# Stephen Donnelly: "Banks make more out of restructured mortgages"



## Brendan Burgess (2 Apr 2015)

From the Dáil yesterday 

[broken link removed]

*Mortgage Data*


 

 asked the *Minister for Finance* 

 

 his views that bank profit on individual restructured mortgages, including those where banks are seeking possession, should be capped at the expected level under normal payment of the mortgage; if so, if he will legislate accordingly; and if he will make a statement on the matter. *[13255/15]*

Deputy Stephen S. Donnelly: 

 

 This question concerns the fact that in many restructurings of distressed mortgages, banks are making more money than they would have had the mortgage not been restructured. For example, the Committee on Finance, Public Expenditure and Reform went through the Bank of Ireland's restructures. The bank's chief executive admitted that in at least 90%, and probably a lot more, of the mortgages the total amount being paid back by the borrowers was more. Therefore, term extensions and capitalisation of arrears led to more. It is particularly depressing right now with the courts becoming filled up with orders for repossession from banks. We are aware that in many cases the banks are making more money out of these mortgages than they would have had they been functioning normally. Does the Minister agree that this should not be happening and, if so, can he legislate accordingly?

Noonan: Vague scripted response

Deputy Stephen S. Donnelly: 

 

 I hope the Minister will agree that the answer which was scripted is boilerplate stuff and does not address the question I raised, which relates to the fact that the majority of restructures increase the level of profitability to the bank from the restructures, although not in all cases. As an example, the chief executive of Bank of Ireland has admitted to the committee on the record that more than 90% of Bank of Ireland restructures result in higher overall payments to the bank. For a great many restructures, including repossessions, the banks are making more money than had the loan been discharged. Let us ignore the CCMA and other such considerations, but, as a principle, does the Minister agree that in those cases the banks should not end up with a higher profit than had the loan been discharged normally? If the Minister agrees with that, would he be open to exploring legislation with the committee to that effect?

Deputy Michael Noonan: 

 

 I will outline the remainder of the reply which I did not have time to read. In relation to the proposal suggested by the Deputy, I am not convinced how workable a solution it may be, but it appears to be the case that many of the properties that banks are moving to repossess have been carrying arrears for some significant period and would be sold for a lower valuation than the original mortgage.

Mortgage arrears is, however, an area that remains under continual review. More and concerted action can be undertaken by the banks to assist customers in arrears and as the Taoiseach has previously announced, my Department is considering a range of options to support the existing framework and to improve the uptake of personal insolvency solutions.

Deputy Stephen S. Donnelly: 

 

 Perhaps I could ask the Minister to stop reading out the prepared stuff from the civil servants because it does not address the question I asked, which is whether he as Minister for Finance believes that, as a principle, the banks should not make additional profits on restructured mortgages. If he agrees with that as a principle, would he be open to working with the committee to draft legislation to that effect? This is something Government Deputies and people within the banks have raised. It is a principle that says the banking sector is partly responsible for what happened and it should not make excess profits on irresponsible lending. They are making profits on the arrears, recapitalisation and term extensions. They are making additional profits over and above the expected net present value of the loans. Should we, as elected representatives, say it is fine for the banks to make the money they would ordinarily have made but they cannot make additional profit on the behaviour that caused the problem in the first place?

Deputy Michael Noonan: 

 

 The Deputy is expressing a very narrow view of profitability. It seems to me that if a lending institution has a mortgage in arrears, for the period of the arrears it is losing a lot of money from the original contract position. I am not sure what Deputy Donnelly is saying about profits. The restructuring should help both parties, the borrower and the lender, and it should arrive at a new position which is sustainable. I cannot see where the argument arises that this leads to extra profits for the bank, unless the Deputy is arguing that when the mortgage is in arrears, its saleable value is so low that only that amount should be realised by the bank-----

Deputy Stephen S. Donnelly: 

 

 No.

Deputy Michael Noonan: 

 

 -----not the nominal value of the mortgage.


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## Brendan Burgess (2 Apr 2015)

Let's tease out what he has said.

*There is only one specific circumstance where what he says has any validity: *

1) Where the term of a Standard Variable Rate loan is rescheduled without any write-off, the lender will indeed earn more interest from that loan. Given that SVR loans are profitable, the lender will make more profit from that particular loan.

