THE EBS Building Society may be asked to curtail its business activities as part of its restructuring plans to justify keeping the €875 million it received from the state.

The European Commission has opened “an in-depth investigation” into the restructuring of the EBS, currently the country’s biggest building society and one of only two left, both in state hands.

The building society is currently for sale and the search for a buyer will continue in tandem with the commission’s investigation, a spokesperson for the Department of Finance confirmed, adding that the sale process will move to its final stage in the coming days. The sale will be narrowed down to Irish Life & Permanent and one leveraged buyout firm, according to sources.

Finance Minister Brian Lenihan will sign off on the two names being drawn up by EBS and the National Treasury Management Agency, which is running the auction, after he returns to Ireland this week from a trip to the US, said the sources.

A spokesman for the Department of Finance declined to comment.

EBS spokesman Gerry O’Sullivan and Irish Life spokesman Ray Gordan also declined to comment

Competition Commissioner Joaquin Almunia, announcing the investigation, said: “Ireland has taken decisive action to strengthen EBS. The amount of aid received by EBS, however, justified that we give interested third parties the opportunity to comment on whether the distortions of competition are adequately addressed.”

In June, the commission temporarily authorised the state injection of capital which resulted in its nationalisation, and the EBS also received aid through asset purchases by NAMA, as well as being covered under the guarantee schemes.

A restructuring plan was submitted at the end of May and yesterday the commission said they have doubts that the distortions of competition caused by the aid to EBS are sufficiently addressed by the plan. In other comparable cases the commission has requested financial institutions to reduce its activities and it is understood they wish to explore why they should not ask EBS to do the same.

The Irish authorities say there is no need for this on the basis that there is a shortage of lending on the Irish mortgage market. The commission also says it wants further information to underpin the state’s claim that the EBS will not need further state aid and will restore its viability on the basis of the current plan.

EBS chief executive Fergus Murphy last month said the building society was on the path to viability though reporting pretax losses of almost €250 million for the first half of the year. It has taken close to €2 billion in deposits since the start of 2008, offering some of the highest deposit rates in the country, raising further issues about distorting the market. It is understood it is preparing to look for €500m to €700m from the markets before the end of the year.

Staff at Irish Nationwide have been told to pull out all the stops in a massive effort to increase mortgage lending at the state-owned building society by 700% next year, according to sources briefed on the matter.

The nationalised lender is beginning a major push to write at least €160m in new mortgages in 2011, after issuing just €20m this year, in an effort to make the business more attractive to potential buyers. Management is targeting €325m in new business for 2012, as well.

Management told staff that INBS has no future as a stand-alone entity – the building society will ultimately need €5.4bn in state help to meet minimum capital standards – but no interested buyers have come forward yet. In the meantime, it will add to the €2.5bn mortgage book left over after the lender transfers more than €8.5bn to Nama.

Irish Nationwide is aiming to do 40% of its new lending through brokers – not a traditional sales channel for the branch-based lender. Chief executive Gerry McGinn has appointed former Bank of Scotland Ireland head of mortgages John Kelly to lead the charge. However, management said the 44 retail branches would remain open to drive new business.

In bad news for members, who lost ownership of the mutual last year, Irish Nationwide’s market leading deposit rates will be cut to help improve lending margins. The building society has long been a market leader in deposits, as it sought funding to support its expansive property and development lending through the boom.

Despite efforts to shore up eroding margins, the building society is still expected to lose money for another two years, management told staff.

INBS began work on turning around its business last month. The move, called ‘Project SAM’, brought in external marketing and IT experts to work on the plan. Former Bank of Scotland Ireland executive Antoinette Dunne was also hired to review the branch network.

The European Commission is currently reviewing INBS’s business plan, but a decision could come as late as next summer, management told staff.

A MAJOR mortgage-bailout measure means banks face forgoing millions of euro in repayment income.

The radical recommendation would let struggling homeowners put off paying up to 33 per cent of their mortgages for several years.

It comes from the Department of Finance’s Expert Group on Mortgage Arrears and Personal Debt, whose report is due out later this month.

The recommendation is highly likely to be enforced on the state-controlled mortgage lenders, the Sunday Independent has learned.

