Brendan Burgess
Founder
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I attach our submission to this consultation. The first few pages deal with the substance of the issue, so I have reproduced them in this post
The Irish Mortgage Market - Submission by the Fair Mortgage Rates Campaign to the CCPC
20th March 2017
Initial comments
It is extraordinary that the state body charged with consumer protection through advocacy and public awareness has taken no action at all on this issue. It has not studied the issue. It has not even raised questions about why rates are so high in Ireland. It has not even asked the Central Bank why they were publishing misleading information about mortgage rates. When Michael McGrath wrote to the Commission in 2015, asking them to take an interest in the issue, the reply was that “the Commission’s resources would be more appropriately used in other areas.”
While we welcome this consultation, the CCPC must stand condemned for washing its hands of this issue up to now. During that period, Irish borrowers have paid around €1.6 billion in excess interest. They continue to pay around €800m a year in excess interest.
The CCPC’s lack of involvement has resulted in a lack of understanding which is reflected in the Consultation Paper, most notably in not asking the fundamental question – “To what extent, if any, are the higher mortgage rates in Ireland justified by higher costs?” So our submission will begin with this question.
The question which should have been asked in the Consultation Paper:
To what extent, if any, are the higher mortgage rates in Ireland justified by higher costs?
Irish variable mortgage rates are around 1.7% higher than the equivalent rates in other euro area countries. This is costing Irish borrowers around €800m a year in excess interest. If these higher rates are justified by higher costs, the number of market players and the extent of competition are not very relevant. If the higher rates are justified and a new lender enters the market, it won’t result in a significant reduction in the mortgage rate.
0.1 To what extent are the costs higher in Ireland? Please explain your answer with supporting evidence, data and a quantification of the extra costs.
0.2 Irish lenders have had huge losses on their mortgage books in recent years. Do these losses justify them in charging new customers to compensate for those losses?
0.3 Are lenders justified in charging new non-tracker customers higher rates to compensate for the lack of profits on cheap trackers?
There is no justification at all for Irish lenders to charge more than euro area lenders for 50% LTV mortgages
The lowest untied mortgage rate is AIB’s rate of 3.1% for LTVs of less than 50%. The average rate for all LTVs in the euro area is 1.72%. It’s reasonable to assume that the rate in the euro area for LTVs of <50% is below 1.5%.
Therefore Irish borrowers with LTVs of below 50% are paying at least 1.5% more than their euro area counterparts. In other words, they are paying double the rates.
All of the costs for 50% LTV mortgages are the same in Ireland as in the rest of the euro area:
· The cost of funds is the same
· The cost of administration is the same
· The cost of capital is the same
And
· The cost of risk is the same
The arguments about the high level of arrears, the high levels of defaults and the difficulties lenders face when seeking to enforce their security have no relevance at all to 50% LTV mortgages.
Borrowers with 50% LTV mortgages are much less likely to go into arrears. But even if they do go into arrears, the lender continues charging the full rate of interest on the arrears. And as it’s a fully secured loan, they will collect that interest eventually.
Most borrowers with 50% LTV mortgages who go into arrears get back on track. Maybe the arrears are capitalized. But again, that does not cost the lender a cent. They earn more interest on the higher mortgage balance.
Even if the lender is forced to take legal action to repossess the property and even if it takes 5 years, so what? The interest continues to accumulate during that period and the full loan and interest will be repaid from the proceeds of sale.
The Central Bank has the data on these:
· Default rate on non-tracker mortgages with LTV <50% - very low.
· Incurred losses on non-tracker mortgages with LTV <50% - zero.
They should publish these data, so that potential overseas lenders would see that the Irish market is an extremely profitable market despite the arrears histories and difficulties in enforcing the security.
90% LTV mortgages should be more expensive in Ireland, but by how much?
There is no doubt that the cost of risk is higher in Ireland than in any other euro area country because the lack of a realistic prospect of being repossessed removes the incentive to pay for some people.
