The shadow of the property crash is very long indeed

House and land prices in Ireland are close to or above the previous record highs seen at the peak of the property bubble in 2006-2007. While this is not good news for anyone looking to buy either a home or a farm, it seems that it is good news for vulture funds, which are taking advantage of the increased value to sell off security attached to loans which they bought at a discount from Ireland’s main banks in recent years.

While there is no data available from the Central Bank on the level of distressed loans attached to farmland which have been sold on to so-called non-bank lenders, there is data on principal dwelling house loans. Those numbers show (see Figure 1) that Irish banks have been reducing their exposure to troubled home loans in recent years, as non-bank lenders have increased their holdings.

Foreclosure and forced sales remain unusual in the principal home mortgage market – latest Central Bank data shows that there were 15 homes repossessed in the first quarter of this year. However, there seems to be an increasing trend for repossessions and forced sales of agricultural land.

An Irish Farmers Journal investigation into upcoming land auctions, where there are a large number of parcels for sale show that most, if not all of them, have charges initially registered on their folios by a pillar bank, such like AIB or Bank of Ireland, with that charge passing to a non-bank lender in recent years.

The charge changes hands when the bank sells its non-performing loans to the vulture funds. Those banks have been under pressure to reduce the amount of their lending which is non-performing, and are, probably for reputation reasons, less willing to foreclose on the security backing the loans themselves. Instead, they bundle substantial numbers of non-performing loans together and sell them on to non-bank lenders and vulture funds, which have fewer reputational concerns.

Reports suggest that those transactions take place at a substantial discount to the full value of the loan, with 50% reductions not unheard of.

The pace of those sales from banks to vulture funds increased in recent years. AIB were particularly active in 2019-2020, selling portfolios of secured residential and secured loans to a consortium led by Galway-based Everyday Finance, which included Cerberus Capital, a New-York-based investment firm with around $60bn (€55bn) in assets.

There was another sale by AIB to Everyday in June 2022, and according to a statement from the bank’s chief executive Colin Hunt at the time, the sale was “an important milestone for AIB”, as it put its non-performing exposure (NPE) “well below 5%” (NPE is a regulatory measure of how much non-performing lending a bank has and is used by supervisors to monitor credit risk at banking institutions).

Hunt went on to say that the sale, “demonstrates further progress as we move towards closing our legacy items this year, while maintaining momentum in the delivery of our strategy”.

Debt

The closure of the legacy items only applies for the bank. For the borrower, the debt remains very real, and the sale to the vulture fund has every chance of making a bad situation considerably worse. Looking again at the upcoming sales of agricultural land, we see in many cases that it is Everyday Finance which owns the charge listed on the folios of the properties for sale.

Every borrower’s situation is different. Some of the land sales seem to be of land that may have been bought with a view to property development. But some of them seem to be farmers who over-extended themselves for expansion, or had some bad luck, or even ended up on the wrong side of a superlevy fine.

Whatever the reason, many of the loans that have been sold and are being foreclosed on, are based on borrowing from between 10 and 20 years ago. If nothing else, the length of the process alone has had to have had a severe impact on the borrowers involved.

In April of 2022 the issue made headlines, when a group of independent TDs, including Mattie McGrath, Michael and Danny Healy Rae, Carol Nolan, Richard O’Donoghue and Michael Collins, brought a private members bill which would introduce legislation to protect farmland from being sold by creditors against the will of the landowner.

That bill went to a Dáil vote in November of 2022 and was defeated by 64 votes in favour to 72 against. The Minister for Agriculture Charlie McConalogue was among those who spoke against the bill, saying that “the restrictions it places on debt recovery in the sector are such to dissuade financial institutions from lending to the sector in the future”.

Comment

The issue of land, and ownership of it, has always been an extremely emotive one in Ireland. The days of easy credit during the Celtic Tiger and property boom saw many farmers take on borrowings with the hope of expanding their operation and/or increasing their wealth.

In the majority of cases, those farmers managed to get through the downturn and pay off the money owned to the bank without getting into too much difficulty. Others haven’t been so lucky.

They have lived through more than a decade of stress and now may be set to lose their land to an auction demanded by a faceless fund which only seeks to make a return on their investment as fast as possible. The bank which the farmer originally borrowed from has washed its hands of the situation, putting the legacy of its own bad decision-making behind it.

The minister said that introducing legislation to halt the forced sale of farmland would stop banks lending to the farm sector as a whole. If that were a reasonable argument, then banks would have stopped mortgage lending a long time ago – the difficulty they face in foreclosing on family homes is very well documented and yet they continue to compete for business in that sector. It is obviously in the banks’ interest to exaggerate the risk from any ban on forced sales of land, as they may eventually need to rely on vulture funds again to do their foreclosure work for them. But in the event that there was a ban in place, making a sale of such non-performing loans almost impossible, the banks would have no choice but to deal with the borrower themselves, and come to a solution which might also acknowledge their culpability in the existence of the loan in the first place.

Perhaps an easier solution would be to ban the sale of non-performing agricultural loans to vulture funds?