"It's time to shout "stop" on excessive charges"

I have an article in today's Indo in response to the [broken link removed]from the Competition and Consumer Protection Commission yesterday.

It's time to shout "stop" on excessive charges

Brendan

If you are one of the 300,000 non-tracker mortgage holders who is paying around €150 to €200 a month in excessive interest rates, you won't get much comfort from reading the report on mortgage rates published yesterday by the Competition and Consumer Protection Commission (CCPC).

In fact, you will get very annoyed reading it. You will see that new borrowers in Finland, another member of the eurozone with a mortgage market around the same size as Ireland's, are paying 1.09pc for their mortgages compared to the 3.5pc here.

You will see Irish mortgage rates are not just a bit above average - they are by far the highest in the eurozone.

And it's not because the costs of funds are high in Ireland. Irish banks pay lower deposit rates than the average eurozone banks.

You will be annoyed when you realise the National Consumer Agency and its successor the CCPC have done nothing at all about this since Irish banks started pushing up their rates five years ago.

They never issued a statement on mortgage rates. They never asked why rates were so high. They never complained about the Irish mortgage lending cartel.

The CCPC is paid by the taxpayer to advocate on behalf on consumers but it has looked the other way.

And now, after you have paid around €15,000 in excess interest over the past five years, the CCPC comes out with a report that says we need more competition, a long-term strategy, a vision and we need more committees and inter-departmental working groups to discuss this strategy.

The report tells you there are no quick-fix solutions to high mortgage rates. But maybe a switching code might be developed which will make switching easier. Irish borrowers didn't need a switching code back in 2002 when a new lender came into the market offering lower rates. There was widespread switching and the existing lenders cut their rates to try to retain customers.

Irish borrowers don't switch now because all the lenders are charging high rates and there just isn't enough saving to be made.

The CCPC, the Government and the Central Bank tell us to be patient and that competition will bring down mortgage rates - eventually. Well the Government and the Central Bank have been telling us that for the last three years and there is no sign yet of any competition. Are borrowers to wait another three years before rates are reduced to a fair level?

The lenders have been on notice to stop gouging Irish families for well over two years. They have taken no heed. It's now essential that Michael McGrath's bill to limit mortgage rate gouging is pushed through the Dáil.

This bill would stop lenders discriminating against existing customers by charging them more than new customers as they would be forced to pass on rate cuts to new and existing customers. It would stop lenders using cashbacks and one-year discounts to trick customers into expensive mortgages.

It would allow existing customers who have reduced their Loan to Value to avail of the lower rates pertaining to that lower risk category. I believe less regulation is better than more regulation. I believe in a free market. But when an effective cartel of banks imposes excessive costs of around €150 per month each and every month on 300,000 Irish families and shows no sign of stopping, it's time to shout 'stop'.

Brendan Burgess is a spokesman for the Fair Mortgage Rates Campaign

With potential disruption of new entrant Frank gone, the cartel are laughing all the way to the bank

Hi Brendan,

What gets up my goat about this country is that we want it every way.

Low interest rates such as in Finland come at a cost. If a borrower falls behind in their mortgage payments the banks can sell the house in a process that only takes two - three months. In most cases due to the huge inflation in Finish property prices the owner will do this themselves so they can retain the profit.

Compare that to the Irish system which is extremely costly and time consuming.

Are we prepared and do you propose that we change to a Finish style system where people can loose their homes in only two or three months?

Hi Badger

Yes, I have, on many occasions, called for much quicker repossessions of houses from those who pay nothing and don't engage.

I have pointed out that other borrowers are paying for these by way of higher mortgage rates.

I have also pointed out that we want three mutually incompatible things - low rates, 100% mortgages and no repossessions.

I think that the priority should be low rates.

However, the lack of repossessions justifies some additional rates on LTVs in excess of 80%.

It does not justify charging a 50% LTV borrower 1.5% more than he would be charged in any other eurozone country.

