Shooting fish in a barrel – can anything stop Irish mortgage lenders making out like bandits?

The regular audience on here will be familiar with the frequent criticism of the quango, the National Consumer Agency (NCA, CEO: Ann Fitzgerald) because, whilst we continue to live in a country where prices have to a large extent clung to the dizzying highs of the peak of the Celtic Tiger, household incomes have been slashed through unemployment, cuts to gross wages and new/increased taxes and levies. And I blame the NCA for sitting on its hands and allowing our consumer costs to remain 18% above EU averages according to the most recent Eurostat survey whilst our per capita GNPs (an approximation of income) is only 3% higher than average. The NCA might say that it is not there to police prices, and I can say from personal experience that if you complain about what you consider a rip-off, you are politely advised to shop around and don’t continue to provide custom to the rip-off merchants. But if the NCA isn’t going to police prices, who is? The market? Not when there are high barriers to entry and practical obstacles eg limited number of phone licences. The Government? It may have to, but it has not demonstrated any great enthusiasm or competence in this area so far. Regulators? Judging by the reception that the Financial Regulator got from the banks when he called on banks to moderate future increases to variable mortgage rates, they didn’t quite give the Regulator the finger but the cool response wasn’t too far off.

Whilst the NCA might try to bat away criticism of its role in relation to prices generally, it is on rockier ground when it comes to a requirement placed upon the agency when the Bank of Ireland restructuring plan was approved by the European Commission in summer 2010. The European Commission, and more specifically the Competition Commissioner is charged with making sure that private enterprise doesn’t unfairly benefit from state aid, and the Competition Commission also has a role in ensuring that EU countries foster competition in their own countries. So when the EC was approving the Bank of Ireland restructuring plan, it noted the state aid being provided to Ireland’s biggest bank, for example in the form of guarantees, and was concerned that the competition in Ireland’s devastated banking sector would suffer in future with new entrants being deterred by existing players protected by the Government. And the EC saw the potential for Irish banks generally to rack up interest rates so as to rebuild their balance sheets (higher interest rates = higher profit = more capital) and unless there was regulation and intervention in the banking sector, consumers would be scalped.

So the EC inserted a condition in its approval of the Bank of Ireland restructuring plan and that was that the NCA was to produce a mortgage comparison facility on a website it owns and operates itsyourmoney.ie, and the requirement was to get that operational by Q4, 2010 (that is, one year ago). The last time there was contact from here with the NCA asking about progress was in July 2011 and at that stage the mortgage comparison was to be introduced in September 2011. And thanks to Ciaran Tannam for pointing out that the facility has now been launched though I certainly didn’t see a press release, and I am on the monthly newsletter distribution list from the itsyourmoney.ie website. Why are they keeping it a secret?

Two experts in mortgages and personal finance, Karl Deeter at Irish Mortgage Brokers and Charlie Weston, the personal finance editor for the Irish Independent have both complimented the innovation. Karl says the facility is sharp in its presentation and has some basic underwriting details. Charlie says that it looks like a good tool.

What the new tool does demonstrate is the shortage of mortgage finance in Ireland at present. Stick in what you might consider to be very general parameters, a €200,000 house, a requirement for a €150,000 mortgage meaning you have a 25% deposit and are looking at a 75% Loan-to-Value, over 25 years and a standard variable mortgage and there are just seven results, and interestingly Permanent TSB, once the biggest mortgage lender in the country is not one of them. There are just three mortgages that will offer you a 5-year fixed rate with the above parameters and again Permanent TSB is not one of them.

The European Commission’s requirement for this comparison calculator was to support competition in Ireland, the idea being that if a bank in receipt of state aid was taking the mickey with interest rate rises, you could find transparency in what the competitors were offering and take your custom from one provider to the next.

The first problem with that is there are few alternatives, and of course it is one thing to advertise a specific rate but approval will depend on other factors not shown, such as your credit history, earnings, age.

We know that in Ireland some 69,837 mortgages out of 777,321 have been restructured, and I can’t see many of these being able to switch mortgage company. There are some 55,763 mortgage accounts in arrears over 90 days and there are 17,000 households in receipt of mortgage interest supplement. There will be some over-lapping between restructured, arrears and mortgage interest supplement but I think it would be fair to say that about one in 10 mortgages is in some sort of default which would prevent a smooth move from one mortgage provider to another.

But perhaps the biggest problem is negative equity, where the value of your existing mortgage is more than the value of your home. It will not be unusual in terms of transactions at the peak of our boom for a borrower to have bought a home for €300k with a €250k mortgage and the property to be now worth €150k but more than €225k is still owing on the mortgage, in other words there is €75k of negative equity. So if you are in negative equity and are unhappy with interest rate increases by your lender, the transparency offered by the itsyourmoney.ie facility is not going to help you, because no bank is offering loans at 100% Loan to Value, let alone the 150% LTV that the borrower in the example above would need to move their mortgage. Estimates of Irish mortgages in negative equity vary widely and will change with loan repayments and changes to property prices, but the estimates are in the 180-400,000 mortgages range.

Of course you expect your mortgage company to be responsible in the way it changes its interest rates. If you are one of the mortgage holders with a tracker mortgage (which represent about 400,000 of the 777,000 mortgages in the State) then you have certainty about your rate and how it will change to mirror changes made at the ECB; you will probably have been paying 2-3% per year for the past three years and it looks as if you will be keeping your rates at this level for some time to come. However if you are one of the 270,000-odd who have standard variable rate mortgages or 113,000 with fixed rate mortgages which will revert to standard variable after a fixed period of typically 3-5 years, then you really are at the mercy of the banks. Having seen some old terms and conditions for mortgage loans, I myself would have said that banks were unable to change rates unless the ECB changed rates but plainly banks increased rates last year when the ECB had maintained its rate at an historic low. Last month, the Financial Regulator, Matthew Elderfield called on banks to put a stop to raising variable rates independent of changes at the ECB. Fine Gael promised when they came to power at the start of this year that they would force banks to absorb the first 0.25% of any ECB rate increase but that didn’t happen when the ECB raised its rates by 0.25% in April 2011.

The ECB did increase rates in two 0.25% increments twice this year from 1.0% to 1.5% but then reduced rates last week back down to 1.25%, and now it seems that banks will not even pass on the rate cut. National Irish Bank has confirmed to customers that it is proceeding with a 0.25% increase to its variable rate this week, to customers who might otherwise have been expecting a rate cut.

So despite the good intentions of the European Commission, particularly its Competition Commission, the Fine Gael party upon coming to power and no doubt the mortgage comparison facility now provided (at last) by the NCA, it still seems that for a large proportion, maybe the majority of mortgage holders that they will be unable to move their mortgages because of existing default issues or because of negative equity. Meanwhile the Government and Financial Regulator wring their hands and issue pleas and threats to a banking sector that is largely state-owned or controlled as a result of guarantees and €60bn of a bailout, and so far the banking sector gives the finger in reply. Yes indeed, shooting fish in a barrel.

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