Why the pain of the property crash goes on for borrowers
Financial loans bought by newly-arrived financial organisations, such as Cerberus are a continuing responsibility for the original borrowers. The banks have cleaned up their balance sheets by selling outstanding loans, often at a large discount of (usually) 50% to 75% of the face value of the loan. For the Irish banks, the intervention of the National Assets Management Agency (Nama) was a critical lifeline, both north and south in Ireland.
Nama has operated professionally and more recently sold its Northern Ireland-based loans to Cerberus. Nama, and some of the other agencies, are now subject to enquiries on the mechanics of the sale of the Northern Ireland-based loans. For these purposes, let's consider the practicalities facing the borrowers whose loans have been transferred.
The borrower whose loan has transferred is now a client of a new funder. The debt has the same repayment obligations and carries the original guarantees issued by the borrower. Nama has sold these loans with the continuing loan conditions and guarantees.
Some borrowers now assess that their repayment obligations have become much tougher. The essence of the possible tension is that the terms of transferred loans usually allow borrowing for an agreed period, after which renewal is subject to agreement on revised terms. As loans reach renewal dates, new lenders have the sanction of non-renewal (and asking for repayment) or tighter terms for the loans. Indeed, as some borrowers now realise, their loans were on a rolling contract basis.
In this situation, one or two large businesses have made public comments on their search for new funders. A small number have paid off the original loan and switched to a new lender.
For loans originally sold to Nama, the initial understanding was that the borrower would become liable for the repayments to Nama.
Nama was expected to deal with these loans by collecting the repayments that were due, when and where possible.
Once loans had been transferred, those organisations (including Nama) also looked to the marketplace to sell these loans to other buyers at reassessed market values.
Many business borrowers, without any prior permission or specific influence, found that they were in debt to a different lender and, critically, the new lender had no obligation to roll over an unchanged contract.
Many borrowers have faced unwelcome problems. These problems emerge if the new lender, at a review date, raises interest charges or forcefully asks for an accelerated repayment of the loan on pain of a withdrawal of the loan, including the prospect of legal action to appoint administrators to release assets.
The purchasers of a portfolio of loans paid a discounted value for the loans. The terms of this discounted calculation are, of course, confidential. To exploit the commercial potential, new lenders have a dual motive: to recoup as much of the original loan as possible and to speed up the original deal on a repayment timetable to gain earlier capital repayment. There is an expectation of a profit to be made, which is why they bought the loan.
Several cases have been reported of problems for borrowers who have been making continuing repayments or repayments that were possible without driving the business into extra difficulty. The sanction that the loan will not be renewed and this linked to the appointment of administrators leads towards the realisation of assets at depressed market values.
One frustrated business owner alleges that this type of treatment could cost them more than £1m.
The combination of loan transfer, harsher lending conditions and the threat of business closure has created unusual tougher debt management techniques.
The loan funders are in this business to earn profits on their investment. For borrowers, the legacy of the property crash and the cost and pain of borrowing lives on.