I have long argued that lenders should be happy to see SVR loans in positive equity switched to interest only as it's more expensive to get a new customer than to keep an existing customer.

From an accounting point of view, if an SVR loan in positive equity goes into arrears, I think that the lender has to make a provision for it.

*In all other circumstances, what he says is incorrect *

2) Where the lender issues a split mortgage on an SVR loan.
A split mortgage effectively reduces the interest rate by the percentage of the split. So the lender makes less money

3) Where the lender issues a split mortgage on a tracker
This turns the tracker into a big loss maker

4) Where the lender extends the term of  a tracker
Lenders want trackers repaid as quickly as possible as they are loss making.  All the extensions cost the lenders money.

*But worst of all, the idea that the lender can make money on repossessions *

_It is particularly depressing right now with the courts becoming filled up with orders for repossession from banks. We are aware that in many cases the banks are making more money out of these mortgages than they would have had they been functioning normally._

_For a great many restructures, including repossessions, the banks are making more money than had the loan been discharged._

5) Most repossessions are of houses in negative equity.  The banks takes a big hit and recovers very little of the shortfall.

The banks losses are compounded by the absurd legal system we have which requires multiple court appearances.  The banks must employ solicitors and often employ barristers.

6) Even if a case is in positive equity
Most borrowers in positive equity who can't pay their mortgage will eventually agree a sale before the final court date. The bank will nearly always end up paying their costs.

*But what about the costs of the arrears crisis generally *

The lenders have huge expenses in complying with the Code of Conduct on Mortgage Arrears.  They have vast teams of people dealing with mortgage arrears and they are constantly reporting to the Central Bank and the Department of Finance.  And how does Stephen deal with it?

_Let us ignore the CCMA and other such considerations,_

In other words, let us ignore any evidence which counters my argument.

*Just look at the provisions which the lenders have made for losses on home loans*

If the banks were making more money from arrears, then they should not be making such high provisions.


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## Brendan Burgess (2 Apr 2015)

It's a pity that Noonan did not just tell him straight that he was talking rubbish. But I suppose this is as close as one can come in a Dail debate: 

_Deputy Michael Noonan: 

 

 The Deputy is expressing a very narrow view of profitability. It seems to me that if a lending institution has a mortgage in arrears, for the period of the arrears it is losing a lot of money from the original contract position. I am not sure what Deputy Donnelly is saying about profits. The restructuring should help both parties, the borrower and the lender, and it should arrive at a new position which is sustainable. I cannot see where the argument arises that this leads to extra profits for the bank, unless the Deputy is arguing that when the mortgage is in arrears, its saleable value is so low that only that amount should be realised by the bank-----_


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## 44brendan (2 Apr 2015)

Well said Brendan. This type of populist oratory gains plenty of traction for Stephen Donnelly, Joe Higgins etc. There is no onus on them to provide any evidence of what they are inferring. SD is an intelligent person and should know when he is spouting rubbish. Unfortunately, this is the type of oratory that the supporters of these politicians expect.


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## Gerry Canning (2 Apr 2015)

It irks me to see a TD of Donnellys intellect doing this.

Common sense tells anyone that Repos/ arrears etc are very costly.
Worse still, it weakens good argument and puts us into Black & White camps.

All Parties have fallen for the Sound-bite type oratory, I shouldn,t use oratory .
Lets us say Sound -bite Spoutings!

We end up being forced into Right-Wing Blue Shirt Fascists or Left-Wing Pinkos!

A bit depressing.


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## Brendan Burgess (2 Apr 2015)

You can watch the exchange here 

[broken link removed]


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## Brendan Burgess (2 Apr 2015)

I am trying to figure out what Richie Boucher said to the Oireachtas Finance Committee which caused Stephen to think like this.

BoI discussed arrears with the committee on 10 April 

And they had a more general discussion in November but Stephen did not take part in that.


This was his contribution in April 2014 

_Deputy Stephen S. Donnelly: 

 

 What interest does Bank of Ireland charge on the shelved portion of a split mortgage?


Mr. Stephen Mason: Again, it goes with the original contract so if the customer was on a tracker or variable rate, that would be the rate charged on the warehoused portion.


