The Central Bank of Ireland repeatedly asserts that it puts protecting consumers at the heart of everything it does. And to be fair, in most areas it has done a good job protecting consumers.
The Consumer Protection Code and the Code of Conduct on Mortgage Arrears have raised the standards of behaviour of the financial institutions. The Central Bank’s mortgage lending restrictions have protected borrowers from reckless lending. And although it was slow to respond to the tracker mortgage issue, it did a good job getting cheap trackers returned to about 30,000 borrowers who would not otherwise have got them back.
But when it comes to mortgage rates, the Central Bank has let down borrowers very badly. This was obvious from the comments of the Central Bank governor Gabriel Makhlouf at the Oireachtas Finance Committee on Wednesday. The governor explained that the ECB was raising interest rates in an effort to tame inflation. And, as reported in The Irish Times, he added that it would be “concerning” if banks held off for a “long time” from increasing rates, as it would mean that ECB monetary policy was not being transmitted to the wider economy.
So the Central Bank is telling Irish mortgage lenders that they should increase mortgage rates. From 2008, the ECB began cutting its interest rate from 4 per cent down to 0 per cent. During the same period, instead of cutting mortgage rates, Irish banks pushed them up to the highest rates in the euro zone.
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Where was the Central Bank then? Why was the Central Bank not “concerned that ECB monetary policy was not being transmitted” to Irish borrowers? These high mortgage rates contributed significantly to the high levels of arrears in Ireland.
The Central Bank’s performance has been even worse when it comes to protecting the 113,000 borrowers whose mortgages have been sold by the main banks to vulture funds. When these loans were sold over the past decade or so, the minister for finance and the Central Bank reassured borrowers they would not lose out by having their mortgages sold.
Try telling that now to the former customers of PTSB whose mortgages were sold to Pepper. If they were still with PTSB, the highest variable rate they would be paying would be 3.95 per cent, whereas Pepper is charging up to 6.5 per cent. On a €200,000 mortgage balance, a Pepper customer is paying up to €400 a month more interest than they would be paying to PTSB if their loan had not been sold. And whereas all the main lenders offer their customers options to fix their rates to protect against future rate increases, vulture funds don’t offer fixed options.
Borrowers who are already paying 6.5 per cent are facing the prospect of further increases and the vulture funds can legitimately claim that they are simply “transmitting ECB monetary policy” to their customers.
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‘Intensive process’
When Sinn Féin’s Pearse Doherty accused the Central Bank of “washing their hands” of the customers of vulture funds, the governor replied that this was “unfair” and that the bank was engaged in a “pretty intensive process” with the funds. Furthermore, he told Doherty that the Central Bank had no role in price setting. But had he not told the committee earlier that he would be concerned if the lenders did not increase rates as they would not be transmitting EU monetary policy?
He might not be involved in price setting, but he is certainly involved in price signalling.
Last year, the Central Bank was happy to intervene in insurance pricing. It banned insurers from a practice known as “price walking”, where they exploited the inertia of long-time loyal customers by charging them higher premiums than other customers whom they had identified as more likely to shop around.
The case for intervening in mortgage pricing is much stronger than the one for intervening in insurance. Insurance contracts are for one year, whereas the typical mortgage term is 20 years-plus. A borrower’s mortgage payments will usually be a far higher proportion of their annual expenditure than their insurance premium. It is easy, quick and free to switch insurers, while it is difficult, time-consuming and expensive to switch mortgage lender. Yet the Central Bank intervened to ensure the fair treatment of insurance customers while refusing to insist on the fair treatment of mortgage borrowers.
The Code of Conduct on Mortgage Arrears prohibits lenders from charging customers in arrears a higher rate than customers who are not behind with their payments. But that is the effect of the sale of their mortgages to vulture funds. The loans were sold because they were either in arrears or restructured. And now these customers are paying more as a result of the sale.
The Central Bank must show some consistency in its approach. It must insist that lenders generally, and vulture funds in particular, treat customers fairly. A simple solution would be for the Central Bank to insist that the vulture funds should be required to offer their customers the same variable and fixed rates that the lender that sold the mortgages offers to its existing customers.
The Central Bank must not wait for five years to take this action. It must take action now before the higher rates lead to a return of the mortgage arrears misery.
Brendan Burgess is the founder of askaboutmoney.com.