“Part of the mortgage-interest payments would be suspended for a period of time,” an informed source said.

“Say you have a €300,000 mortgage and can’t fully make payments on it, but you can make payments on €200,000. You could park €100,000 and then continue to service the €200,000 portion.”

This ‘breather’ would continue for three to five years.

“That portion could be recovered through the eventual sale of the house or when the homeowner’s circumstances improve,” the source added.

It’s not a blanket opportunity for homeowners to go rogue on their mortgages, however, and would only be an option of last resort.

The source explained: “A mortgagee would have to be able to service some of the debt. It would apply only after other forbearance measures, like a period of interest-only payments or a mortgage holiday had been exhausted.

PROPOSALS TO protect homeowners in arrears will push up borrowing costs for other mortgage-holders, according to the Bank of Ireland.

Planned changes to the existing code of conduct on mortgage arrears would also be viewed negatively by international markets, the bank warns in a submission to the Financial Regulator.

All the banks which made submissions are seeking to have the regulator’s proposals diluted. In particular, they object to proposed limits on the number of unsolicited communications a bank can send to a mortgage-holder in arrears and to plans for an independent appeals process where disputes arise.

Under the proposed changes, householders in arrears who are behaving reasonably will be protected against repossession. Banks could only apply to the court to repossess a home at least 12 months after a revised payment arrangement had broke down.

There are also protections against banks forcing customers off cheaper tracker mortgages.

Bank of Ireland says it has serious concerns about the proposals in terms of their speed of implementation and the potential for some customers to use them to create an “unwarranted delay” in the arrears process. It says the proposed limit of three unsolicited communications per month is a blunt instrument and recommends that no specific limit should apply.

The bank also says it is concerned that people with more than one property and who are in arrears could exploit the revised code by moving from one property to another to frustrate the banks and its attempts to secure arrears.

It says the planned third-party appeals mechanism is not necessary because each lender has its own independent appeals process. An additional mechanism would lead to “spurious appeals” by some lenders trying to delay the process.

Lenders have a legal right to rely on security, but any dilution of this right would be viewed by international markets as an indication that Irish institutions were no longer allowed to manage fully their exposures to arrears. The consequences would be higher funding costs for lenders and higher prices for mortgage borrowers.

Ulster Bank said under the proposals, customers could make only three repayments over 36 months and be entitled to a further 12 months before proceedings could begin.

KBC Bank Ireland describes the limit on communications as unrealistic and extreme and claims it will result in lenders being unable to engage meaningfully with borrowers.

The bank also claims the proposals could lead to a situation where some borrowers claim to be facing financial distress or deliberately default on repayments to maintain their tracker rates. The Money and Budgeting Service says borrowers on fixed rate mortgages who can’t afford repayments should be allowed to switch to an alternative product such as a variable rate without penalty.

CONSUMERS were assured yesterday that their savings in AIB, Anglo Irish Bank and Irish Nationwide are safe.

But there remains concern about the increased cost of banking for customers after the State effectively took control of AIB.

Deposits in Irish banks and building societies are covered by a double-lock of guarantees, a spokeswoman for the Financial Regulator said.

Some consumers expressed concern after the Government said it must pour more money into AIB and building societies Irish Nationwide and EBS.

The first €100,000 of all deposits in Irish-regulated banks and building societies is guaranteed under the State deposit protection scheme.

The scheme covers €100,000 per person, per institution. The scheme has no end date, the regulator said.

The deposit guarantee covers AIB, Bank of Ireland, ICS Building Society, EBS Building Society, Anglo Irish, Irish Nationwide Building Society and Irish Life and Permanent. It also covers credit unions and Ulster Bank.

Most deposits are also covered by another guarantee, which has now been extended until the end of the year — the Eligible Liabilities Guarantee Scheme.

This guarantees eligible deposits (of up to five years), which are placed on deposit before the end of the year. This scheme covers amounts of more than €100,000.

Covered under this scheme are AIB, Anglo Irish Bank, Bank of Ireland, EBS Building Society, ICS Building Society, Irish Life and Permanent and Irish Nationwide Building Society.

