High mortgage rates caused by low levels of repossessions

Delboy

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Well, it's not rocket science. But still refreshing to see something so basic laid out in the Irish media
And a little dig or 2 at the populist interference by political parties in the Banking sector

http://www.irishtimes.com/business/...sessions-linked-to-higher-mortgages-1.2692506
Low rate of repossessions linked to higher mortgages
Borrowers pay price for low repossessions and State control of banks, ESRI says...
...However, Spain, which experienced a similar boom and bust to Ireland in recent times, has one of the lowest average rates in Europe, at 1.7 per cent. One of the reasons was that it was comparatively easier to repossess properties when loans were in default in Spain than elsewhere, said Kieran McQuinn, associate research professor at the ESRI.
“If it’s more difficult for banks to repossess properties and repossess distressed loans, on average, [banks] tend to price this into their credit risk and that overall leads to higher interest rates on average,” said Mr McQuinn....
....The Government’s continued involvement in the banking sector following the financial crisis, and Fianna Fáil’s successful initiation last month of a Bill to give the Central Bank powers to cap variable home loan rates, were damaging competition and contributing to higher mortgage costs, Mr McQuinn said....
...“But the point we’re making is that because Irish firms and Irish households are facing higher interest rates in the market, there’s also potentially a cost associated with that State involvement which maybe people aren’t focusing on.”
 
It's convenient for the banks to be given an excuse to overcharge
 
The low level of repossessions is absolutely a justification for charging higher mortgage rates for mortgages with LTVs >80%.

But they do not explain why Irish borrowers with 50% LTV mortgages are also paying twice the rate they would be paying in other Eurozone countries.

Brendan
 
Their report actually said very little on the issue. The comments must have been at the press conference:

On banking, the Programme for Government states that the overall aim of
banking policy is to encourage more entrants and the presence of a vibrant
banking sector with real competition in order to provide more choice to
mortgage holders. While most will agree with this aim, the continued
involvement of the Government in the Irish banking sector may be one of the key
impediments to credit institutions from outside the jurisdiction seeking to come
into the Irish market. As a significant stakeholder in certain Irish credit
institutions, the State has a particular motivation in seeing these institutions
maximising their profit levels. Inevitably, greater competition between the
existing institutions and from outside the market is required to ensure that Irish
households and SMEs are not subjected to significant ‘wedges’ or margins
between official policy and domestic interest rates. Such increased rates of
competition would almost inevitably have adverse implications for the
profitability of the main Irish credit institutions. Recent research (McQuinn and
Morley, 2015) indicates that this wedge between domestic rates and the ECB
policy rate is actually increasing in an Irish context and the relatively high rates
charged in the Irish market are confirmed by Euro Area cross country data
presented in the Commentary. Unfortunately, the recent legislation proposing to
give the Central Bank of Ireland powers to regulate variable interest rates may act
as a further disincentive to new competition entering the Irish market. It merely
confirms the extent to which the different institutions of the State are intervening
and, potentially, distorting the domestic banking market.
 
Just reading the Irish Times article.

"While the average interest rates on new Irish variable rate mortgages fell to 2.7 per cent in March from almost 3.5 per cent a year earlier, this remains well above the euro-area average of 1.9 per cent, according to the ESRI.

However, Spain, which experienced a similar boom and bust to Ireland in recent times, has one of the lowest average rates in Europe, at 1.7 per cent. One of the reasons was that it was comparatively easier to repossess properties when loans were in default in Spain than elsewhere, said Kieran McQuinn, associate research professor at the ESRI.

“If it’s more difficult for banks to repossess properties and repossess distressed loans, on average, [banks] tend to price this into their credit risk and that overall leads to higher interest rates on average,” said Mr McQuinn."

I don't know how they could get it so wrong. It's very frustrating.

"While the average interest rates on new Irish variable rate mortgages fell to 2.7 per cent in March from almost 3.5 per cent a year earlier, this remains well above the euro-area average of 1.9 per cent, according to the ESRI."

It wouldn't surprise me if the ESRI actually said this. They have little or no understanding of the actual mortgage market in Ireland.

But the Irish Times should not have reported it uncritically.

Brendan
 
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From memory (dangerous) !
Was it not that we bailed out the Banks and that bad pre 2008 stuff was provided for and lumped into (bad) ie separate holdings?
So the issue of Bad Loans/lending was fenced off from today?

It seems that good payers are
1. Hit hard by bailing out Banks.
2. Hit hard by too high rates, to pay for provisions on bad debts they have already paid for.

It looks like .
1. Non-payers (in particular those who pay nought) get off.
2. Looks like payers are hit on double.

Am I wrong ?
 
"While the average interest rates on new Irish variable rate mortgages fell to 2.7 per cent in March from almost 3.5 per cent a year earlier, this remains well above the euro-area average of 1.9 per cent, according to the ESRI.

However, Spain, which experienced a similar boom and bust to Ireland in recent times, has one of the lowest average rates in Europe, at 1.7 per cent. One of the reasons was that it was comparatively easier to repossess properties when loans were in default in Spain than elsewhere, said Kieran McQuinn, associate research professor at the ESRI.

I'd love to know where the ESRI are getting their figures from.

Per the ECB MIR statistics, the average new floating rate (which includes renegotiations and home loans that are fixed for up to one year) was 3.16% (not 2.7%) at end-March 2016 and the equivalent Eurozone average rate was 1.89%. The up to date figure for Ireland at end-April was 3.08% - the comparable figure for Spain was 1.66% and 1.86% for the Eurozone as a whole.

Are the ESRI adjusting these figures to take account of cash incentives offered by Irish lenders and mortgage arrangement fees that are the norm in Spain? I doubt it but, if they are, I'd love to see their calculations.

