Tiger robbery versus the great Celtic robbery

They’re as Irish as spice burgers, head shops and use of the word “optics” but thankfully Tiger robberies have declined in frequency and barring the odd aberration like the robbery a few weeks ago, should largely be a phenomenon of the past as far as banks are concerned. The robbery a few weeks ago is reported to have netted the criminals €210,000 – a substantial sum of money at an individual level.

Now although you might wince at the recent spate of increases in mortgage standard variable rates by State-guaranteed banks, the banks do say the rises are a result of their increased cost of finance (deposit rates and capital markets are demanding higher rates even if the ECB rate has remained at 1% for the last year). And although you might feel it unfair that banks are raising rates when the ECB rate stays unchanged, this practice by the banks could hardly be classed as robbery (that said, given the definition of Standard Variable Rates in some Irish banks’ terms, I’m surprised they haven’t faced legal challenges).

However, what about the practice of banks strong-arming those in difficulty with their mortgages to come off of tracker mortgages and accept the bank’s Standard Variable Rate product as a condition of being helped with their difficulties? This phenomenon was hinted at by the Financial Regulator on 26^th May, 2010 and was later confirmed by the group set up to help those in mortgage arrears on 30^th June, 2010. To be clear, some mortgage holders with tracker mortgages who are experiencing difficulty with their repayments are seeking some restructure of their mortgage – perhaps to be put on interest-only for a period, perhaps to have a payment holiday with the non-payment amount added to the mortgage or perhaps to extend the period over which the mortgage is repaid;  note these restructures are not about debt forgiveness or writing any part of the mortgage off at the bank. And in return for restructuring mortgages, banks are forcing borrowers to give up their valuable tracker mortgages for the bank’s Standard Variable Mortgage product. And how much will abandoning the tracker cost the borrower?  Of course it will depend on the sum borrowed and the number of years remaining on the mortgage but let’s take what I suggest is a typical example with the following characteristics:

(a) Mortgage taken out on 1^st January, 2007

(b) Mortgage was for €300,000 and was a repayment mortgage

(c) Mortgage was for 30 years

(d) Tracker rate was ECB + 0.75%

(e) On 1^st January, 2010 the borrower is forced to change to the bank’s SVR product which was 3% in January-July and 4.2% from 1^st August, 2010

(f) From August to the end of this year the tracker remains at 1.75% and the SVR at 4.2%.

(g) From 1^st January 2011 to the final redemption of the mortgage, the ECB rate is 2% (and the tracker is therefore 2.75%) and the SVR is 4.5%.

(e) Mortgage interest relief of 25% applies for the first seven years.

With a tracker the borrower would repay a total of €426,939. Using the assumptions above, a borrower who was forced to abandon the tracker in favour of a SVR, they will repay a total of €517,430. A difference over the life of the mortgage of €90,492 (contact me if you want the Excel spreadsheet – unfortunately google docs appears to have problems with the PPMT and IPMT functions). That’s for one mortgage. The number of “restructured” mortgages numbers in the region of 50,000 (30,000 at the start of 2010 rising at 3,000 per month according to reports). If ALL of these mortgages were trackers and using the assumptions above, then that’s just over an extra €4.5bn that the banks will get having forced vulnerable borrowers off their trackers. Could this be termed the great Celtic robbery? The sums involved certainly dwarf the sums stolen in Tiger robberies.

Of course it may be the case that ECB rates rise over the next 25 years beyond 2%. This chart shows the main ECB lending rate since the introduction of the euro and as you can see it reached a high of 4.75% in 2001 and went as high as 4.25% in 2008. Could we see such highs again? The betting is that ECB rates will rise in 2011 perhaps to as much as 2%. Beyond that who knows – the EU has a commitment to low inflation as a consequence of its Stability and Growth Pact . To an extent you would expect SVR rates to tend to increase if ECB rates increase.

And lastly, there will be those who will say that a mortgage is a contract. And like any other contract, a breach will have consequences. If you can’t repay your mortgage according to the terms, then why shouldn’t the bank receive some reward for agreeing a restructure? In response, many countries including our own recognise the importance of property ownership to the stability of society – the State doesn’t give interest relief if you borrow to buy a car and the State hasn’t forced the banks to restrain themselves for 12 months before pursuing you for a credit card balance. So your own home is differentiated in the State’s eyes, and not for some well-intentioned socialist reason – with property ownership come roots, stability, responsibility and to an extent financial reach which supports the wider economy. It says something about the priorities of our government’s dealing with weaknesses in the banking sector that they have not intervened strongly to stop the practice of forcing vulnerable borrowers off their trackers. And why is our Financial Regulator being relatively mute on the topic (absolutely mute since the end of May)?