A spokeswoman for the regulator said: “Deposits in Irish banks are unaffected by the capital announcements and all depositors will continue to benefit from the deposit guarantees in place.

“Consumers are reminded that under the deposit guarantee scheme all deposits are covered to a maximum of €100,000 per person, per bank, indefinitely.

“Eligible deposits in Irish banks are fully guaranteed to the end of December 2010 under the Eligible Liability Guarantee.”

Meanwhile, the bill for saving our banks is set to cost every man, woman and child in the State €10,000 each.

This is based on the total cost of the bailout hitting €44bn, but it could rise to €50bn. In that case, the cost for each citizen would rise to €12,000.

And yesterday, consumer groups predicted that the State’s effective takeover of AIB, the need to put more funding into Anglo Irish and building societies Irish Nationwide and EBS, would mean branch closures and higher lending costs.

The failure of AIB to raise funds on the markets — and the need for the State to pump more money into it — means the banks will have to increase costs for consumers.

Consumers’ Association vice-chairman Michael Kilcoyne said it was inevitable that AIB would be forced to shut branches as it attempts to return to profitability to escape state ownership.

The bank has 182 branches and 88 sub-branches, along with 15 business centres.

He said the bank would squeeze consumers by hitting them with higher lending costs and higher charges for banking transactions.

The bank has 7,284 people working in its branch network in Ireland and a total workforce of 12,500, a spokesman for AIB said yesterday.

Mr Kilcoyne said layoffs were highly likely. “There will be a big rationalisation at AIB,” he said.

Director of the Irish Mortgage Corporation Frank Conway said consumers would lose out from the AIB nationalisation.

“The Government increasing its stake in AIB will mean less choice and more costs for consumers,” he said

When it comes to managing finances, it is vital to prioritise your debts and repay secured creditors first

WITH SO much talk in the past week about massive sovereign debts, banks with distressed property loans, billion euro debt and subordinated bond holders, the average punter could be forgiven for sidestepping his own financial woes.

But a pay cut or a reduced working week – not to mention the loss of a job – has meant that many mortgage holders are no longer able to pay their bills in full – or at all.

An ominous sign of the times is that more than 32,000 mortgage holders are already over three months in arrears on their mortgages.

This repayment is invariably just one of a number of bills that surface every month and as repayments are missed with increasing frequency, the pressure from the bank will inevitably build up. The experts advise those in difficulties to take two forms of remedial action. First of all they should prioritise how they pay their bills. Secured creditors should be looked after first and if there is anything left over then it can go to the secondary debtors.

A second way to reduce the pressure is to negotiate lower repayments with the bank. Whether or not this concession is made frequently depends on the borrower’s ability to produce an accurate income and expenditure account showing a fall off in income.

Any hint of wastefulness or an extravagant lifestyle will automatically rule out the client. But by now even the property developers have got rid of their racehorses, their helicopters and their jets.

The most important priority is to understand who should be paid first – the mortgage provider or the credit card company. In a tough old world of debt collection, there should be a clear distinction between priority debts and secondary debts.

Frank Conway of Irish Mortgage Corporation identifies priority debts as mortgages and mortgage arrears, utility bills such as gas and electricity, court fines and judgments and car finance repayments. Essentially, a functioning home and a car to get you to work without the threat of jail are prerequisites to earning a living.

Secondary debts are generally categorised as debts that are unsecured, such as credit cards, personal loans, bank overdrafts and store credit cards. Because unsecured creditors such as American Express and Visa are always more vulnerable, they are invariably the first to mount an aggressive collection campaign of pestering the client with phone calls and letters warning of immediate court action and the implications for future credit worthiness of reneging on the debt.

As a general rule, a reduced repayments schedule is often acceptable provided the client makes an open and honest disclosure of the facts.

A debtor who can show a fall off in household income has good reason to believe the bank can and will change the ground rules in these difficult times. It is only by engaging with the bank that a revised schedule of payments can be agreed.

Frank Conway , who has very considerable experience of banking and the mortgage sector, is convinced that borrowers can manage their finances even in the most challenging times. However, he stresses that it is vital to be well prepared before approaching the bank and to have good knowledge of how lenders operate. By the same token, he says clients should have “the tenacity not to be forced to make a payment to a lender who operates an aggressive collections regime”. But, he says, it is important to stick to a financial repayment plan once it has been agreed.