Brendan

It seems to me that the failure to deal with NPLs in a timely and cost efficient manner has a number of inter-connected impacts:-

1. Moral hazard. If there are no real consequences to defaulting on a loan why keep paying? This inevitably gives rise to strategic default and means we still have extraordinarily high arrears rates notwithstanding the fact that we are rapidly approaching full employment.
2. Cost of capital. Banks, whether new or incumbent, are required to provision on the basis of historic default rates.
3. Barrier to competition. Why would another lender enter such a dysfunctional market?

I don't understand Brendan's argument about low LTVs. If it's incredibly difficult for a lender to enforce its security interest, what difference does it make what the LTV was when the loan was originated?

What would you say to there being a sort of sliding scale incentive form the banks. If for example the borrower were to pay back each month for say 5 yrs the banks would reward such borrowers with a small percentage off their mortgage rate, no cut at all if that pact was broken for whatever reason. Then again after another few yrs of honest payback there would be another reduction, etc, etc, etc. Not only would it cut rates, it would also encourage customers to keep on track. Just a thought, but sure maybe that's daft altogether?

That sounds very like a sliding scale of rates for lower LTVs. We already have that.

Sarenco said:

I don't understand Brendan's argument about low LTVs. If it's incredibly difficult for a lender to enforce its security interest, what difference does it make what the LTV was when the loan was originated?

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I think I have explained that to you before a few times. But I will do so again.

Borrowers in negative equity are much more likely to default than borrowers with 50% LTV.
The banks actually lose money when they eventually repossess a house in negative equity. They lose nothing on 50% mortgages.
They have lost no money on 50% LTV mortgages charged at non-tracker rates.

If a lender is charging 2% to a borrower on 50% LTV, and the borrower defaults, so what?
The bank continues charging 2% on the full mortgage. It's actually in the bank's interest.
It's a fully secured loan and they will never lose money.

Combine that with the very low actual default rate and you will see that there is a zero cost to the lenders.

So, I repeat, the problems with repossession do not justify higher mortgage rates on 50% LTV mortgages. They do justify them on 90% LTV mortgages.

Brendan

Sarenco said:

Cost of capital. Banks, whether new or incumbent, are required to provision on the basis of historic default rates.

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This is a big element that people overlook. Because of past experiences in Ireland the amount of core Capital that Irish banks have to set aside is almost twice that of some of the countries commentators are drawing comparison to. Added to that - the banks ratings here are lower so they need twice as mush capital, but can't access unsecured debt as easily as other countries. For example Nordea (one of the largest players in Finland) is AA- rated by S&P, compared to BOI's 'BBB'.

Sarenco said:

That sounds very like a sliding scale of rates for lower LTVs. We already have that.

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Got nothing to do with LTV. Just an incentive for everyone.

Brendan Burgess said:

If a lender is charging 2% to a borrower on 50% LTV, and the borrower defaults, so what?
The bank continues charging 2% on the full mortgage. It's actually in the bank's interest.
It's a fully secured loan and they will never lose money.

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Surely that assumes that the bank will be in a position to enforce its security interest in a timely and cost efficient manner?

If not, the value of the security on a home loan that was originated at 50% LTV may not actually be sufficient to discharge the outstanding loan by the time the lender manages to liquidate the security, after all outstanding interest and enforcement costs are taken into account.

I take the point that default rates are lower on low LTV loans and I agree that the spread between the rates charged on high and low LTV/DTI loans should be wider. But that's an argument for increasing the spread of rates charged to different cohorts - it doesn't argue for lower rates overall.

noproblem said:

Got nothing to do with LTV. Just an incentive for everyone.

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I don't follow. Are you suggesting that everybody should incentivised to meet their contractual obligations?

Surely there is already an incentive (or at least there should be) for meeting your loan obligations - you get to keep the secured property!

I just wish a new lender would come in and offer competitive rates - then the powers that be would be shaken up and start offering lower rates. I also wish someone in government would do something about this.

I think we all want to see new entrants to the mortgage market.

My fear is that potential new entrants are being scared off by FF's proposed price fixing legislation and the failure to allow lenders to deal with defaults in a timely and cost efficient manner.