UPDATE: 28th July, 2010. The Independent reports on the Financial Service Ombudsman’s launch of his annual report. The Ombudsman has warned banks not to bully borrowers into signing away valuable tracker mortgages. The Ombudsman also calls on the Financial Regulator to “investigate the whole area of homeowners being induced to sign away their trackers”. Overall I would characterise the Ombudsman’s oversight in this area as lacking effort – it seems scandalous that vulnerable mortgage holders may be strongarmed into signing away their trackers without possibly understanding the financial consequences of their actions. The Independent reports that there are 400,000 people with tracker mortgages – whether this equates to 400,000 mortgages is unclear but there are 800,000 mortgages in the State.  As noted above about 50,000 mortgages have been “restructured” – what proportion are trackers which have now been substituted with SVRs? Difficult to know but it could certainly be a high proportion.

UPDATE: 27th August, 2010.Pat McArdle the retired former chief economist at Ulster Bank writes in the Irish Times that changes to SVR mortgages by banks may not have such a huge impact. He asserts that most SVRs are old and that the average outstanding mortgage is €100,000 and suggests 15 years as a representative period left outstanding on a typical SVR mortgage. These numbers are based on Pat’s own research, the detail of which has not been made available.

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NAMA’s John Mulcahy under the spotlight

Brendan McDonagh should consider issuing a diktat to his staff that the only yachts they’re to be seen on are ones being repossessed from NAMA developers. The Mail on Sunday is investigating claims that NAMA’s Head of Portfolio Management, John Mulcahy, was holidaying on businessman (and sometimes developer) Paul Coulson’s yacht in the Mediterranean. The Mail are pursuing the story with some gusto visiting the homes of all nine NAMA board members (“I appreciate your job but my family is my family” Brendan McDonagh is reported as saying when doorstepped). The Mail even rang John Mulcahy at home after 9pm interrupting his family dinner apparently to discuss the claims and John hung up on them.

The Mail’s story comes two days after NAMA-bound developer, Paddy Kelly, revealed that it was John Mulcahy who valued his property in Ballsbridge at €350m in 2007, only for it to fall in value to €80m two and a half years later. NAMA had previously taken steps to distance John Mulcahy from the valuation of the Irish Glass Bottle site at €412m.

John Mulcahy is arguably the agency’s most senior property man and has had a sterling and long career in property. Insinuations about his involvement in the Irish Glass Bottle site have overlooked the fact that he seemed to get a fabulous result for his client, Paul Coulson’s South Wharf PLC. In restrospect property values during the property boom were highly inflated and some property may be worth 2% of its value just 4 years ago. However this overlooks the professional responsibility of a valuer – to assess what the property would fetch between willing buyers and willing sellers with both parties being in possession of perfect knowledge – and the fact is that John Mulcahy’s valuations (if we believe Paddy Kelly) were no different in character to those of his peers.

The Mail story does highlight an issue for NAMA which is if NAMA is to attract experienced staff, it will need accept that the experience of those staff will include a period in our history which is now having devastating consequences on our economy. John Mulcahy’s value to NAMA will include his vast address book, and we will expect him to use that address book when seeking to maximise the return to the taxpayer from NAMA’s assets. Should the fact that Paul Coulson is apparently in that address book be a source of concern? No, I would say – Paul Coulson is apparently one of the businessmen to emerge from the property crash in a financially healthy condition and he may conceivably be a buyer of NAMA property or an investor in NAMA developments. The only way for NAMA to deal with this issue would have been to employ people who were not involved in Ireland’s property industry which would have meant that there were either a) inexperienced in property or b) inexperienced in Ireland and do we really want people who are learning on the job with a €50bn State exposure or who don’t know the players in Irish property (some, perhaps many, are still investing and expanding) – sure the likes of India’s WGA may invest in our property but the betting would be that much of the investment will be domestically sourced.

So this story should teach NAMA two lessons – one optics are significant, no yachts, fine wines, beef Wellingtons. And two, take steps to demonstrate that the conflict of interest codes are transparent, enforced and worthy of public trust.

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