The death knell for Irish Nationwide Building Society was signalled again last week after a doubling of the amount of cash it needs from the taxpayer to €5.4bn.

But Irish Nationwide is still at an advanced stage of launching ‘Project SAM’ to turn itself into a savings, mortgage and investment product specialist.

The Sunday Tribune has learned Irish Nationwide has appointed John Kelly, former head of mortgage brokerage at Bank of Scotland Ireland, to drive the building society’s transformation. The move to embrace mortgage brokers – not a traditional sales channel for Irish Nationwide – signals a change in strategy which has implications for the future of its 49-branch retail network.

If Kelly can slash the fixed costs associated with the branches and start building on the mutual’s €2.5bn mortgage book by selling more cheaply through brokers, there might yet be some slim chance INBS has a future – at least as an attractive addition to another financial institution.

MORTGAGE HOLDERS may face the prospect of their mortgages being written down in value if a US private equity firm which is part of a consortium bidding for the Educational Building Society (EBS) is successful with its offer.

Billionaire investor Wilbur Ross, whose company is part of a consortium led by Irish firm Cardinal which is bidding for the 75-year-old financial institution, said it would consider cutting the mortgage interest repayments that customers would be required to pay to service their mortgages.

Speaking on CNBC television, Mr Ross said banks may have to write down mortgages if a bank repossessed a home.

“Unlike many of the states here [in the US], if you get foreclosed out of a home, you don’t lose the debt, you’re still on the hook for the debt In many, many of the American states, you can just put the keys back to the bank and you’re off the hook,” he said.

Mr Ross said that, while there have not been many foreclosures in Ireland, there have been high levels of arrears.

“We can be very useful to the country, coming into it at a properly mark-to-market level; we’ll be able to give the people a lot of relief on the mortgages, and yet be able to make the bank function well because of the level at which we’ll be coming in,” he said.

Mr Ross said his firm could apply what it has learned about US mortgages in Ireland if it successfully takes over what he called on CNBC the “Educational Bank”.

“The big thing we’ve learned in this country: you’ve got to cut the principal amount. If a guy has got a mortgage 125 per cent of the value of the house, the chances of that guy really playing are very slim, ’cause they’re under water; no one wants to throw money into a rat hole,” he said.

Mr Ross, who made his fortune rescuing troubled financial institutions, said he expects the sale process for the EBS to be concluded by the end of next week and that he was “optimistic” that Cardinal’s bid would be successful.

It is expected that the outcome on the future of the lender may not be known until next month.

As The Irish Times first reported last week, Mr Ross’s New York-based private equity firm, WL Ross, is the third member of a consortium led by Dublin-based Cardinal, which is controlled by businessmen Nick Corcoran and Nigel McDermott and backed by US private equity giant Carlyle.

The three other bidders for the institution are Irish Life Permanent, UK-based Doughty Hanson, and US buyout firm JC Flowers, founded by former Goldman Sachs executive Chris Flowers.

Mr Ross said the company was also looking at other opportunities in the Irish market, and that he had visited Ireland recently.

“We do think there’s room for consolidation in the Irish market,” he said. “There is a need for another very large bank to compete” with the country’s two largest banks [Allied Irish Banks and Bank of Ireland], he said.

He said it was “important to have professional outside investors” entering the Irish lending market with capital.

EBS, which is in full State ownership, requires a further €437 million to meet the Financial Regulator’s €875 million capital target.

The Government has injected €350 million into EBS – €100 million in cash and €250 million by way of a promissory note last June – and will invest the remaining €437 million if the lender cannot source this from private investors.

The society also made a €88 million gain by buying back debt.

The banks’ forbearance to customers in arrears may be storing up future trouble as household debt spirals writes Jon Ihle

The banking system is desperately trying to hold back an ever-rising tide of overdue mortgages as high unemployment and increasing mortgage rates play havoc with family finances. Lenders have been ordered by the Financial Regulator to help people stay in their homes, even when they’ve stopped paying their loans, but how much forbearance can our weak financial system take before buckling?

