"Restrict legal protection to those who can't switch"

[Brendan Burgess]

This has been suggested on other threads.

The argument appears to be that those who can switch, should do so. If they don't, then they don't deserve protection.

It is further argued that, competition will eventually fix the problem. If we were to control mortgage rates, we could deter new entrants.

I am not sure where I stand on this.
I have less sympathy for those who could switch, but can't be bothered. But I have some sympathy for them as I don't like seeing lenders exploiting the long and complicated switching process.
But even switchers need protection. The best a rate tart can get is 3.1% which is still around 1.5% ahead of what they would be paying elsewhere in Europe.

Let's assume that is agreed for the purpose of this argument, that we should restrict protection to the most vulnerable, how would you design a system to do that?

 

[newirishman]

Reasons for not being able to switch might be relevant, some thoughts:

• Income changes so LTI too high
• Lifestyle changes e.g. kids, stay-at-home parent, etc.
• Negative Equity
  • but LTI ok and loan performing
  • but non performing loan and no changes in sight
  • previously arrears but performing now
  • ?
• Non-performing loan with arrears (but positive equity)
• Loan at risk of going non-performing due to changes in repayment ability (lower income, job loss)
• Overall too much debt and should look at PIA or similar

There's probably a few more.

Which of the above would need protection, which wouldn't ?
And also should clarify what you mean by "protection" - is it an interest rate cap, or other thing as well?

 

[Leaky1]

Not sure how you would design a system to protect those who can't switch.

But to add to Newirishman's reasons for not being able to switch:- having equity but not enough equity to switch. On a 1bed apartment banks won't accept a new or switcher mortgage were the LTV is greater than 75%.

 

[Brendan Burgess]

A few ways which might help

1) Oblige lenders to offer existing customers the same deals as new customers
This would help those with lower LTVs who can't switch due to income reasons or arrears. They would get the same rates as new customers on lower LTVs.
But it wouldn't help those on high LTVs as the lender could set a rate of 8% for anyone with an LTV in excess of 90%
2) Give the Central Bank the power to control mortgage rates for lenders who are no longer open to new business
This would not discourage new lenders from coming into the market while protecting the most vulnerable
3) The Relative Rate Option - Set the maximum rate at no more than [33%] above the average rate [for new business]
The average rate for new business is around 3.6% at present, so that would allow lenders charge up to 4.8% or 4.5% if you limited it to 25% above the market rate.
Of course, if new entrants and competition drive market rates down to 2.4%, that would bring the maximum rate to 4.2% (33%) and 3% (25%)

 

[Sarenco]

My suggestion was to introduce a statutory cap at 125% of the new floating rate that the Central Bank reports to the ECB. That rate is currently 3.23% so the cap would be 4.03% as things stand.

Alternatively, we could simply copy the French model that caps rates at 133% of the average rate on all outstanding variable rate mortgages in the previous quarter. That average rate is currently around 2.66% so a cap of around 3.54% would currently apply.

 

[gnf_ireland]

The argument appears to be that those who can switch, should do so. If they don't, then they don't deserve protection

I would not use the phase 'dont deserve protection' but rather don't need it ! If they can switch, then they are not trapped and at the mercy of the lender the way others are

But I have some sympathy for them as I don't like seeing lenders exploiting the long and complicated switching process.

I 100% agree here - mainly because I am one of those. That said, do these people require legal protection. Maybe what is needed is to remove/dramatically reduce the 'claw-back' period for any incentives given and that way they have to remain competitive to keep their customer base. Lets say its a maximum of 6 months for example.

But even switchers need protection. The best a rate tart can get is 3.1% which is still around 1.5% ahead of what they would be paying elsewhere in Europe.

I actually believe switches need competition, and if meaningful competition existed switchers would just need initiative
Personally, I would be happy for the bill to protect those who cannot switch, and encourage competition for those who can. But if competition does not appear in say 18 months, revisit that area again with a second bill. This would surely encourage the regulator to encourage competition in the area

how would you design a system to do that?

Ultimately has to be based on the french model proposed a good while back by @Sarenco at a 25% or 33% risk premium on the new business/average business rates. If the central bank is so keen to use average rates, I would suggest using this also

Which of the above would need protection, which wouldn't ?

Ultimately all, although I think some need to appreciate that they may have to pay a further 'sub-prime' premium. There is a fundamental difference between someone who is in negative equity and performing, and someone who is not performing.
I am assuming that someone who is unable to switch can be 'realistically' treated as a higher risk category than someone who can? Is this a fair statement to make? If this is the case, they should expect to pay a risk premium - so the 25%/33% discussed above ?
However, those who are classified as sub-prime for whatever reason are a further risk category, that also need to be looked at. I think we would need a seperate conversation on what happens if someone goes sub-prime during the life of the home loan and how it should be treated

And also should clarify what you mean by "protection" - is it an interest rate cap, or other thing as well?