In any event, I strongly agree with the core conclusions in the ESRI report/interview:
  • Difficulties experienced by lenders in enforcing security inevitably lead to higher rates;
  • The State is conflicted in this matter due to its equity interest in the banking sector; and
  • The proposed price fixing Bill will disincentive new entrants and ultimately will be counter-productive.
 
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They have simply published the Central Bank stuff without any caveats.

From PDF page 29 of http://www.esri.ie/pubs/QEC2016SUM.pdf

upload_2016-6-21_11-55-56.png


For both lending to households and non-financial corporates, it would appear
that Ireland’s interest rates are comparable only to Greece’s. In both cases, Irish
rates would appear to be significantly higher than the Euro Area average and
that, if anything, the margin or wedge between the two is actually increasing
through time.

As can be seen from Figure 12, Spain has one of the lowest mortgage variable
interest rates in the Euro Area; however, the mortgage market in Spain also has
one of the shortest periods of foreclosure proceedings in Europe at less than one
year. As noted by Aiyar et al. (2015) weak debt enforcement raises the legal
cost of debt restructuring and hampers banks’ ability to seize loan collateral,
reducing the expected recovery rate on delinquent loans. This ultimately may
feed into higher interest rates. This potential relationship between the interest
rates charged by financial institutions and the efficiency with which they can
work through distressed loans is important in the domestic context.
 

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That chart is wrong - the figure for Ireland to end-March should be 3.16% and not 2.7%.

The figure for Greece (to end-April) is actually 2.61% (against 3.08% for Ireland).
 
That chart is wrong - the figure for Ireland to end-March should be 3.16% and not 2.7%.

They are completely theoretical and academic and don't seem to actually ask themselves "Do our figures make any sense?" Here is another one, which I had corrected publicly at a meeting. But they continue to publish it as fact.

http://www.esri.ie/pubs/BP201501.pdf

upload_2016-6-21_12-37-20.png


So between 2007 and 2012, we reduced the mortgages outstanding by 40 billion. At that rate, it must be down to €40 billion by now and will be paid off entirely by 2020.

There was €112 billion of pdh loans outstanding and €30 billion of buy to lets.
 
Hi Sarenco

He seems to be taking it from here
[broken link removed]

upload_2016-6-21_13-22-25.png


I don't know how that ties in with the Central Bank's press release:
  • The rate on new floating rate loan agreements[1] for house purchase (which includes renegotiations) was 3.08 per cent at end-April 2016, representing a decrease of 8 basis points over the month. The equivalent euro rate was 1.86 per cent (Chart 2), which decreased by 3 basis points over the same period.

In any event, both figure grossly distort the true rate being charged to new customers of Irish banks.

Brendan
 
He seems to be taking it from here
[broken link removed]

I don't think so Brendan.

In the quote they say the rate "fell to 2.7 per cent in March from almost 3.5 per cent a year earlier". But the renegotiated rate wasn't 2.7% in March 2016 (it was 2.85%) and it wasn't almost 3.5% in March 2015 (it was 3.09%).

Also, at the foot of the chart they cite euro-area-statistics.org (rather than the Central Bank) as their source.

I think they simply got the data point wrong for the relevant Irish rate at the end of March - it should have been 3.16% rather than 2.7%. Otherwise the chart looks right to me(although I don't know why they didn't use the more up to date figures to end-April).

The key point is that the scale of the difference between the new business floating rate in Ireland and the comparable rates in the other selected Eurozone countries is materially understated.

The only country in the Eurozone that has a higher comparable rate is Cyprus.
 
You are of course right, assuming that you include trackers issued at 0.5% in 2006 as new business issued in 2016.

Mortgages written in 2006 (trackers or otherwise) don't feed into the new business MIR data unless they are renegotiated during the relevant reporting month. Loans that are restructured at rates that would not be offered to a similar customer seeking a new loan are excluded from the MIR data.

In other words, a tracker mortgage originally written in 2006 that was restructured in the relevant month in 2016 would not feed into the new business rate, if the agreed rate on the restructured loan would not be offered to a similar customer seeking a new loan.

However, trackers written in the appropriate month in 2016 (pursuant to a tracker "mover" offering) would certainly be included in the MIR data.
 
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Quite the difference versus UK:
http://www.irishtimes.com/business/...reaks-uk-records-with-0-99-mortgage-1.2693243

HSBC breaks UK records with 0.99% mortgage
Move highlights differential in mortgage rates between Ireland and rest of Europe


[broken link removed] has broken mortgage records by offering UK customers a two-year fixed rate home loan at an interest rate of 0.99 per cent, underlining the difference between the rates Irish homeowners are paying on their mortgages versus their European peers."
 
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That chart is wrong - the figure for Ireland to end-March should be 3.16% and not 2.7%

Loans that are restructured at rates that would not be offered to a similar customer seeking a new loan are excluded from the MIR data

@Sarenco this is where I (and I assume lots of others) get lost. In March 2016, there was no variable rate or 1 year fixed mortgage available at 3.16% or 2.7% to new or switcher customers. Yes, AIB and KBC have come in with rates below 3.16% since, but not at the time.

How can the loans which are restructured at rates not offered to new customers be excluded, when the average reported is simply not available to any new customer ? Something has to be bringing down the average - so can someone explain what is it if its not the restructured loans? Are people getting deals that are not available to others in general - and if so, how do you get one of them?

I think this is the general point most people have with these numbers, whatever they are. The numbers quoted are not available to new customers, so how can they be the averages without some 'other factor' influencing them.

I would actually like to see the rates for NEW BUSINESS loans, freely available on the market, reported to show the real figure for the ordinary person looking at the data - rather than the industry insiders who know how to 'read' it
 
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