More than one in 10 borrowers is now in distress, according to the latest quarterly figures on residential mortgage arrears from the Financial Regulator and unofficial estimates by the Irish Banking Federation (IBF).

Around 36,000 households are now more than 90 days in arrears, with two-thirds of that total more than six months behind on their mortgages, according to the regulator.

The IBF is preparing new data on restructured mortgages – loans switched to easier repayment arrangements – showing about 35,000 homeowners in distress but not picked up in the regulator’s figures.

Banking sources also estimate another 30,000 or so have missed payments, but haven’t yet crossed the 90-day threshold. That puts about 100,000 borrowers out of 790,000 in the troubled category.

The trend is ominous, too. In the last year, 90-day-plus arrears counted in the regulator’s surveys have gone from 3.3% to 4.6% of the total. In value terms, mortgages in arrears account for 5.9% of the total outstanding debt compared with 4.5% at the start of the year. Arrears balances stand at €559m, or 8% of those mortgages which are in arrears, according to calculations by Davy.

Yet the banks are doing very little to recoup the money they are losing on souring home loans because the Code for Conduct on Mortgage Arrears prevents them from moving on homeowners who cannot afford to pay. Repossessions have actually fallen in each of the last three quarters.

And the code is set to get tougher if proposals put forward by the regulator over the summer are fully implemented.

“The latest figures from the Financial Regulator confirm that the focus of mainstream lenders remains firmly on forbearance and this is helping homeowners to manage their arrears and to stay in their homes” said Pat Farrell, chief executive of the Irish Banking Federation, in a statement last week.

“IBF mainstream lenders remain committed to doing everything possible to help people with genuine repayment problems.”

But the banks’ commitment could cost them dearly in terms of bad-debt charges and shrinking margins in the coming years, as arrears are unlikely to peak until after unemployment starts coming down. With the jobless figure holding steady at nearly 14%, according to live register figures published last week, that peak could be a long way off.

“Arrears levels are likely to rise further from here,” said Emer Lang, banking analyst with Davy. “[Irish Life & Permanent] reports that early arrears are rising ‘more slowly’ and is signalling a peak in its arrears at the end of the current year. From a provisioning perspective, the Irish policy of forbearance will elongate the tail of mortgage losses this time around.”

While losses for the banks will keep mounting in a ‘long tail’ scenario, the market is already showing signs that borrowers are building big mountains of debt as a result of forebearance – the balances grow as missed payments pile up and get added to the principal.

“While those in arrears between three and six months grew by 10%, their average level of arrears grew by a massive 44%, from €50m to €72m,” said Ronan O’Driscoll, director with Savills Ireland, the real estate services firm.

“This indicates that long-term arrears are a growing problem, with few appearing to recover or escape from the debt once they fall into arrears.”

With just 387 repossessions completed in the last year – or slightly more than 1% of distress loans recovered through asset forfeiture – the banks are mopping up very little of the problem, raising concerns that forbearance is only delaying the recovery as the lenders preserve their balance sheets and try to restore their public image.

“How is it that arrears are going up 11% per quarter but we are repossessing fewer houses?” said Karl Deeter, operations manager with Irish Mortgage Brokers. “This isn’t a public service. It’s political pressure and the realisation by the banks that they don’t want to do repossessions for their own good.”

A bank does not take a full writedown on a restructured loan or a loan in forbearance, but will take a haircut based on probable loan recovery. With a repossession, however, the bank has to account for the value of the underlying property, which could be worth much less than even a discounted loan.

“This has a number of knock-on effects,” he said. “We are not actually dealing with the situation, which kills the property market because we’re not finding a clearing price [on houses]. The quicker you reach the bottom, the better it ends.”

The regulator’s code, however, militates against finding this bottom, as the procedures it puts in place for banks to deal with arrears extends the moratorium on legal action potentially to several years. Each bank now has to have a ‘mortgage arrears resolution process’ (Marp) for dealing with distressed borrowers. As long as a borrower is engaged in the process, their property cannot be touched. But nobody yet know what to do when forbearance simply doesn’t work.

“Forbearance is manageable at the moment,” said a senior banking source. “But some people will still be unable to deal with the problem. We still need a process to work that out.”

