Brendan Burgess
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HELEN GROGAN was keen to make up for lost time when she bought her home in Palmerstown in Dublin in 2006. Having returned from the UK in her forties, she was a late arrival to the property boom. If she stuck with the scheduled repayments, she would be saddled with her mortgage from EBS building society until she was 70. By stepping up the payments, she had the chance to become debt-free earlier. The lower the rate of interest, the easier this would be.
It did not take long to find a cheaper mortgage. A newspaper ad from Permanent TSB caught her eye, promoting a tracker loan with an interest margin of 0.8 percentage points. While only marginally less than the one-point margin on her existing EBS tracker, Grogan reckoned she needed all the help she could get.
The deal looked even better when she followed up with Permanent TSB. It threw in an extra attraction — a discounted margin of 0.6 points for the first year. Grogan was hooked, leaving EBS for Permanent TSB early in 2008.
The bargain turned sour as soon as the introductory discount ran out the following year. Instead of the 0.8 points she had expected, Permanent TSB said the margin would be 2.25 percentage points for the remainder of the mortgage.
Trackers are sold on the basis of transparency, with the cost pegged to the European Central Bank rate by a defined margin for the life of the loan. How could a margin of 0.8 points suddenly become 2.25 points?
Grogan complained and, when Permanent TSB refused to budge, she went to the financial services ombudsman, who also rejected her complaint. The reason was a clause buried in the small print, which allowed Permanent TSB to dictate whatever tracker margin it wanted after the introductory discount ran out.
In better times, this might have worked in Grogan’s favour. By leaving its options open, the bank had the scope to cut a better deal to hold on to Grogan’s business if she were tempted to move her mortgage again.
By 2009, though, tracker customers with wafer-thin margins had acquired pariah status for all lenders. The credit crunch transformed their competitive plain vanilla loans into loss makers that threatened banks’ survival. Trackers were taken off the table for new customers, and banks combed through their books for ways of extracting more profits from trackers already on their books.
The stakes were high. Tracker interest rates currently average just 1.07%, according to the Central Bank of Ireland. This could be increased to an average of 3.96% if customers could be moved to a standard variable rate.
Even though Permanent TSB had the right to increase Grogan’s tracker margin, she believes she was misled. “I felt they tricked me by playing around with the term ‘tracker’,” she said. “I would never have given up the lifetime tracker I had with EBS if I had known that Permanent TSB was offering only a one-year product. This was a one-year product masquerading as a tracker mortgage.”
Despite hitting a brick wall when she complained in 2009, Grogan may yet win her battle.
HAVING dragged its heels for years, the Central Bank finally ordered an examination before Christmas into the treatment by all lenders of tracker customers. As well as ensuring that contractual rights and regulatory obligations were respected, lenders will have to take account of customers’ “reasonable expectations” in deciding who will get their trackers back. This nebulous criterion could provide the passport that will reunite Grogan and other customers with their trackers.
The outcome of the examination will have far-reaching financial and reputational consequences for all lenders, especially the state-controlled banks.
The scale of the exercise is vast, encompassing 13 lenders including some that have fled the country such as Bank of Scotland (Ireland) and Danske Bank. They will have to review all mortgages sold since 2001, when trackers first appeared in Ireland, including buy-to-let loans. The review will present formidable logistical challenges, requiring banks to hunt for data about mortgages sold in the distant past from information systems that are well past their best-before dates.
Lenders had until the end of last month to tell the Central Bank how they proposed to handle the tracker reviews. The importance attached by the regulator is underlined by its insistence that the plans be signed off by the banks at board level and approved by independent accountants that must be appointed to oversee the process. A progress update is due later this month from the regulator, which expects “significant progress” before the end of the year.
This looks like an ambitious target, with bankers claiming it could take them up to two years to complete all of the work demanded by the regulator.
Although declining in relative importance since banks stopped selling them, trackers still accounted for 40% of the value of all home loans by last autumn, according to the Central Bank, and almost two-thirds of buy-to-let mortgages.
The obvious focus will be on trackers that have disappeared from the banks’ books. The regulator wants to know whether the banks had the right to remove trackers from those affected and whether they were warned of the consequences. Those who have suffered detriment — the term used by the regulator but never defined — will be entitled to redress.
Permanent TSB, led by chief executive Jeremy Masding, has set aside €145m to cover redress — but the cost does not end there. A €10m gain booked in 2014 on the sale of Springboard, its sub-prime lender, was all but wiped out last year when it had to pay the purchaser €9m to cover the cost of returning some of the loans to tracker terms.
The bank also paid €8.6m in 2015 to accountancy firm KPMG for “regulatory and compliance projects”, mostly for overseeing mortgage redress programmes, and the bill will grow this year as the scope of the examination is widened.
Allied Irish Banks, whose tracker review is also being overseen by KPMG, estimates its redress bill at €105m. It has taken a further €85m hit to earnings because the mortgages involved will not be as profitable after they return to tracker terms.
In the run-up to an initial public offering planned for the autumn, the state- controlled bank needs to be able to quantify the full scale of its exposure to trackers for prospective investors. Chief executive Bernard Byrne has committed up to 300 employees to what he is calling Project Dawn, sifting through customers’ tracker files to determine who should get a refund.
Bank of Ireland is coy on the issue. It has said it is “assessing” the potential impact of the tracker examination, with the help of accountants from Deloitte, but chief executive Richie Boucher declined to provide any details when announcing the bank’s 2015 results in February.
Ulster Bank has made no provision for redress, a stance consistent with its position that all customers entitled to a tracker mortgage have received one. It has set aside €5m, though, to cover the costs of complying with the Central Bank’s examination.
All accept that redress should include the return to a tracker mortgage, a refund of overcharged interest and an allowance for the time that customers were deprived of their trackers. Compensation is a far bigger sticking point, however.
The Central Bank expects some gesture of contrition; the banks believe they should not have to pay compensation for what they claim were genuine mistakes or decisions that appear suspect only with the benefit of hindsight.
Even if the regulator were to accept the institutions’ redress plans, the outcome is unlikely to please everybody. A third of the 1,074 customers who were included in a previous redress programme at Permanent TSB, part of an enforcement investigation taken by the Central Bank, gained little from the process.
They have been offered a return to trackers with margins of more than 2.4 points, which is all they are entitled to, according to Permanent TSB. The Central Bank says it cannot interfere in contractual arrangements between lenders and their customers. The customers feel short-changed, offered trackers that are almost as expensive as their current mortgages.
MANY homeowners have turned for help to Padraic Kissane, a financial adviser who has helped hundreds of clients recover tracker mortgages via the ombudsman’s office. He is considering a legal challenge to the margins offered under Permanent TSB’s earlier redress programme, a move that would be deeply embarrassing for the Central Bank, which oversaw the scheme.
“They [Permanent TSB] are going to lawyer-up with the best, and we are going to do the same,” Kissane promised a packed meeting on March 31, just as the banks were rushing their latest redress plans to the Central Bank. “Mortgage redress is like getting a tax refund: you get all excited until you realise it’s your own money you’re getting back.”
A meeting at the Citywest hotel in Dublin attracted more than 200 people.
“I want to give Permanent TSB a piece of my mind,” Grogan told the audience. “I’m so upset with how I’ve been misled.”
Her fight continues.