Court imposes 2.5% fixed for 25 years on Pepper as part of a PIA

Road map for borrowers as Pepper forced to fix rate for 25 years​

A court decision forcing a financial services company to halve the mortgage rate offered to a distressed borrower and to fix it for the likely duration of the loan offers thousands of people a “roadmap” towards a degree of financial security, campaigners have said......At a sitting of Tullamore Circuit Court last week, Judge Mary O’Malley Costello gave the green light to a Personal Insolvency Arrangement (PIA) for a couple with a home loan serviced by Pepper Finance. The deal saw a fixed rate of 2.5 per cent over 25 years applied to their mortgage of just under €290,000.

Pepper Finance had objected to the deal and had previously vetoed it, saying it could not “countenance” a fixed rate at that level for such a lengthy period.

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To be quite honest I don't think this is a good thing. As I've argued before a lender charging rates of 8% is not at all fair on customers but forcing them to offer 2.5% fixed for 25 years is nor fair on the lender either. I can't see a scenario where this doesn't result in a large loss for them.


I really think the Oireachtas should be making the law systematically on this issue and not judges doing it on an ad hoc basis.

Edit: I should point out that this is in the context of a PIA so the lender would be expected to be taking a bath. I still think some fixed margin over a reference rate is a better way to do this than a pure fixed rate.

"The Minister for Finance Michael McGrath said be welcomes today's decision to instruct Pepper Finance to give one its customers a fixed rate on their mortgage.

The Minister made his remarks in answer to a question at a press conference today.

He said he has told both the Central Bank and mortgage lenders of his view that borrowers should be offered fixed rates when variable rates reach very high levels, which is currently not in the Code of Conduct on Mortgage Arrears."

I presume Pepper or the funds will appeal this ruling?

The 2.5% rate over 25 years is clearly below the market rate at the moment.

Indeed, is it below the rate that the State can borrow at?

So Pepper could argue that it is being forced to charge a rate below the market price (loss-making?)

However, we don't know Pepper's/Fund's cost of funds, so we don't know whether it is loss-making.

NoRegretsCoyote said:

Road map for borrowers as Pepper forced to fix rate for 25 years​

To be quite honest I don't think this is a good thing. As I've argued before a lender charging rates of 8% is not at all fair on customers but forcing them to offer 2.5% fixed for 25 years is nor fair on the lender either. I can't see a scenario where this doesn't result in a large loss for them.


I really think the Oireachtas should be making the law systematically on this issue and not judges doing it on an ad hoc basis.

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I think this ruling might force that issue Coyote. The general consensus is they are making money, even at that rate (see IT article at lunchtime). Hence they will not disclose the funding rate…

Tomandgerry said:

The general consensus is they are making money, even at that rate

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I struggle to see how you can turn a profit on a fixed rate of 2.5% for 25 years to a sub-prime borrower in today's interest rate environment.


If you have better info on this please share it but Conor Pope quoting one anonymous source is not something I put much faith in.

Protocol said:

However, we don't know Pepper's/Fund's cost of funds, so we don't know whether it is loss-making.

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Pepper may have bigger, strategic reasons not to disclose funding costs for a whole portfolio at the Circuit Court. I wouldn't use non-disclosure as conclusive evidence that it can indeed turn a profit at this rate.

NoRegretsCoyote said:

I struggle to see how you can turn a profit on a fixed rate of 2.5% for 25 years to a sub-prime borrower in today's interest rate environment.


If you have better info on this please share it but Conor Pope quoting one anonymous source is not something I put much faith in.




Pepper may have bigger, strategic reasons not to disclose funding costs for a whole portfolio at the Circuit Court. I wouldn't use non-disclosure as conclusive evidence that it can indeed turn a profit at this rate.

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I’ll see if I can find anymore context on it…

Tomandgerry said:

Hope for vulture fund mortgage prisoners as lender forced to offer couple lower fixed rate

A leading mortgage servicer acting on behalf of vulture funds has been forced by a court to give a cheap long-term fixed rate to a borrower couple.

m.independent.ie

What I thought was interesting here is that Pepper could not prove that the 2.5% rate did not meet the funding costs of the loan (or chose not to disclose it in an open forum). I understand Minister McGrath has requested the vulture funds to set out their funding costs to the Central Bank so this might be good news.

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It looks like good news for those trapped in high interest loans. I agree the government should be legislating for this. 2.5 % is low, but conversely, 8 or 9% is high. The customer has no choice and the judge gave Pepper the same choice.

Of course they will appeal, as the stakes are very high for them and the funds they service loans for. I do not believe all of these loans are sib-prime, some are performing loans on a variable rate that has been increased well above market rates. That in some cases makes them sub-prime.

Pity the judge did not specifically request details of the ownership of the loan. Laughable that Pepper claimed unfairness to them, but declined to offer evidence of the impact of that unfairness.

Simple question to Pepper. What of the unfairness to the borrower of 8 or 9%, variable, which I am certain they must be well aware of but choose to ignore.

NoRegretsCoyote said:

forcing them to offer 2.5% fixed for 25 years is nor fair on the lender either

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Or on other borrowers who didn't fail to meet their mortgage contractual obligations and end up with mortgage forebearance/restructuring. Moral hazard and all that...