Mr. Richie Boucher: At the last committee meeting the Chairman made a suggestion which I said I would think about. When we say we will think about something that means we do, and we take it seriously. We recognised there was a concern. The vast majority of defaulting customers are on trackers and we felt there was a perception that we were seeking to make a profit. Therefore we said that for the period of the warehousing, for three years subject to review, it would be the cost of three-year unsecured money to the bank at that time. That was transparent because we issued a bond to the market at a rate of approximately 2.5% to 2.6%.


Deputy Stephen S. Donnelly: 

 

 So if a tracker customer pays 2%, the bank will shelve a portion of that mortgage and charge the same rate on the shelved portion as on the portion that the customer is paying.


Mr. Richie Boucher: The tracker rate follows through to the warehoused part.


Deputy Stephen S. Donnelly: 

 

 There is no interest rate reduction on the shelved portion.


Mr. Richie Boucher: No.


Deputy Stephen S. Donnelly: 

 

 Therefore, the total payment commitment does not fall but is simply deferred.


Mr. Richie Boucher: The primary purpose is to try to match the cash out on a month to month and year to year basis with the cashflow of the customer._

_Deputy Stephen S. Donnelly: 

 

 Earlier somebody asked why Bank of Ireland has 81 split mortgages compared to Permanent TSB's 3,955 and Mr. Mason said the split mortgage is not affordable for many of the bank's customers. If the bank takes somebody's mortgage at 2.25%, splits the two pieces of capital in half and charges the same interest on both, there is no financial change for the customer. It is unaffordable because Bank of Ireland's split mortgage is completely meaningless.


Mr. Stephen Mason: Our split mortgage is fully consistent with that recommended in the Keane report. Interest is charged on both sides but the customer pays capital on only one side, so the monthly payment is reduced-----


Deputy Stephen S. Donnelly: 

 

 In the short term, but the full amount of capital is accruing a full amount of interest.


Mr. Stephen Mason: -----for the life of the mortgage and there is a warehoused amount that must be dealt with at the end.


Chairman: 

 

 Is there a variation on the variable interest rate? Mr. Boucher referred to a set rate for tracker mortgages.


Mr. Richie Boucher: After the committee's suggestion I consulted with my colleagues and considered it, and we capped it at the three-year unsecured cost of money to the bank at the time, which is 2.5%._

The split mortgage product is complicated and Stephen is not unique in not understanding it.


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## 44brendan (2 Apr 2015)

Brendan Burgess said:


> The split mortgage product is complicated and Stephen is not unique in not understanding it.


Which may explain but does not excuse his behavior. SD as one of our Public Representatives has the job of representing his constituents in the Dail. In order to do this effectively it is essential that when he speaks on a topic and proposes a solution, he understands the nature of both the topic and the proposed solution. Surely the broader electorate will at some stage tire of those politicians how continuously spout empty rhetoric? probably not


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## Sophrosyne (2 Apr 2015)

Brendan,

Pardon my ignorance, but I do not understand this either.

On the “parked” portion of the mortgage, only interest is paid; nothing comes off the capital. Therefore, interest is always chargeable on the _original _“parked” capital.

Is that correct?


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## 44brendan (2 Apr 2015)

Interest is charged on the full mortgage amount. The "parked" portion is deferred for capital payment purposes. Point is that if the mortgage is on a SVR the bank will "earn" a reasonable profit from the full mortgage assuming that it will all be recovered in time! If it is a tracker the bank will lose money as tracker rate is unprofitable.


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## Stephen Donnelly (3 Apr 2015)

Brendan,

I haven’t time to address all of the errors in your post, so I’ll highlight some of the biggest. I’ve categorised these errors into three types – contextual, logical and technical.

*1. Contextual*

i) You appear to have missed the point of the Dáil interaction entirely. Here’s an analogy – Imagine a member of parliament asks the relevant line minister for their view on homelessness, in the context of economic, social and cultural rights, and asks the minister if they agree with applying the principles of ESC rights, and if so, if they would be willing discuss potential legislation with the committee. You have, essentially, stated that that person is ‘talking rubbish’, because some homeless people are put up in B&B’s – rather missing the salient point (while also misunderstanding the technicalities of the issue).