So how much more expensive should they be? To answer this question, let’s look at the lenders’ own estimates of the additional costs of risk.
Variable rates for new business customers as at 20th March 2017
The banks realise that the 50% LTV mortgages are risk-free. If they were not risk-free, then they would have a lower rate for 30% LTV mortgages, or whatever LTV they consider to be risk-free.
AIB estimates the additional cost of risk of a 90% LTV mortgage to be 0.4%, whereas Ulster Bank estimates it to be 0.8%.
The other costs are the same for Irish banks as for other euro area banks.
The average rate for a euro area mortgage is 1.72%. Although it is not published separately, the average rate for a 90% LTV mortgage would be higher, say 2%. The fair mortgage rate for a 90% LTV mortgage in Ireland should be around 2.8%, i.e. 0.8% higher. In fact, they range from 3.5% to 4.5%.
The high level of legacy arrears is not a justification for overcharging new customers.
It is argued that the lenders have to be profitable so they have to charge high variable rates to make up for the historic losses.
There is no logic to this argument. Why should today’s customer pay for a mistake made by the lender 10 years ago? The illogicality of that argument would be demonstrated quickly if a new lender were to come into the market unburdened by any legacy arrears. If they started charging lower rates, the existing banks would have to reduce their rates accordingly to compete for new business.
Not only is the historic losses argument illogical, it is also factually incorrect. The Irish lenders have made full provision for arrears. In fact, for the last two years, they have been writing back their provisions. The historic losses are no longer dragging down the profits.
The high proportion of cheap trackers is not a justification for the high rates either.
It is argued that because the lenders are losing money on trackers, they must make up for it with the non-tracker mortgages.
There is no logic to this argument either. If a pub charges some customers €1 for a pint, they will not be able to charge others €9 to compensate. The customers would simply move to another pub. Of course, Irish borrowers can’t do this at present, because all the Irish lenders are charging the equivalent of €9 for a pint.
Again, if a new lender, without the tracker drag on profitability, were to enter the market and charge lower rates, the existing lenders would have to cut their rates to match.
The Irish Mortgage Market - Submission by the Fair Mortgage Rates Campaign to the CCPC
20th March 2017
Initial comments
It is extraordinary that the state body charged with consumer protection through advocacy and public awareness has taken no action at all on this issue. It has not studied the issue. It has not even raised questions about why rates are so high in Ireland. It has not even asked the Central Bank why they were publishing misleading information about mortgage rates. When Michael McGrath wrote to the Commission in 2015, asking them to take an interest in the issue, the reply was that “the Commission’s resources would be more appropriately used in other areas.”
While we welcome this consultation, the CCPC must stand condemned for washing its hands of this issue up to now. During that period, Irish borrowers have paid around €1.6 billion in excess interest. They continue to pay around €800m a year in excess interest.
The CCPC’s lack of involvement has resulted in a lack of understanding which is reflected in the Consultation Paper, most notably in not asking the fundamental question – “To what extent, if any, are the higher mortgage rates in Ireland justified by higher costs?” So our submission will begin with this question.
The question which should have been asked in the Consultation Paper:
To what extent, if any, are the higher mortgage rates in Ireland justified by higher costs?
Irish variable mortgage rates are around 1.7% higher than the equivalent rates in other euro area countries. This is costing Irish borrowers around €800m a year in excess interest. If these higher rates are justified by higher costs, the number of market players and the extent of competition are not very relevant. If the higher rates are justified and a new lender enters the market, it won’t result in a significant reduction in the mortgage rate.
0.1 To what extent are the costs higher in Ireland? Please explain your answer with supporting evidence, data and a quantification of the extra costs.
0.2 Irish lenders have had huge losses on their mortgage books in recent years. Do these losses justify them in charging new customers to compensate for those losses?
0.3 Are lenders justified in charging new non-tracker customers higher rates to compensate for the lack of profits on cheap trackers?
