Should mortgage holders in arrears be charged a penalty?

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ClubMan

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Brendan Burgess said:
I fully support sub-prime lending.

But I agree with the CCMA prohibition on banks charging customers more because they are in arrears or restructured. So the mortgages sold by ptsb should be on the same rate as existing ptsb customers.

Brendan
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Maybe it's a topic for a different thread [seems it was and was split into its own thread], but why shouldn't those who cannot meet their loan obligations and require loan restructuring be charged more? Isn't it basically a form of subprime lending so something that you support? Otherwise it's like applying a form of community rating to the mortgage market rather than pricing products according to risk? Or is it a case of having to apply this sort of "community rating" in order to avoid bigger market and societal problems?
 
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Hi ClubMan

An interesting question.

Arguments in favour of charging borrowers in arrears more
  1. These loans are more expensive for the lenders in that they must provide more capital against them
  2. These loans are more expensive in that they require extra management
  3. The risk is higher - and risk rated pricing is a good idea
Arguments against charging borrowers more
  1. The risk is assessed when the loan is taken out and not as a result of subsequent events
  2. Charging more makes the problem worse
  3. Most lenders do not want to charge more - their objective is to help borrowers get back on track
  4. It opens the door to predatory lending - jack up the rate, the borrower can't switch, keep jacking up the rate
The Irish Nationwide experience
The only mainstream lender who did this was the Irish Nationwide. They had no SVR and said that they negotiated each rate depending on the characteristics of the loan. In practice, they didn't pass on interest rate cuts automatically to any customer. If a borrower noticed that their rate was much higher than they would be charged elsewhere and they complained, their rate was reduced to stop them switching. But if they were in arrears, they were told to get their loan back on track first and then they would talk to them about interest rate reductions.
 
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For these reasons, it has been banned by the Code of Conduct on Mortgage Arrears, and, on balance, I would agree with the ban.

The only cohort I would have made an exception for was for restructured cheap tracker mortgages. Lenders had to restructure these - extending the term and giving them split mortgages - when they were already loss making. This increased the losses for the banks.

It would have been fair to charge market rates on any arrears.
 
ptsb and Bank of Ireland have rewards for customers not in arrears.

The 1% cash back after 5 years is dependent on all the loan repayments having been made on schedule.

The ptsb 2% cash back on mortgage payments is, I think, dependent, on all the repayments being made on time.
 
Compare to insurance.

Customers get No Claims Bonuses for not making claims.

And if they do make claims, they usually face higher premiums.

Brendan
 
Thanks @Brendan Burgess - that's some food for thought for me. Just to clarify - I'm not proposing that this should be done but just wondering why it's not, why the CB/CCMA bans it, and why some (e.g. you :)) support sub-prime lending and "loading" but but not charging those who fail to meet their loan contractual obligations more. I guess that your point about the risk being assessed before the loan is extended is key here?
 
Yes, a person's credit record is the best predictor of their default likelihood. So if you are giving someone a new loan, you should factor it into the price.

If I take out a one year insurance policy and have a claim in the first week, they don't increase the price for the rest of the year. But they do increase the price on renewal.

Brendan
 
Brendan Burgess said:
Compare to insurance.

Customers get No Claims Bonuses for not making claims.

And if they do make claims, they usually face higher premiums.

Brendan
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...they face undiscounted premiums....

I've noticed any time I think I can get a discount offer say for having an annual rail ticket. They are applied only to the undiscounted rate not my current premium making them utterly pointless as in not cheaper than my current rate.

I vaguely remember any mortgage agreement I've read, even fixed rate ones always had a get out (of the rate) clause of sorts for the lender.

That seems quite different to other countries where people can hand the keys back. While I get the interest in discourage "can pay won't pay". The last crash in 2008 the banks forced people into default by forcing unsurvivable terms on people. Which ultimately ended up as bad loan for the bank. Instead of extending length of the term and giving them a lifeline.
 
AlbacoreA said:
That seems quite different to other countries where people can hand the keys back.
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I don't think that is correct. In some US states they have non-recourse lending. It's a terrible idea as it results in higher mortgage rates for everyone.
 
AlbacoreA said:
The last crash in 2008 the banks forced people into default by forcing unsurvivable terms on people. Which ultimately ended up as bad loan for the bank. Instead of extending length of the term and giving them a lifeline.
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That is just not correct. The banks did not change people's terms (apart from the tracker scandal). People went into default because they could not or would not pay their mortgage. In 130,000 or so cases the lenders agreed a restructuring with the borrower. But they were never forced on the borrowers.

Brendan
 
Brendan Burgess said:
That is just not correct. The banks did not change people's terms (apart from the tracker scandal). People went into default because they could not or would not pay their mortgage. In 130,000 or so cases the lenders agreed a restructuring with the borrower. But they were never forced on the borrowers.

Brendan
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I should have qualified that. By saying in some cases they only offered unviable restructuring terms. Plenty of cases in the media at the time.

I wonder how many of these ultimately escaped these debts leaving the banks, Nama and tax payer to carry the can.

I'm wondering whats the tipping point where penalities are self defeating. Moral hazards and all that.
 
Brendan Burgess said:
I don't think that is correct. In some US states they have non-recourse lending. It's a terrible idea as it results in higher mortgage rates for everyone.
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I think there a number of opinions on it...

"...lender irrationality and not the inability of lenders to get deficiency judgments would explain the crisis...."

www.atlantafed.org

Did nonrecourse mortgages cause the mortgage crisis?

As part of the nation's central bank, the Atlanta Fed plays an important role in monetary policy, bank supervision and regulation, and the operation of a nationwide payments system.
www.atlantafed.org www.atlantafed.org
 
AlbacoreA said:
I should have qualified that. By saying in some cases they only offered unviable restructuring terms.
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That is not a "qualification". That is something completely different.

In many cases borrowers had completely unsustainable mortgages. The banks bent over backwards to accommodate them.

But many borrowers wanted their negative equity written off and without it said that the bank wasn't being flexible.

Brendan
 
AlbacoreA said:
I wonder how many of these ultimately escaped these debts leaving the banks, Nama and tax payer to carry the can.
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We have ridiculously generous PIA legislation which caused the banks and other mortgage holders to carry the can.

Nama had no involvement in home mortgages.

Not sure about the taxpayer except that they had stakes in the banks.

Brendan
 
Brendan Burgess said:
That is just not correct. The banks did not change people's terms (apart from the tracker scandal). People went into default because they could not or would not pay their mortgage. In 130,000 or so cases the lenders agreed a restructuring with the borrower. But they were never forced on the borrowers.

Brendan
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Your wrong , Ulster Bank unilaterally changed mortgagor’s Prime 1 to 5 rate mortgages on the 20 May 2006, to its new Bank Cost of Funds rate mortgage. I will be posting a thread on same shortly.
 
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Brendan Burgess said:
That is not a "qualification". That is something completely different.

In many cases borrowers had completely unsustainable mortgages. The banks bent over backwards to accommodate them.

But many borrowers wanted their negative equity written off and without it said that the bank wasn't being flexible.

Brendan
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Well I wasn't making a sweeping generalization even if it read like that.

My anacdotal memory of the banks behavior isn't as charitable as yours.
 
The current legal position in Irish Law is that mortgagee’s cannot charge mortgagors surcharge interest on arrears, (never mind residential mortgagors). End of.
 
AlbacoreA said:
Not sure the value of it.
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Well ACC charged same, I have had sight of it applying same to mortgagors loan accounts. The value of it is that some Providers gouged more money from customers than legally allowed to.
 
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