The point of the interaction was to establish Minister Noonan’s view on a principle – is it okay for banks to take in additional, unexpected profits from the restructuring of individual mortgages, in the context of those restructures happening in part due to poor lending practices?

ii) To the point on repossession – Additional profits from repossession will, I hope, be rare, but they will, without a shadow of a doubt, occur – and so the potential for that to happen creates an additional focus, making it less difficult to bring political attention to it.


*2. Logical*

i) You admit in your post that, in the case of term extensions on mortgages (other than trackers of course), the banks do indeed end up with greater profits than had the mortgages not been extended. And so you accept that the principle I raised exists.

As it happens, term extensions comprise 16% of all PDH restructures. And so we come to a logical impasse – you admit that the issue exists, and we know it is the reality for a substantive number of families and mortgages – yet you clearly believe that the Minister should have told me I was ‘talking rubbish’.

If we go back to our analogy, this is like you saying that the issue of homelessness is ‘rubbish’ because only 16% of those categorised as homeless are sleeping rough.

ii) You reference certain mortgages restructures that do not increase profitability to the lender, and in some cases do indeed reduce profitability to the lender. The inference is that, due to the existence of these, other cases cannot exist. This is simply ridiculous - it's like pointing to Spain to prove that Italy doesn't exist.


*3. Technical*

Which brings us to the final set of errors. You go on to claim that it is only for this 16% of restructures that the question I ask has any validity. To the logical errors above, even if these were true, it would be entirely valid to raise it - but your claim is inaccurate too. Here’s a non-exhaustive list of other types of restructures that can return greater profits to banks than had the mortgage been discharged normally (i.e., full capital and interest payment for the term of the mortgage):

1. BoI split charges interest on shelved portion at market rate, meaning less than full capital is being paid off while full interest accrues on shelved portion, making it, in NPV terms, the same as a term extension, in which case the NPV of the loan increases (above the expected NPV at time of issue...same baseline for all below);

2. Capitalisation of arrears usually incurs full interest on arrears, which are building during arrears period, leading to same NPV effect as term extension, in which case the NPV of the loan increases;

3. Moving trackers to SVR or (tracker +1%i) or (tracker for five years +1%i then to SVR 5 years) all increase the NPV of the loan;

4. Repossession when positive equity, with legal costs charged to borrowers, with full arrears and charges included, increases the NPV of the loan;

5. Repossession with negative equity, when bank successfully seeks full repayment of residual, when arrears have been incurred (which they almost always have), increases the NPV of the loan;

6. Interest-only periods increase the NPV of the loan;

7. Reduced capital payments for a period increase the NPV of the loan;

8. Deferred interest restructures increase the NPV of the loan;

9. Payment moratoriums increase the NPV of the loan.


Let's add a few numbers, to round things off. Here are the shares for just some of the PDH restructures above:


A. Term extensions - 16%

B. Arrears recapitalisations - 26%

C. Temporary reduced payments - 15%

D. Interest only - 10%

E. Payment moratoriums - 2%


Taking just these, we get to 70% of all PDH mortgage restructures (rounding to 70% based on first decimal point). Let's assume, conservatively, that there's another 5% in there – for products like the BoI split mortgage. Now let's be really conservative, and assume that half of all these treatments are being applied to trackers (which they're not), or in other ways do not increase profitability (e.g., only partial recapitalisation of arrears with portion written off) – and we STILL get nearly 40% of all restructures leading to higher profitability to the lender.

This should be sufficient data for you to understand that the issue raised is not applied to a very narrow view of profitability, but to a very clear and well understood view of profitability – ‘I was going to make this much, now you’re going to pay me more, so I’m going to make more.’

While I have no problem with that occurring in a steady state economy, in the context of the economic collapse and the poor lending practices of the banks, I believe it deserves political discussion. Hence I raised it.

Stephen.


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## newtothis (3 Apr 2015)

Well said!


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## epicaricacy (3 Apr 2015)

+1


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## Sarenco (3 Apr 2015)

44brendan said:


> Interest is charged on the full mortgage amount. The "parked" portion is deferred for capital payment purposes. Point is that if the mortgage is on a SVR the bank will "earn" a reasonable profit from the full mortgage assuming that it will all be recovered in time! If it is a tracker the bank will lose money as tracker rate is unprofitable.



Could you explain how a lender will lose money on a tracker if the interest charged is less than the bank's cost of funds?  

