Waterford Office Garraunfadda, Dungarvan, Co.

Waterford, X35 D653

BANKS RECOVERING JUST 34% OF MORTGAGE DEBT IN BANKRUPTCY

Today Waterford based Personal Insolvency Practice Insolvency Resolution Service has published its third
annual Bankruptcy report. While the numbers make for stark reading for banks and borrowers alike, the
trend is not surprising. The number of people choosing bankruptcy is up, and bankruptcy continues to
cost banks and vulture funds millions of Euro each year. What is surprising is that banks continue to suffer
losses of 66% on mortgage loans in bankruptcy when there are personal Insolvency alternatives that
would lessen these losses and keep families in their homes.

The bankruptcy data released today relates to 100 people adjudicated bankrupt on their own petition in
the High Court to the end of December 2016. [bankruptcy data attached]

According to Waterford based Personal Insolvency Practitioner (PIP) Mitchell OBrien Despite new laws
limiting the extent of the Bank Veto, debtors continue to opt for Bankruptcy rather than accept bad deals
offered by banks. Mr OBrien says Government needs to wake up to the realities distressed borrowers
are facing dealing with their mortgage lenders. The Governments Abhile scheme provides borrowers
free access to PIPs and solicitors nationwide, and borrowers are now engaging with PIPs. However,
without clear pronouncements from Government as to how the Personal Insolvency Legislation is to be
implemented, up to 85% of borrowers presenting for Government funded PIP advices will not be able to
keep their family homes if the banks and vulture funds have their way.

According to the Central Bank in September 2016 there were 34,551 family home mortgages 2 years or
more in arrears. Mr OBrien claims the majority of borrowers contacting his office for assistance under
the Abhile Scheme are from the 34,551 long term arrears statistic. Based on the solutions that banks will
currently agree to, most of these families will not find a solution that involves keeping their home. There
are two main reasons for this, 1.) the borrowers are too old, with too little time left to pay down a
mortgage before old age pension age, and 2.) the borrowers household income has collapsed to such an
extent in the years since 2008 that they could not fund mortgage payments at even the current market
value of their family home regardless of how much is actually owed to their mortgage lender.

However, Mr OBrien does see some hope in a yet to be used section in the Personal Insolvency legislation
that provides for Debt for Equity swaps. He is of the opinion that 100% of the long-term arrears cases
could be dealt with using this mechanism that would appear to have remained hidden in plain sight since
2012 when the Personal Insolvency laws were introduced.

Mr OBrien explains that a debt for equity swap (as part of a Personal Insolvency Arrangement) would see
a borrower servicing whatever portion of their mortgage loan is deemed sustainable in context of their
reasonable living expenses. The percentage of the mortgage balance the borrow can pay would represent
the percentage of the value of their home they would keep ownership of. The balance of the ownership
in the home would be granted to the mortgage lender by way of an irrevocable option exercisable by the
bank in one of two events, 1.) the sale of the family home by the borrower, or 2.) from the estate of the
longer surviving co-borrower.

OBrien claims this would keep borrowers in their homes with security of tenure while paying a mortgage
they can afford, at the same time exposing banks to capital appreciation of the home in the period before
they can exercise their option, and get paid the balance of what they are owed. [case study attached]

058 23511
Waterford Office Garraunfadda, Dungarvan, Co. Waterford, X35 D653
Mitchell O'Brien is authorised by the Insolvency Service of Ireland to carry on practice as a personal insolvency practitioner
PIP authorisation no. PC00001
Committee member of the Association of Personal Insolvency Practitioners

www.sustainabledebt.ie
100 CASE DATE-SET / SELF-ADJUDICATION BANKRUPTCIES TO DEC 2016