Obviously an interest rate cap to avoid them being exploited. There may be discussion around frequency of rate increases, given these people are ultimately more 'trapped' than renters since they cannot move either property or provider !

 

[gnf_ireland]

Oblige lenders to offer existing customers the same deals as new customers

Would only help some customers - i.e. those with lower LTV's

Give the Central Bank the power to control mortgage rates for lenders who are no longer open to new business

Plenty of lenders in the market who are still operating have excessive mortgage rates, and people also need protection from them

3) The Relative Rate Option - Set the maximum rate at no more than [33%] above the average rate [for new business]

This is the best model I feel, but we should use the average rate rather than the new business rate ! The central bank likes to use this figure, so I think we should too
The "risk premium" (say 33%) should be relatively easy to agree - I hope

The big thing about this model is it could only impact competition if someone wants to charge excessive rates - in this case do we want them as lenders.

That said, I think there would need to be allowances made for sub-prime mortgages, maybe capped at 50% or something. I am not sure what the french do here

 

[gnf_ireland]

I believe this would be the right thing to do for the following reasons

1. protect those not in a position to switch by giving a realistic mortgage rate without 'living in fear of being fleeced completely'
2. encourage those who can switch to do so, especially if new competition enters the market
3. very hard to use the 'competition' discussion if its only for those who would be unable to switch. Very few lenders would be targetting them anyway
4. very hard to agree that those people dont need protection, and very hard for a bank to complain about a 33% premium due to risk etc
5. falls into other areas, such as 'money lending rules', which caps the rates that can be charged etc
6. because its in line with the french model, very hard for the ECB to disagree with the proposals

I would love to see what arguments anyone in the dail, or papers, would be able to come up with as to why this restriction would not be a good idea.


The best one I have read so far is if the mortgage rates are capped then the banks will have to look for other sources of revenue and will end up fleecing SMB loans. So its ok to fleece variable mortgage holders but not SMB's !!!!!

 

[Brendan Burgess]

But if competition does not appear in say 18 months, revisit that area again with a second bill. This would surely encourage the regulator to encourage competition in the area

Interesting idea. In a sense the FF Bill adopts the same approach. If the lenders get their act together, then I would imagine that FF would withdraw the bill.

If the central bank is so keen to use average rates, I would suggest using this also

Good one. But I don't think it's fair to base any policy on tracker mortgage rates.

So if the average rate for all LTVs and risk categories is 3%, then a lender can only charge up 3.75% even for the highest risk category?

I had assumed that the French model was along the lines that if a 90% mortgage had an average rate of 3%,then the maximum rate for a 90% mortgage was 3.75%. It hadn't occurred to me that the rate charged for a 90% mortgage would be determined in part by the rate charged for a 50% mortgage.

I have given my overall views on this model in this post. The main flaw is that it simply does not work in a market where there is a cartel. If lenders agree to keep rates high as they are doing at present, they can still charge what they like. It would only protect against one lender suddenly doubling the rates, but would not benefit the majority of customers, all of whom are being overcharged at present.

Brendan

 

[gnf_ireland]

I have given my overall views on this model in this post. The main flaw is that it simply does not work in a market where there is a cartel. If lenders agree to keep rates high as they are doing at present, they can still charge what they like. It would only protect against one lender suddenly doubling the rates, but would not benefit the majority of customers, all of whom are being overcharged at present.

Absolutely - but this particular discussion was to protect those who are most vulenerable, not lower the mortgage rates overall.

They are mutually exclusive concepts in my view - lowering mortgage rates for low LTV mortgage may actually/probably see mortgage rates rise for those who who are trapped

 

[Sarenco]

The main flaw is that it simply does not work in a market where there is a cartel. If lenders agree to keep rates high as they are doing at present, they can still charge what they like.

If anybody has any evidence whatsoever that there is any such agreement, tacit or otherwise, in place between lenders then they should report it to the Competition and Consumer Protection Agency. It's a crime to operate a cartel in this country.

 

[Sarenco]

I had assumed that the French model was along the lines that if a 90% mortgage had an average rate of 3%,then the maximum rate for a 90% mortgage was 3.75%. It hadn't occurred to me that the rate charged for a 90% mortgage would be determined in part by the rate charged for a 50% mortgage.

The French model is really very simple - variable mortgage rates are capped at 133% of the average effective rate on all outstanding variable rate mortgages during the previous quarter.

The average effective rate in France during the last quarter was 2.66% and therefore the "usuary rate" is currently 3.53% - that is the maximum amount that can be charged on any variable rate mortgage, regardless of a borrower's LTV, etc.

Incidentally, the average rate charged on all variable rate mortgages in Ireland during the last quarter would also be around 2.66%.

 

[gnf_ireland]

Obviously the French system has a better standard deviation of the outstanding mortgages, rather than ourselves which appear to have two clusters at the outside, with very little in the middle I imagine.

Long term, it should be about achieving this better distribution of mortgage rates, and anything that can help achieve this would be a good thing in my view