Sarenco said:

I don't follow. Are you suggesting that everybody should incentivised to meet their contractual obligations?

Surely there is already an incentive (or at least there should be) for meeting your loan obligations - you get to keep the secured property!

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To your question, my answer is Yes and I really thought that was very obvious.

noproblem said:

To your question, my answer is Yes and I really thought that was very obvious.

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Fair enough.

It just seemed such an odd idea I assumed I had misunderstood your proposal and hence the request for clarification.

Is the flip side of your proposal not that defaulting borrowers would pay higher rates?

That's your interpreation, not mine, but aren't there always penalties for those who don't conform?

Well, if one borrower gets a rate discount for meeting his contractual obligations does it not logically follow that another borrower that is not meeting his contractual obligations will pay a higher rate (simply because he doesn't get the discount)?

And, no, penalty interest cannot be charged on a home loan within MARP.

Tebbit said:

I just wish a new lender would come in and offer competitive rates - then the powers that be would be shaken up and start offering lower rates. I also wish someone in government would do something about this.

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There won't be any new entrants to the market in the near future for a few reasons. This is just my personal thoughts, and intended to create debate rather than saying it's all correct.

1. Lending is effectively unsecured. Repossession is almost non-existent except in cases of complete non-engagement
2. There is too much political interference already - a bank issuing a mortgage now has no idea what might change in the future. e.g. MARP / CCMA etc apply to mortgages that were issued before they existed. FF's bill for capping rates would be scaring away competition at the moment.
3. The cost of capital is too high for a bank lender. Only a non-bank lender who can avoid the requirements for tier 1 capital and have access to funding at near market rates would be interested (and it's difficult to borrow at near market rates when the collateral is an Irish mortgage portfolio, due to the low repossessions - for example who would want their pension funds invested in something like this?)
4. The cost of regulation is high, especially in arrears cases but this cost cannot be passed on specifically to those customers in arrears (MARP, etc), and
5. The market is already quiet competitive meaning there isn't much profit to be made. Let me qualify that!

We've seen a market reaction recently in terms of competition for new lending through the use of cash-back and fixed rates. Take a look at BOI; 2% cash back and 3% fixed for 3 years. Taking the first 3 years, assuming a 20 year term, that's an effective rate of 2.3%. Or wait for 5 years before switching and its 2.35% fr 5 years (assuming you can roll to a 3% rate). If we saw an advertised headline rate of 2.3% fixed for 3 years anywhere I think people would think we're getting some real competition. In return BOI knows it won't lose any business for at least 3 years.

The existing players are competing for market share because their 'good' mortgage books are being paid down faster than they are issuing new business. I don't think we're going to see any major moves on SVRs because it will become effectively a race to the bottom between the banks whereas they can be inventive with new business rates while keeping SVR's artificially high - i.e. compete for new business but make as much as you can from your existing book.

Like it or not, the market here tends to take a lot of their product design from the UK market, and it's common place to see discounted introduction rates reverting to quiet high SVRs. The difference in the UK market is that there is a strong history of switching, but they also have another feature which we don't see here - the customer being charged an arrangement fee for setting up the mortgage.

Is that something that would fly here? Charge the customer say 1% upfront, and then offer 2% fixed for 3 years reverting to an SVR after that? That would work out the same cost of BOI's current offer with cash back.

From the outside one might think that the switcher market here should be very profitable for low LTV's. But the problem with low LTVs is the mortgage value is low, and the actuarial life of the mortgage tends to be short - the ideal type of customer is also the one that's trying to pay his mortgage off early. Unless switchers are willing to pay for the cost of underwriting their loan, the costs are too high for a bank to lend at below 2% and then possibly have the loan repaid within 2 or 3 years (for context in 2004 the average life of the entire UK mortgage market was just over 5 years - a lot shorter than people imagine).

How come the insurance companies and waste companies are being brought to task by watchdogs but no such measure exists for the banks that are fleecing in the region of 300000 on Variable and LTV rates