents in Ireland are much higher than the mortgage costs, and they lose ownership of their home," he says.
But O’Leary responds by saying “we’re not talking about the mortgage they have but the mortgage they would get against the current value of the property.We’re dealing with houses that are maybe half what they were worth when the families took out the mortgage.” So while many of these mortgage holders can’t afford the repayments on a €500,000 loan, they might be able to make the repayments on a €250,000 mortgage. It’s these hard cases that dominate the long-term arrears sector. O’Leary says banks have no solution for this cohort as they can’t sell portfolios of primary dwelling home (PDH) loans for fear of the political and public backlash while they are loathe to go down the repossession route, which is costly and onerous.
What does Arizun get out of it?
Arizun will earn an income from managing the portfolio of properties held in a special Arizun fund, not unlike a pension fund. While its initial €100 million tranche of funding would buy around 400-500 €250,000 loans, the company has been promised up to €400 million more if the scheme works. Arizun is also keen to emphasise that its focus is long term unlike vulture funds and that its dealings with householders would be strictly confidential.
