Strategic default is a reality

As [broken link removed] lines up the sale in the not-too-distant future of as much as €2 billion of troubled property investment and buy-to-let loans (dubbed Project Redwood), its chief executive, [broken link removed], has one message for borrowers who refuse to engage and face the prospect of their loans being moved on to vulture funds: come forward and try to do a deal.

Some 80 per cent of a portfolio of €400 million buy-to-let mortgages sold to Goldman Sachs earlier this year, at a 50 per cent discount to par value, was made up of borrowers who had not engaged with the bank for at least 720 days, Byrne told the Oireachtas finance committee this week.

The executive indicated that some borrowers heading into the lap of Goldman Sachs in the so-called Project Cyprus portfolio actually went to AIB afterwards to try to do a deal, having suddenly found money behind the sofa or from family and friends. But that’s “too late”, said Byrne.

Byrne also said that a “very significant number of customers” whose accounts were earmarked for the Project Cyprus sale earlier this year had managed to “resolve themselves” before the sale took place.

AIB is not alone. Many other sellers of portfolios of soured loans in recent years, including Nama, are known to have seen borrowers in default with apparently no other means suddenly find fresh funds when their borrowings are lumped into a portfolio and put up for sale, lending credibility to the debated existence of “strategic defaulters” in the Republic.

As the banks resort increasingly to loan sales in a final push over the next few years to reduce their non-performing loans – under direction from the [broken link removed] – it will be interesting to see how many more such fellows will be flushed out.

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