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Archive for April 18th, 2011

I was surprised last year that our new Financial Regulator, Matthew Elderfield didn’t make a point of intervening in mortgage restructuring where banks were strong-arming distressed mortgage borrowers into giving up their tracker mortgages in return for the bank restructuring their mortgage loan – and to be clear, restructuring was not about debt forgiveness, it was about allowing a period of interest-only mortgage payments, or extending the term of the mortgage or giving a mortgage repayment holiday but adding the arrears and interest to the mortgage; there were no free lunches when Irish banks were restructuring mortgages. But what seemed heinous was the fact that banks were demanding that vulnerable borrowers cede their tracker mortgages as a condition of any restructure. This issue was examined in some detail in a post on here “Tiger Robbery versus the great Celtic robbery”. To the best of my knowledge neither the Financial Regulator nor the near-invisible, Financial Services Ombudsman, William Prasifka, confronted the issue.

Tracker mortgages, that is mortgages whose interest rate is set at a fixed margin above the main ECB lending rate and which represent some 400,000 of the 785,000 mortgages in Ireland are a headache for the banks. Even after the 0.25% increase in the main ECB rate two weeks ago, typically tracker mortgage holders are paying 2.25-2.5% per annum. On funds that cost banks in the order of 5% (that is an guesstimate, ECB funding is at 1%, CBI funding at 3%, deposits might pay 4% and the “market” is charging north of 6% and the banks are desperately trying to recoup losses), these 2.25% mortgages force the banks to make losses. Permanent TSB (PTSB) is understood to have approximately 30% of outstanding Irish mortgage debt and is regarded as having the largest stock of tracker mortgages. This morning it made its tracker mortgage borrowers an offer. A cheeky offer.

The offer as reported by RTE is that if tracker borrowers pay down €5,000 from their outstanding mortgage (or multiples of €5,000 – presumably that means €10k, €15k, €20k etc) then PTSB will give the borrower 10% of the payment. The table below shows the interest PTSB would receive on a mortgage whose interest was set at the bank’s standard variable rate of 5.19% and what the bank would receive on a tracker whose interest rate was set at 1% above the main ECB financing rate of 1.25%.

(Click to enlarge)

If your mortgage has less than 4 years to run, then the bank roughly breaks even on the deal announced this morning. If you only have a year to run on your mortgage for example, then the 10% of the €5,000 that PTSB will give you will be worth more than three times what the bank might expect to generate in profit. On the other hand if you have more than four years left on your mortgage then PTSB starts to profit. And at the extreme if you have 30 years outstanding on your mortgage, then PTSB could be expected to profit to the tune of €3,910 (€4,410 less the €500 they pay you) for every €5,000 you repay. Cheeky.

PTSB CEO David Guinane is reported by RTE to have said “’It’s in both parties interest to reduce the amount of outstanding balances on tracker mortgages” Well it might be in your interest if you have a tracker mortgage and are unable to get a better rate of interest on the €5,000 that you are being tempted to repay PTSB. You can get up to 4.2% from PTSB deposit accounts, 9.7% from 10-year Irish sovereign bonds, 9% from residential property. Yet PTSB is prepared to give you less than a measly 2% over a five year period on your €5,000 repayment.

I haven’t seen the letter that has apparently been sent to PTSB tracker mortgage borrowers so I don’t know what information has been provided or what the letter says about seeking independent financial advice. But if past experience is anything to go by, the Financial Regulator and Financial Services Ombudsman will sit on their hands whilst consumers of financial products potentially get fleeced. And lastly, given that borrowers with shorter remaining mortgage periods could benefit from this deal, I wonder what external oversight there will be to ensure PTSB don’t just accept applicants for the deal that have 4 years plus remaining on their mortgages.

UPDATE: 18th April, 2011. The template letter from PTSB offering the “early repayment bonus” is now available here.  It should be stressed that the article above is really examining the offer from PTSB’s perspective. It doesn’t consider closely what the offer might mean to the borrower. The borrower will save the tracker interest on the €5,000 each year (currently 2.25% but the outlook from the baseline scenario of the currently ongoing European Banking Authority stress tests is that the ECB rate will rise to an average of 1.75% next year which might give you an tracker rate of 3% then). In addition to getting an annual return equal to the tracker rate, the borrower will get an upfront 10% once-off return which will be worth 10% if you have only one year left on your mortgage, ~5% per annum if you have two years ~3.3% annum if you have three years, ~2.5% annum if you have four years, ~2% annum if you have five years and 0.4% per annum over 24 years. I am surprised that the Financial Regulator or Financial Services Ombudsman has not intervened with the letter. Its presentation is capable of confusing – for example the 10% bonus might mean a return of 10% in one year if you have one year left on your mortgage (unlikely as trackers were mostly a 2000s innovation) or it could mean a return of 0.4% per annum if you have 24 years remaining and the “potential” interest saved is based on what seems like a very long 24 year outstanding period. On an offer that affects your home, that is substantial in financial magnitude and may affect you for decades, I would have expected more close scrutiny of the offer so that tracker borrowers had access to better information – it seems to me that if you have 24 years remaining on your mortgage and can get an annual return of more than the tracker rate plus 0.4% then you will be financially better off taking a rain-check on this offer. However tax considerations, the length of outstanding mortgage, current returns on your investments and savings, risk all come into the equation. So it is all the more surprising that this letter has not been forcibly modified by our financial regulation authorities to provide more independent advice.

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