Regulators and Department of Finance officials here tend to go into robot mode when asked about the disparity in mortgage pricing between banks and non-banks or property funds, rabbiting off something about borrowers needing to contact their service providers if they’re in arrears or at risk of falling into arrears. It’s the call centre equivalent of “your call is important to us”. No it’s not or you would have answered by now.
When asked about the issue at the publication of the Central Bank’s latest Financial Stability Review last week, governor Gabriel Makhlouf said “certainly it is a concern when you see some of the very high rates that some borrowers are facing” before defaulting to: borrowers should engage with their mortgage providers if they’re having trouble meeting their repayments.
He then appeared to change tack, taking issue with the word “disparity”.
“The reality is that in a competitive market you will find different people paying different rates for different products . . . so what matters is that people are being treated fairly, that people are being treated reasonably and if people face difficulty in meeting their obligations the lenders or servicing firms take their responsibilities seriously,” he said.
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“I think it’s important that we don’t get ourselves into a position where we think that everybody should be paying exactly the same rate of interest because that reflects an uncompetitive market and ultimately that will not be good for borrowers,” he said.
“I don’t think we’re going to get into a situation where everybody everywhere is paying exactly the same interest on their mortgage,” he said.
The governor’s somewhat elliptical remarks seemed to link the disparity in rates being charged by banks and funds to competition, or at least he said we would have less competition without some disparity.
That’s a hard notion to swallow particularly for the 38,000 to 60,000 (there are different estimates) borrowers who find themselves on the books of these funds. In some cases they are being charged variable rates of 8 to 9 per cent, way above the average charged by retail banks.
The funds aren’t competing with banks so competition doesn’t come into it. They have entirely different funding models. They can’t borrow as cheaply and therefore need to reprice their assets quicker than conventional lenders in response to European Central Bank (ECB) rate changes. Hence funds have passed on most of the ECB rate rises to borrowers while Bank of Ireland and Permanent TSB, for instance, have yet to change their variable rates.
If they were competing there would surely be a mass migration of borrowers back to conventional lenders but they’re trapped there.
It’s called a secondary banking market for a reason. It’s there principally to remove NPLs (non-performing loans) from the post-crash balance sheets of banks. That said, many loans sold after 2017 weren’t in arrears. Vulture funds, as they are disparagingly referred to here, are a necessary part of the financial ecosystem, more so in Ireland’s case because banks have been frustrated legally from retrieving the assets underpinning these loans. Eviction evokes a certain emotional response here for historical reasons and therefore we’ve restricted banks from cleansing their own balance sheets of NPLs.
Vultures in the wild act as a waste disposal service, recycling dead animals while removing harmful pathogens from system.
But the Irish mortgage market is not the Serengeti and the borrowers involved aren’t rotting carcasses. Many find themselves in this annex of the mortgage market through no fault of their own. They’ve been essentially put here for the sake of wider financial stability, essentially to make banks conform to European regulatory norms.
The Central Bank has a dual mandate: to ensure financial stability and to protect consumers.
Sometimes the emphasis appears to be more on the former than the latter. The regulator was slow to move against banks overcharging tracker mortgage customers and didn’t do so until a legal case fleshed out the issue.
Minister for Finance Michael McGrath has written to the Central Bank, expressing concern about premium pricing by nonbank mortgage providers, wondering how customers on top rates can be “protected as far as possible”.
In response to calls for it to introduce interest rate caps, the Central Bank has repeatedly said it has no legal mandate to interfere in the setting of interest rates by lenders. McGrath says he has no indication that the regulator wants additional powers “at this point in time”.
[ Another ECB rate hike already baked inOpens in new window ]
Mortgage holders could be looking down the barrel of two further rate hikes in the coming months as the ECB seeks to rein in inflation. A further two 0.25 percentage point increases would see the annual cost of a €300,000 mortgage climb by more than €900 a year.
Makhlouf also warned that he expects rates to remain elevated for longer than markets are anticipating, as underlying inflation remains too high.
The first signs of the toll this is taking on borrowers can be seen in the Central Bank’s latest arrears figures, which point to a pickup in short-term arrears last year. Most significantly, those in short-term arrears with non-banks, which includes credit servicing firms, rose by 51 per cent, representing the first spike in more than a decade. And this predates the most recent hikes. The figures also show non-bank entities controlled 77 per cent of all residential mortgages in long-term arrears.
There is a brewing arrears problem here centred around property funds, and repeatedly telling borrowers to contact their providers isn’t going to fix it.