There is a concern that forbearance, then, just stores up more serious problems for borrowers and banks alike, ultimately forcing larger writedowns and defaults in the future.

“Borrowers in arrears will get to a point where they just can’t pay what they owe,” said one senior bank analyst at a Dublin securities firm. “At some stage you have to make a decision. We’re not there yet, but in one or two years you could be looking at ‘my Nama’ for mortgages.”

Experts are divided on when interest rates may rise, but if you decide to go for a fixed-rate mortgage, you need to act quickly, writes Emma Kennedy

The decision on whether to f ix your mortgage interest rate now depends on your long-term view of interest rates themselves. Future moves in mortgage interest rates will be governed by two events - the actions of retail banks and those of the European Central Bank.

Retail banks have already shown their inclination to rebuild their balance sheets with their customers’ money, with standard variable rates inching upwards in recent months, despite ECB rates remaining at record lows.

‘‘Now that lenders have taken to increasing the cost of finance on standard variable rates, the best move is definitely to fix,” said Frank Conway, director of Irish Mortgage Corporation.

‘‘Banks have taken back control of their cost of operations, and will do all they can to survive. The financial risk to borrowers with a standard variable rate cannot be overstated.”

Banks are likely to continue with the trend in rate hikes, citing increased funding costs as their justification, but they will definitely hike again once the ECB puts up rates.

When that day will come is unclear. ECB president Jean Claude Trichet last week announced that interest rates would remain at a record low of 1 per cent, for now.

Trichet said the ECB expected ‘‘price developments to remain moderate’’, adding that recovery should proceed at a moderate pace, with ‘‘uncertainty still prevailing’’.

Commentators agree little movement is likely from the ECB before 2011,but the timing and magnitude of subsequent ECB interest rate decisions does not attract similar consensus.

Jim Power, chief economist at Friends First, said Europe’s core, led by Germany, was doing quite well, while other European economies, such as Spain, Portugal, Greece and Ireland, were struggling. ‘‘The ECB has to set interest rates for the whole euro area, so it will undoubtedly have some concerns about the strong momentum in the German economy and the potential for higher inflation,” he said.

‘‘Despite the ECB’s upward revision to growth prospects for the Euro area, the reality is that around 20 per cent of the region will experience tough economic times over the coming year and that should dampen any enthusiasm the ECB might have to increase official interest rates any time soon.

‘‘Also, inflation remains very well-behaved, so there is no immediate pressure on the ECB to take official rates higher.”

Power said it was hard to see the ECB hiking official rates until the second quarter of next year, but said the risk would ‘‘probably increase as 2011 progresses’’.

Ronnie O’Toole, chief economist of National Irish Bank, said he thought the ECB would keep interest rates on hold until the final quarter of 2011, adding that increases would be slow when they came. He predicted an initial increase of 0.25 per cent. Some see the increase coming earlier.

‘‘Our base case is for the first hike to come in June of next year,” said Simon Barry, chief economist at Ulster Bank. He predicted that ECB rates would hit 1.75 per cent by the end of 2011, with three rate hikes of 0.25 per cent each.

‘‘This scenario envisages a gradual process of getting rates back up towards normal levels,” Barry said.

However, he added that his predictions depended on economic performance in the intervening months. ‘’Recovery is by no means copper-fastened and downside risks from the United States and global economies have certainly increased lately. If such risks materialise and the euro zone economic recovery falters, we could well see a scenario where ECB rates are unchanged for all of next year.”

For borrowers who do decide to fix, the advice from experts is to act quickly. Rachel Doyle, director of mortgage services with broker group PIBA, said that while media attention had focused on rising standard variable rates, fixed rates had also been creeping upwards in recent months.

Doyle said that borrowers who intended to fix should consider a longer-term fixed rate, such as five years.

‘‘If you go for a shorter term, such as two or three years, you could end up coming out of the fixed rate at the wrong time,” she said, adding that interest rates could still be rising in two or three years’ time. She said rates would more likely have stabilised within five years.

According to Doyle, Irish borrowers are less likely to fix than their European counterparts, meaning mortgage holders here are more vulnerable to rising interest rates.