There is no justification at all for Irish lenders to charge more than euro area lenders for 50% LTV mortgages
The lowest untied mortgage rate is AIB’s rate of 3.1% for LTVs of less than 50%. The average rate for all LTVs in the euro area is 1.72%. It’s reasonable to assume that the rate in the euro area for LTVs of <50% is below 1.5%.
Therefore Irish borrowers with LTVs of below 50% are paying at least 1.5% more than their euro area counterparts. In other words, they are paying double the rates.
All of the costs for 50% LTV mortgages are the same in Ireland as in the rest of the euro area:
· The cost of funds is the same
· The cost of administration is the same
· The cost of capital is the same
And
· The cost of risk is the same
The arguments about the high level of arrears, the high levels of defaults and the difficulties lenders face when seeking to enforce their security have no relevance at all to 50% LTV mortgages.
Borrowers with 50% LTV mortgages are much less likely to go into arrears. But even if they do go into arrears, the lender continues charging the full rate of interest on the arrears. And as it’s a fully secured loan, they will collect that interest eventually.
Most borrowers with 50% LTV mortgages who go into arrears get back on track. Maybe the arrears are capitalized. But again, that does not cost the lender a cent. They earn more interest on the higher mortgage balance.
Even if the lender is forced to take legal action to repossess the property and even if it takes 5 years, so what? The interest continues to accumulate during that period and the full loan and interest will be repaid from the proceeds of sale.
The Central Bank has the data on these:
· Default rate on non-tracker mortgages with LTV <50% - very low.
· Incurred losses on non-tracker mortgages with LTV <50% - zero.
They should publish these data, so that potential overseas lenders would see that the Irish market is an extremely profitable market despite the arrears histories and difficulties in enforcing the security.
90% LTV mortgages should be more expensive in Ireland, but by how much?
There is no doubt that the cost of risk is higher in Ireland than in any other euro area country because the lack of a realistic prospect of being repossessed removes the incentive to pay for some people.
So how much more expensive should they be? To answer this question, let’s look at the lenders’ own estimates of the additional costs of risk.
Variable rates for new business customers as at 20th March 2017
The banks realise that the 50% LTV mortgages are risk-free. If they were not risk-free, then they would have a lower rate for 30% LTV mortgages, or whatever LTV they consider to be risk-free.
AIB estimates the additional cost of risk of a 90% LTV mortgage to be 0.4%, whereas Ulster Bank estimates it to be 0.8%.
The other costs are the same for Irish banks as for other euro area banks.
The average rate for a euro area mortgage is 1.72%. Although it is not published separately, the average rate for a 90% LTV mortgage would be higher, say 2%. The fair mortgage rate for a 90% LTV mortgage in Ireland should be around 2.8%, i.e. 0.8% higher. In fact, they range from 3.5% to 4.5%.
The high level of legacy arrears is not a justification for overcharging new customers.
It is argued that the lenders have to be profitable so they have to charge high variable rates to make up for the historic losses.
There is no logic to this argument. Why should today’s customer pay for a mistake made by the lender 10 years ago? The illogicality of that argument would be demonstrated quickly if a new lender were to come into the market unburdened by any legacy arrears. If they started charging lower rates, the existing banks would have to reduce their rates accordingly to compete for new business.
Not only is the historic losses argument illogical, it is also factually incorrect. The Irish lenders have made full provision for arrears. In fact, for the last two years, they have been writing back their provisions. The historic losses are no longer dragging down the profits.
The high proportion of cheap trackers is not a justification for the high rates either.
It is argued that because the lenders are losing money on trackers, they must make up for it with the non-tracker mortgages.
There is no logic to this argument either. If a pub charges some customers €1 for a pint, they will not be able to charge others €9 to compensate. The customers would simply move to another pub. Of course, Irish borrowers can’t do this at present, because all the Irish lenders are charging the equivalent of €9 for a pint.
Again, if a new lender, without the tracker drag on profitability, were to enter the market and charge lower rates, the existing lenders would have to cut their rates to match.
