Bad debt... good business

Just a few years ago the market for receivables secured by mortgages was virtually non-existent in Poland. If there were any transactions, they mostly involved testing the market or were of a very low value. As time went by, more significant transactions started to emerge, but the true breakthrough took place in 2014. In the spring of that year the Kruk group bought a portfolio of receivables secured by mortgages with a total nominal value of app. PLN 710 mln from Getin Noble Bank, paying PLN 230 mln for it. At the end of the year, Kruk also bought a portfolio of receivables secured by mortgages with a total nominal value of PLN 443 mln from BZ WBK, paying PLN 70.2 mln. “In 2014 we purchased receivables secured by mortgages with a combined nominal value of PLN 1.2 bln,” says Tomasz Kałuziak, the manager of the investor relations and development team at Kruk. Debt collection company Kredyt Inkaso is also carving out a position for itself on the market. In autumn 2014 it concluded an agreement with BGŻ bank for the acquisition of a portfolio of receivables secured by mortgages that included receivables denominated in Polish złoty, Swiss francs, euros and American dollars. The total nominal value of the receivables acquired amounted to PLN 118.2 mln and cost PLN 26.5 mln. Meanwhile, in December Kredyt Inkaso and US company Portfolio Recovery Associates (PRA) bought a portfolio of retail, car and mortgage loans from Getin Noble Bank. The total nominal value of the receivables bought came to PLN 1.12 bln and were acquired for PLN 300 mln. According to Pragma Inkaso, the banks offered a total of app. PLN 2 bln in mortgage loans in 2014.

The market grows, portfolios get cheaper

So it is not surprising that those who were at first taken by surprise by such dynamism in this market, are now optimistic about the future. “The transactions were quite a novelty, for both investors and for debt collection companies. Because of this, looking at the relative comparability of the portfolios we were seeing an interesting evolution in prices. They fluctuated from over 30 pct of the nominal value of the transactions concluded at the beginning of the year to 23 pct, 18 pct, and then to 15 pct in the last few months of 2014,” says Pragma Inkaso in its annual summary. “We can certainly expect a dynamic growth in mortgage NPLs (non-performing loans). Pioneers among the sellers, such as Getin, PKO BP and BGŻ, will see their ranks added to by others. The transactions will to a great extent solve the problem of ineffective enforcement and bad mortgage debt portfolios,” forecasts Pragma Inkaso. And this is not a small problem. “According to National Bank of Poland data, the volume of overdue mortgages has increased by 25 pct since 2012 to over PLN 11 bln. Entities that sell mortgage portfolios have now been joined by the banks,” adds Tomasz Kałuziak. So it is unlikely that financial institutions will be putting off selling distressed portfolios, particularly taking into consideration the fact that according to rumours swirling around the market at the beginning of this year a huge portfolio is set to be put up for sale by Raiffeisen Bank Polska. According to the Polish Press Agency, it will be selling a PLN 1 bln portfolio of mortgage loans. However, the bank has not confirmed this report. “In 2015 banks could put up for sale portfolios of receivables secured by mortgages with a value of as much as PLN 5 bln,” expects Kamil Karpicki, the investor relations manager at Kredyt Inkaso. And he is referring to residential loans. “When it comes to receivables secured by mortgages for commercial properties, the 2015 turnover could reach PLN 3 bln of the nominal value,” adds the representative of Kredyt Inkaso, which by 2011 had built up a portfolio of such receivables with a nominal value of app. PLN 500 mln.

A fig leaf?

The sale of distressed loans is rather good business for both parties. Debt collection companies acquire receivables secured by mortgages with a substantial discount, while the banks obtain a tax shield (the worse the receivables are sold by the bank, the more potential profit it generates in the form of tax write-offs), improve the quality of their loan portfolios and, importantly, resolve problems related to the inconvenience of debt collection. “Effective enforcement related to inhabited properties is always an emotional issue when it involves people losing their homes. In practice, therefore, banks are more interested in amicable solutions, particularly in situations where clients are willing to settle the debt voluntarily,” explains Iwona Radomska of the press office of PKO BP bank, which, however, has not opted for selling any large portfolios of mortgage receivables yet. Debt collection companies are also more inclined towards amicable settlements. “The portfolios of receivables secured by mortgages purchased by the Kruk group constitute a cross section of bank mortgages. We are talking about variety in terms of the type security, such as undeveloped land, unfinished houses, apartments purchased for leasing and apartments for borrowers to move into. Their geographical locations are also diverse – pretty much all over the country. Each receivable is considered by us individually and we look for the best amicable solution in each situation. A number of solutions are available, allowing for an amicable closure of the case,” insists Tomasz Kałuziak. The debt collection for a mortgage receivable generally takes place in three ways. “We usually contact the debtor, the property is sold and the money raised from the sale is allocated for the repayment of the debt. We can also take possession of properties but rent them back to the indebted residents, who sign a long-term lease agreement and wait for their financial situations to improve. Another solution is to take legal action to execute the debt enforcement, but this is the least convenient option for the debtor,” argues Kamil Karpicki.

Huge business in Europe

In spite of its rapid development and highly promising prospects, the Polish mortgage receivables market is still in its infancy. “Given that the ‘mass’ turnover of mortgage receivables is not yet fully developed, all attempts at analysing or forecasting in this area have a high risk of error. Because of this all such forecasts should be cautious and balanced,” believes Iwona Radomska. However, debt collectors would be foolish to miss the clear opportunity to cash in. “The secured consumer receivables market as well as corporate and commercial receivables will in our opinion continue to grow in Poland and we are fully prepared to actively take part in future debt auctions and transactions,” declares Tomasz Kałuziak. The scale of the Polish market cannot, however, be compared to other European countries where the segment has flourished for many years and many millions of euros of receivables are traded all the time. According to the calculations of C&W, last year the volume of sales of receivables related to commercial real estate (CRE) and real estate owned (REO)
in Europe amounted to as much as EUR 80.6 bln, two-and-a-half times more than in 2013. This year such a result will be difficult to obtain, but the beginning of the year revealed that institutions interested in such purchases are still very active.
According to C&W, EUR 2.7 bln of transactions have already been finalised so far this year. ν