ClubMan said:

Or on other borrowers who didn't fail to meet their mortgage contractual obligations and end up with mortgage forebearance/restructuring. Moral hazard and all that...

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Just because these funds can charge a high %, and people are paying does not make it OK to charge them.

It's widely reported that people are struggling with these high rates. In essence, they are being taken advantage of.

The hazard here is the system allowed them become prisoners to these funds. If the funds charged normal rates they could avoid the days in court and an imposed 2.5% fixed for 25yrs.

The funds won't go broke, and if they do, that's the business they are in.

Tomandgerry said:

Hope for vulture fund mortgage prisoners as lender forced to offer couple lower fixed rate

A leading mortgage servicer acting on behalf of vulture funds has been forced by a court to give a cheap long-term fixed rate to a borrower couple.

m.independent.ie

What I thought was interesting here is that Pepper could not prove that the 2.5% rate did not meet the funding costs of the loan (or chose not to disclose it in an open forum). I understand Minister McGrath has requested the vulture funds to set out their funding costs to the Central Bank so this might be good news.

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This is bad news for mortgage holders.

The fact that a commercial entitity can be forced to provide finance to a defaulter on uneconomic terms is a further disincentive for new entrants to the market.

Why would a Santander enter the Irish market? It’s almost impossible to evict someone and the courts might force them to reduce their interest rate for a delinquent customer to an uneconomical level.

If a bank is a PLC, it must publish its annual report with data.

If a bank is a private limited company, I presume its reporting requirement are much less.


Did UB publish its cost of funds in RoI market?

Every borrower is different and the reasons for ending up at vulture funds is varied but something somewhere has to give within the system. I'm not against helping anyone but tweaking one part of the mess that is the Irish mortgage market only causes issues somewhere else. It would be good to take the politics out of this and as a society decide where the balance should lie.

If a lender can't foreclose, then they sell the loan. But who will buy the loan if the ability to determine interest rates on those loans are undermined. The purchaser faces a combination of credit risk and now legal risk.

This will impact the market for distressed debt which right now seems to be the only way for an originating lender to clean up it's balance sheet.

The court ruling may well help thousands of people, that's not a bad thing. The problem is it will also reduce lending in the future. New banks won't come near Ireland and those existing providers that remain will be all the more discerning. They will lend less and those that do manage to borrow will face higher rates than they would otherwise have faced. The reasons why we were among the most expensive countries to get a mortgage haven't gone away. This ruling will do nothing to change this.

The Irish system is becoming increasingly dependent on good lending standings as the sole means of ensuring a functioning mortgage market. Prevention is most definitely better than cure but at some point a plan B wouldn't go amiss.

It's a circuit court decision that is almost certainly going to be appealed all the way to the Supreme Court. It's such an extreme decision, I'd struggle to see how it will be upheld.

thedaddyman said:

It's a circuit court decision that is almost certainly going to be appealed all the way to the Supreme Court. It's such an extreme decision, I'd struggle to see how it will be upheld.

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I think people have to realise that it's in the context of a PIA where the bank along with all other creditors has to take a bath.

NoRegretsCoyote said:

I think people have to realise that it's in the context of a PIA where the bank along with all other creditors has to take a bath.

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Exactly , this does not set a precedent in respect of the Vultures and their interest rate policies .

CorkHome2022 said:

Exactly , this does not set a precedent in respect of the Vultures and their interest rate policies .

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Doesn't it though? In theory, most of the mortgages sold to 'Vultures' are distressed aren't they? So many others may look at the PIA process and think, "maybe there's a better rate there for me?".

If others follow, then if I'm a Vulture fund, then I'm going to look hard at the price I pay a bank for these mortgages. If I'm a bank, then I'm going to think hard about what price I might only get, should I need to offload a distressed mortgage, and be more selective in the mortgages I offer.

I think that this has very limited implications for others.

A borrower can't just opt for a PIA so that the lender will be forced to lower the interest rate.

They must be insolvent.
They must go through a fairly tough insolvency process.

I doubt if someone with a decent salary who is struggling with their mortgage payments will qualify for a PIA. I doubt that they would want a PIA and the limitations it brings.

Brendan

The PIA legislation is fundamentally flawed if it allows a Circuit Court judge to issue a ridiculous decision like this.

The fact that Pepper is charging outrageously high rates is not enough justification for them to be forced to charge outrageously low rates.

The judges are not trained in understanding mortgages. The judge had no understanding of the implications of his decision.

I hope Pepper appeal and win the case.

I also hope the the Central Bank or the Minister for Finance brings in controls on the rates vulture funds can charge.

Brendan

I am a PIP there is nothing new in this decision. The HC in [2017] IEHC 657 already confirmed its permissible. A case in court to getting to this stage takes 2 years. When rates were low there was not an obvious reason to fix rates. But there is now. There will be a lot more appeals on this involving other Debtors. The Court in tehse circumstances treat the funds as Investments. investments can go up an down. There is a very long and nuanced test to get these approved its under section 115A of the act. The court performed it and accepted the proposal.

See paras 44-83

The risk to Investors