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.