When is a repossession not a repossession? When you 'volunteer' to give up your house, of course. As more cash-strapped homeowners run into trouble with their mortgage payments, banks are trying to avoid formal, legalistic repossession procedures in favour one-to-one solutions.
One of these is something called 'voluntary surrender'. Sometimes called 'jingle mail' in the US, voluntary surrender is an agreement whereby the borrower hands over possession of the house to the lender to clear the outstanding mortgage.
It's a legal practice but, crucially, does not appear in official repossession statistics as the arrangements take place out of court.
While the number of repossession cases reaching the courts has been rising steadily in the last two years, very few of these result in the bank taking actual ownership of the property. Irish Life & Permanent, Ireland's largest mortgage lender with about 20% of the market, repossessed only two houses in all of 2008 – and one of them was vacant.
Start Mortgages, the largest subprime lender in Ireland but much smaller than IL&P, has seized 18 properties despite being in business for five years and at the riskier end of the market.
There is a clear aversion to going the repossession route. Part of the reason is cultural: nobody wants to be seen turfing families out of their homes. Part of it is economical: according to the chief executive of one mortgage lender, it can take two years, a dozen broken agreements and tens of thousands of euro before the parties even come before a judge.
"Nobody wants to go after the family home," said James Wyse, managing director of Sixty Plus Finance, a home equity release provider. "It's too politically sensitive. It's real dynamite, Joe Duffy stuff. Paying cash incentives for voluntary surrenders is better than dragging people through the court system."
But voluntary surrender is less visible, more efficient and – unsurprisingly – much more common.
Maurice Lyons, a solicitor specialising in debt collection and repossessions who works for 10 different mortgage providers, processes as many as 16 per week. Both the Money Advice and Budgeting Service (MABS) and the Free Legal Aid Centre are also reporting that voluntary surrenders are increasing. Borrowers, they say, often chose to avoid courts because of the high costs involved in defending actions.
The advantage for banks? No hassle with the court system and virtually none of the negative publicity that comes with taking someone's house away from them. And since the Department of Finance introduced new, stricter guidelines for banks when dealing with customers in arrears or facing repossession, voluntary surrender offers a way around the rules without breaking them. As one senior industry source put it: "The banks have not promised to refrain from voluntary surrenders, just from repossessions."
Yet voluntary surrender is just one of several tactics banks are using to get control of a bad mortgage loans. In many cases, banks are actually seeking to forgo repossession and voluntary surrender entirely.
Industry sources report a range of behind-the-scenes deals, including payment deferrals and moratoriums, forced sales and cash incentives to refinance with other lenders.
Fresh Mortgages, a now defunct subprime joint venture originally backed by former Anglo Irish chairman Seán FitzPatrick and funded by Credit Suisse, is offering 10% of the remaining loan balance in cash to customers who refinance with another lender, according to broker sources. Fresh actually quit lending back in late 2007 when Credit Suisse pulled its funding lines, but it still has an active book estimated at €50m. It is reportedly shopping this portfolio – which is believed to have a 15%-20% delinquency rate – around to distressed debt investors for 30c on the euro.
Some banks are even trying to shift prime borrowers who are completely up to date with payments because their tracker rates actually cost the lender money under current market conditions. The Sunday Tribune learned of one borrower – a professional with secure employment – who accepted a 2% cash pay-out to take his business elsewhere.
"The volume of this stuff is wider than people think," said one industry source with connections to both brokers and lenders. "Banks are doing deals because they want to avoid the publicity of court, but they're very tight-lipped about it."
According to Diarmuid Kelly, chief executive of the Professional Insurance Brokers Association, evidence for cash incentives to refinance are mostly anecdotal, but his mortgage broker members have been reporting that banks are much more apt to switch tracker customers onto two-year fixed mortgages. These, he says, are poor value for that time frame and customers would be better off sticking with the trackers or going for a longer fix of five or ten years, since inflation is unlikely to arrive by 2011.
Buy-to-let properties are treated differently from residences, though, and banks are reportedly going after many of the amateur investors in that market as they fall behind on payments and eat through their personal resources.
"It might be worth a couple of grand to the lender just to get the tenant out in those case, but I don't know of any specific examples," said Wyse of Sixty Plus Finance.
But other voices in the industry are saying lenders are doing everything possible – rolling up interest payments, offering loan deferrals and no-pay moratoriums – to keep the borrowers in the properties at this stage of the downturn. There are a few reasons this strategy would be attractive to banks. First of all, it keeps them from showing a loss on their books. Second, they avoid the duty of care over a property and the headache of trying to sell it in a market that hasn't reached bottom yet. Most importantly it keeps the one person with in interest in paying at least something on the loan – the borrower – tied to the property.
"Certainly for the lenders we are working for they are being as helpful as possible with each case," said Richard Lay, chief executive of debt management firm White Horse Mortgage Services. "The borrower is now the main security, not the property."