Total Debt 54,956,989

Total Secured Debt 37,439,976

Total Unsecured Debt 17,517,013

Net Realisable value of Secured Assets 12,820,795

Total Deficit on Secured Debt 24,619,181

RETURNS IN BANKRUPTCY - 100 CASE DATA-SET

% of Total Debt write-down in Bankruptcy 77%

% of Secured Debt realised in Bankruptcy 34%

% of Secured Debt written-down in Bankruptcy 66%

% of Unsecured Debt write-down in Bankruptcy 100%

OF UNSECURED DEBT EXTINGUISHED IN BANKRUPTCY

Credit Union Debt 859,374 5% of non-mortgage debt

Revenue Debt 3,084,784 18% of non-mortgage debt

058 23511
Waterford Office Garraunfadda, Dungarvan, Co. Waterford, X35 D653
Mitchell O'Brien is authorised by the Insolvency Service of Ireland to carry on practice as a personal insolvency practitioner
PIP authorisation no. PC00001
Committee member of the Association of Personal Insolvency Practitioners

www.sustainabledebt.ie
 SECURED DEBT BY CREDITOR - 100 CASE DATA-SET

SECURED CREDITORS DEBT

1 AIB/EBS 6,901,805

2 KBC 6,378,041

3 DANSKE BANK 5,224,733

4 PTSB 4,566,445

5 BANK OF IRELAND 3,419,921

6 ACC 3,300,000

7 ULSTER BANK 2,438,002

8 BANK OF SCOTLAND 2,351,946

9 PEPPER (SERVICED BY) 1,188,473

10 START MORTGAGES 775,009

11 OTHERS 720,234

12 COUNTY COUNCILS 175,368

37,439,976
TOTAL SECURED DEBT IN 100 CASES

058 23511
Waterford Office Garraunfadda, Dungarvan, Co. Waterford, X35 D653
Mitchell O'Brien is authorised by the Insolvency Service of Ireland to carry on practice as a personal insolvency practitioner
PIP authorisation no. PC00001
Committee member of the Association of Personal Insolvency Practitioners

www.sustainabledebt.ie
DEBT FOR EQUITY SOLUTION FOR FAMILY HOME MORTGAGES IN ARREARS

S.102(6) of the Personal Insolvency Acts 2012-2015

Without prejudice to the generality of section 100 or subsections (1) to (3) and subject to sections 103 to
105, a Personal Insolvency Arrangement may include one or more of the following terms in relation to
the secured debt:

(f) that the principal sum due on the secured debt be reduced provided that the secured creditor be
granted a share in the debtors equity in the property the subject of the security.

CASE STUDY FOR DEMONSTRATION PURPOSES

A Mortgage Balance Owed 200,000

B Value of Family Home (PPR) 150,000

C Mortgage Balance debtor/borrower can service 50,000

D % of Mortgage Balance debtor can service sustainably 50,000 / 200,000 or 25%

E % of Mortgage Balance to be written down 150,000 / 200,000 or 75%

F Equity in PPR to be retained by the debtor 25% of 150,000 = 37,500

G Equity in PPR to be given to Creditor (mortgage lender) 75% or 150,000 = 112,500

H Return for Creditor in repossession 85% of 150,000 = 127,500

I Return for Creditor in PIA incorporating debt for equity 50,000 + 112,500 = 162,500

J Positive Difference for Creditor 35,000 or 27.5% uplift

K Age of debtor 56

L Average Life Expectancy in Ireland 82

Where a borrower has a mortgage loan of 200,000 relating to a family home worth 150,000, but only
has income enough to service a mortgage of 50,000 in context of his reasonable living expenses (RLES),
the equity in the family home would be split pro-rata with the level of mortgage debt the debtor can
sustainably service until old age pension age. In this example the debtor can service a mortgage of
50,000, and this amount represents 25% of the outstanding mortgage balance. Therefore, the debtor
would retain 25% ownership of his home.

In exchange for the creditor writing down the mortgage debt to 50,000, the creditor would be granted a
75% equity share in the debtors family home. This transfer of ownership in the family home would
happen by way of an irrevocable option granted to the creditor by the debtor exercisable in two events:

i.) The sale by the debtor of his home, or

058 23511
Waterford Office Garraunfadda, Dungarvan, Co. Waterford, X35 D653
Mitchell O'Brien is authorised by the Insolvency Service of Ireland to carry on practice as a personal insolvency practitioner
PIP authorisation no. PC00001
Committee member of the Association of Personal Insolvency Practitioners

www.sustainabledebt.ie
 ii.) From the estate of the debtor (or the longer surviving co-borrower in the
case of a couple).

