‘Aggressive’ vulture funds swoop in on Irish property
Distressed debt specialists criticised for exacerbating homelessness crisis
In 2007, Anna Flynn bought a three-bedroom house in Gorey, a small market town in the south-east of Ireland about an hour’s drive from Dublin.
Recently divorced, the accountancy assistant used the proceeds from the sale of her family home to put down a €100,000 deposit on the semi-detached house worth €350,000.
“It was at the height of the [Celtic tiger] boom. Everyone said, ‘You had better buy, otherwise you will price yourself out of the market’,” says Ms Flynn.
It was advice Ms Flynn would later regret taking. As the global financial crisis began to take shape, Ireland’s unemployment rate soared, its property market collapsed and its banking system came under huge strain.
Ms Flynn’s mortgage wound up in the Irish Bank Resolution Corporation, a bad bank set up by the Irish government to house non-performing assets, after her mortgage provider was bailed out.
Ms Flynn’s mortgage, along with thousands of others, was later sold to a so-called vulture fund, an asset manager that specialises in buying distressed debt.
These investment managers, dubbed vulture funds over fears that they behave in a predatory manner, have since become mired in controversy in Ireland. The government is now facing calls to regulate their activities more closely.
Funds run by many international investment companies, including Cerberus Capital Management, Goldman Sachs and Lone Star, were given this label after snapping up mortgage debt, properties and development land in Europe at knockdown prices after the crisis.
They provided much-needed capital for Ireland’s economy, at a time when many other investors had retreated from the country following an international bailout in 2010.
These investment companies have since become some of Ireland’s biggest landlords and mortgage providers, and generated big profits after the republic’s property market recovered. Residential property prices rose 8 per cent in 2016, according to official figures.
But the fund managers have faced criticism for their treatment of homeowners and tenants. They stand accused of not paying their fair share of taxes and of exacerbating a homelessness crisis in Ireland by evicting mortgage holders from properties.
Michael Byrne, a researcher at the School of Social Policy at University College Dublin, Ireland’s largest university, says: “The aggressive strategies used by vulture funds lead to human tragedies.”
The investment managers make money in two ways. Some acquire debt for less than its face value, but the mortgage holder is expected to repay the full original sum. In other cases, where a homeowner is not making sufficient repayments, the fund can repossess the house and sell it for a higher price than it paid for the loan secured against the property.
David Hall, chief executive of the Irish Mortgage Holders Organisation, a non-profit that represents 2,300 homeowners in financial distress, says: “Many people are at the wrong end of a dance with vulture funds. They wanted to hold on to their house. But vulture funds are not interested in the housing crisis. [They] just care about [their] shareholders.
“[The actions of vulture funds] has completely tarnished the reputation of asset managers in Ireland. Banks are pariahs, but the asset management industry is seen now as a rung below that. Vulture funds are as low as you can get.”
Since 2011 Ireland has emerged as a hotspot for distressed property assets, after its bad banks sold off swaths of loans that had once been held by struggling financial institutions. In 2014, the republic’s bad banks were the largest vendors of distressed property assets in Europe.
Many homeowners whose mortgages were acquired by international investors are critical of the treatment they received.
Ms Flynn lost her job as Ireland’s recession deepened and fell behind on mortgage payments. She says Mars Capital, an affiliate of Oaktree Capital, the private equity firm, acquired her mortgage from the Irish bad bank and was “very, very difficult to deal with”.
“All [Mars] wanted was for me to leave the house; they didn’t want a solution [to ensure I could retain my home],” the mother of four says.
Such an experience is not exceptional, according to Mr Hall. He says banks will usually attempt to help the homeowner retain their property, by providing a reduced interest rate for example.
“Vulture funds do none of this. They come in with a sledge hammer and they are self-confessed predators,” he says.
Ms Flynn, who got a job in retail to try to stay on top of repayments, became physically and mentally ill during her dealings with Mars. She says the company repeatedly tried to take her to court, eventually securing an eviction notice against her.
“[The experience] was horrendous. I became mentally ill and I did try to take my life twice. I ended up in treatment in hospital. It was just the pressure of it, and it then snowballed and I couldn’t cope. It was the worst experience of my life.”
Alex Forrester, group managing director of Mars Capital, says the company cannot comment on individual cases. However, he adds: “Our view is to always treat customers fairly and our primary objective is to use our resources to help them to return to long-term sustainability.”
Mars, which has acquired 5,000 mortgages in Ireland, says few cases have been taken to court.
Lone Star, which owns and manages 8,200 residential loans in Ireland, says “legal enforcement is pursued as a last resort”. To date, Lone Star says there have been 11 repossessions in the country, of which seven were abandoned properties.
Cerberus Capital declined to comment on its Irish investments. Goldman Sachs did not respond to a request for comment.
The Irish government has been broadly supportive of international investors buying property and mortgage debt, although it acknowledges this has caused some problems.
A spokesperson for the Department of Finance says: “We — both the state and the people of Ireland — did not have the investment capital to make these investments [in property and mortgages] during the crisis.
“Strong interest from the global capital markets led to significant levels of much-needed capital investment in our economy during periods of high risk and uncertainty.”
The government has taken steps to address concerns about these asset managers, including introducing rules in 2015 requiring companies that buy loans to be regulated.
Last autumn the minister for finance said the government would close a loophole that allowed these investment companies to pay little tax on the profits they make from restructuring Irish mortgages.
The government has also introduced the “Tyrrelstown amendment”, which prevents a large number of residents in a single development being evicted simultaneously.
For Ms Flynn, life is finally improving. Soon she expects to surrender her house to Mars, which will then sell it to a local housing association. Under the plan, she will become a life-long tenant in the house.
It means she will have lost all the equity she had in the property, but the Dublin native is relieved. “When I knew that I would keep [living in] my home, the weight was lifted. Just that freedom — I can’t describe it,” she says.
“I don’t want to sound like a victim because I’m not. Things are looking up for me now, because I’ve got this deal. And I’m healthy now, thank god. I have a lot to be thankful for. They were bad years but I got through them. I just want to get on with my life now.”
But according to Mr Hall, the government’s actions have not gone far enough. Like many in Ireland, he wants the government to ensure no more assets from Ireland’s bad banks end up in the hands of vulture funds. The government is facing calls from opposition politicians to ensure these investment companies face more stringent regulation.
Last month, Pearse Doherty, a member of Ireland’s parliament and finance spokesperson for Sinn Fein, the political party, said: “We must stop giving advantages to these vultures and instead give the homeowner, the small businessman, the farmer, a level playing field.
“The vultures are not invincible. Concrete political and community action can clip their wings.”