Draft revised letter from Governor Makhlouf to Deputy Pearse Doherty
Drafted by Brendan Burgess for Governor Makhlouf
Dear Deputy Doherty
I have reviewed the letter we sent to you on 4th July and the reaction of the media and the Minister for Finance to it, and on reflection, I realise that it contained a number of wrong figures, that it was confusing and that it failed to deal with the real issue.
For example:
- I referred to mortgage borrowers on occasions when I should have said mortgage accounts thus overstating the figures by 25%.
- I lumped in non-bank lenders such as Avant and Haven (a subsidiary of AIB) with the vulture funds in a lot of the data.
- I claimed that up to 54,000 customers of vulture funds could switch if only they would overcome their inertia.
- I implied that the banks might be slow in accepting switches from customers of vulture funds who had a good credit record.
These are a distraction from the real issue which needs to be addressed: The 34,000 customers of vulture funds who are paying egregiously high mortgage rates and who can’t switch.
It was wrong to imply that up to 54,000 customers of vulture funds could and should switch to escape the egregious interest rates. In fact, there are no more than 1,000 mortgage holders who are paying these high rates who could switch from vulture funds.
The vulture funds have a total of 64,000 mortgage customers (80,0032 accounts).
18,000 of these have never been in arrears and could switch. But these are the former customers of Bank of Scotland Ireland and Danske Bank and are all on cheap trackers. They would lose their cheap trackers, so they should not switch.
21,000 are currently in arrears so they cannot switch.
14,000 are currently in restructures so they cannot switch.
That leaves 12,000 customers who have been in arrears or in restructures but are no longer in arrears or in restructures. 3,000 of these are on cheap trackers, so they should not switch.
That leaves 9,000 customers who are not in arrears or in restructures who are on egregiously high mortgage rates. However, when these apply to switch to a mainstream bank, the vast majority of them are turned down because they have an impaired credit record as they have been in arrears or restructured within the last 5 years. Mainstream banks will accept switches from these customers only in exceptional circumstances. In reality, no more than 10% or c. 1,000 of these customers would qualify as exceptional circumstances.
I am concerned that by publishing a figure of 54,000 who could switch we were blaming them for not bothering to switch and also blaming the mainstream banks for not having the resources to process applications from these customers who do apply to switch.
The blame lies solely with the vulture funds for charging these egregious rates and not with their victims and not with the mainstream banks.
The vulture funds argue that all they have done is to pass on the ECB rate increases of 4.25%. However, that misrepresents the situation. Irish banks maintained artificially high variable rates and competed for new business with much lower fixed rates. The vulture funds have added the ECB rate increases to the already artificially high variable rates and do not offer their customers fixed rates. The net result is that in May, the last month for which we have comparable information, vulture funds charged between 6.5% and 8.25% or around twice the rate being charged by mainstream banks in Ireland or in the euro area. As of August, the vulture funds are now charging rates up to 8.75%.
The effect of all this is that while a customer of a mainstream bank will be offered a new fixed rate of around 4.5% when their old fixed rate of 3% ends, a former customer of the same bank whose fixed rate of 3% is ending, could well go automatically onto a variable rate of 8.5% with no option to fix.
There are about 34,000 mortgage holders paying these egregious rates to the vulture funds who cannot switch.
You might well argue that the Consumer Protection Code imposes an obligation on the vultures to treat these customers fairly. The best way to treat these customers fairly would be for the vultures to offer their customers the same rates on offer from the banks who sold their mortgages.
However, we are not minded to interfere with the vultures in any way. The mortgage contract allows the vultures to charge whatever they like and as long as the vultures adhere to the contract, we will take no action.
The Minister for Finance, Michael McGrath, agrees with me that no action should be taken by the Central Bank or the government to help these mortgage prisoners.
I appreciate that when these mortgages were sold to the vultures, the Central Bank and the then Minister for Finance gave assurances that these customers would not lose out as a result of the sale. We were wrong and I am sorry for that. But how were we to know back then that the vultures would exercise their contractual rights to charge egregious interest rates?
Interestingly enough, my predecessor, Patrick Honohan, was alert to this possibility. He suggested to an Oireachtas Committee back in 2014 that if the vultures charged egregious rates, they should be reined in. But that is no longer our policy.
In the appendix, I deal with all these numbers and issues in more detail.
Yours sincerely