The equity participation for the creditor to be by way of an irrevocable option to protect the creditor from
the contingent liabilities associated with property ownership, i.e. the creditor would not become liable to
pay a share of the insurance costs for the property, or the local property tax, maintenance of the property,
etc.

Creditors who already have systems in place to record warehousing of mortgage debt will be able to use
their existing systems to record a debt for equity treatment of mortgage arrears cases with little
modification required.

Currently warehousing solutions as provided for in CCMA 2013 operated by mortgage lenders shows the
warehoused amount being charged 0% interest for the duration of the warehousing. During the
warehousing period, it is a commonly accepted financial fact that the value of the warehoused amount
falls in real terms in line with the rate of inflation.

However, the debt of equity solution provided for in S.102(6)(f) of the Act would see the equity granted
to the creditor in exchange for the mortgage debt being written down to a sustainable level, increasing in
line with inflation each year until the creditor realises its security. Assuming 26 years to life expectancy
for the debtor in this example, and further assuming a conservative level of capital appreciation for
property of 2% per annum during this 26-year period, the equity stakes of the debtor and the creditor
would have increased as shown below:

Debt for Equity Split 2017 2043

(2017 + 26-years)

Debtors 25% equity 37,500 63,049

Creditors 75% equity 112,500 189,146

Total value of family home 150,000 252,195

It shown above that the creditors equity stake will have appreciated from a value of 112,500 in 2017 to
189,146 assuming the most conservative level of 2% property capital appreciation in the 26-year period.
If property inflation were to run at 3% per annum the 112,500 equity stake would have appreciated to
245,177 in the same period.

If a Debt for Equity proposal is assessed against a performing loan in normal circumstances it could be
considered as unfairly prejudicial. However, in context of the repossession crisis we are facing into, and
considering the warehousing solutions already being used by Irish banks, then the outcomes are clearly
better.

Further, if one considers a debtor who loses his home on the basis he cannot afford to pay a mortgage on
at least the current market value of his home, then the likely hood of this debtor having to rely on the
safety net of social housing (local authority or housing association housing) is very high. The cost of this
to the state is significant in when the numbers of long term mortgage arrears cases work their way through

058 23511
Waterford Office Garraunfadda, Dungarvan, Co. Waterford, X35 D653
Mitchell O'Brien is authorised by the Insolvency Service of Ireland to carry on practice as a personal insolvency practitioner
PIP authorisation no. PC00001
Committee member of the Association of Personal Insolvency Practitioners

www.sustainabledebt.ie
the legal repossession process. The political and societal threats of not embracing the Debt for Equity
solution already provided for in primary legislation are sobering.

This solution works as an alternative to the costly and cumbersome Mortgage to Rent (MTR) scheme
funded by Government. Simply put, the social tenancy rent a debtor would have to pay in a MTR scenario
can be the minimum a debtor would pay as his mortgage payment on a monthly basis in a debt of equity
case. This amount, combined with the mortgage lenders standard variable interest rate, and the number
of months the debtor has until reaching old age pension age, generates the mortgage amount a debtor
can pay sustainably into the future. This mortgage amount as a percentage of the total mortgage debt
owed by the debtor will determine the percentage ownership of the home the debtor will retain.

This mechanism allows a debtor to retain some element of the ownership in their family home to form
part of their estate to be left to children in a will. It also ensures that a debtor living on a state old age
pension (having paid the mortgage on the element of the home that he will have retained) will not have
a housing cost in as a pensioner. This is a significant feature of the proposed scheme as the Irish state old
age pension does not currently envisage a debtor paying for housing from 230 income per week.

058 23511
Waterford Office Garraunfadda, Dungarvan, Co. Waterford, X35 D653
Mitchell O'Brien is authorised by the Insolvency Service of Ireland to carry on practice as a personal insolvency practitioner
PIP authorisation no. PC00001
Committee member of the Association of Personal Insolvency Practitioners

www.sustainabledebt.ie