To put the question another way, if a bank was genuinely losing money on a tracker mortgage then why would it not offer a discount for early repayment?


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## Brendan Burgess (4 Apr 2015)

Hi Stephen

Thanks for your considered reply.



Stephen Donnelly said:


> i) You appear to have missed the point of the Dáil interaction entirely.
> 
> ...
> 
> The point of the interaction was to establish Minister Noonan’s view on a principle – is it okay for banks to take in additional, unexpected profits from the restructuring of individual mortgages, in the context of those restructures happening in part due to poor lending practices?



To be honest I focussed more on your assertion that the lenders are making more money on the bulk of reschedules and repossessions. The implication is that banks benefit from rescheduling and repossessions.

That assertion is plainly wrong.  Of course lenders make more money in some cases, but only in a minority of them.

The  cases where banks do make increased profits - both SVR and positive equity - in no way compensate for the massive losses caused by defaulting mortgages.

So is it ok for lenders to make more money from individual mortgages if they lend the money for longer? Yes, of course it is. Just as it's ok for a landlord to make more money from renting a flat for a year, although the initial lease was only for 6 months.

Brendan


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## Brendan Burgess (4 Apr 2015)

Stephen Donnelly said:


> ii) To the point on repossession – Additional profits from repossession will, I hope, be rare, but they will, without a shadow of a doubt, occur – and so the potential for that to happen creates an additional focus, making it less difficult to bring political attention to it.



Could you explain a scenario  how a lender makes additional profits from repossessions? 

Although you say it's rare, I can't think of a situation where it actually exists.


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## Brendan Burgess (4 Apr 2015)

Stephen Donnelly said:


> And so we come to a logical impasse – you admit that the issue exists, and we know it is the reality for a substantive number of families and mortgages – yet you clearly believe that the Minister should have told me I was ‘talking rubbish’.



I have made it quite clear that in some cases lenders make more profits out of rescheduling mortgages.

We are in agreement on this.

I am disagreeing with your assertion that the banks make more profits on the majority of restructures, including repossessions.  To assert this is wrong.


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## Brendan Burgess (4 Apr 2015)

Stephen Donnelly said:


> 1. BoI split charges interest on shelved portion at market rate, meaning less than full capital is being paid off while full interest accrues on shelved portion, making it, in NPV terms, the same as a term extension, in which case the NPV of the loan increases (above the expected NPV at time of issue...same baseline for all below);



None of the lenders, apart from Bank of Ireland, charges any interest on the warehoused portion of the mortgage. 

So, I presume, you agree that split mortgages result in reduced profits for all the  other lenders? 

BoI reduces the interest on the warehoused portion of an SVR to 2.5%.  Their SVR is 4.5%. So they are making less profits through rescheduling. 

BoI charges the tracker rate on the warehoused portion of a tracker mortgage.  They are not making profits on tracker mortgages, so they are not increasing their profits through splitting tracker mortgages.


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## Brendan Burgess (4 Apr 2015)

Stephen Donnelly said:


> 2. Capitalisation of arrears usually incurs full interest on arrears, which are building during arrears period, leading to same NPV effect as term extension, in which case the NPV of the loan increases;



Capitalisation of arrears is simply a form of term extension.  If it's an SVR and in positive equity, it is the one category where I have already acknowledged that the lender makes more money.


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## Brendan Burgess (4 Apr 2015)

Stephen Donnelly said:


> 3. Moving trackers to SVR or (tracker +1%i) or (tracker for five years +1%i then to SVR 5 years) all increase the NPV of the loan;



Apologies, I had assumed that you had been talking about the family home.  My mistake.  Switching  defaulting Buy to Lets to SVRs increases the profits for lenders.


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## Brendan Burgess (4 Apr 2015)

Stephen Donnelly said:


> 4. Repossession when positive equity, with legal costs charged to borrowers, with full arrears and charges included, increases the NPV of the loan;



I can't see how it does?

If a bank has a loan of €200k on an SVR, let's say it has an NPV of €250k  assuming it goes to the end of its mortgage term.

If the bank repossesses, it gets €200k, so it misses out on the €50k it could have earned if the mortgage had not defaulted.

I watched a number of repossession cases in the Circuit Court last week, and, to my surprise, costs were refused in every case.

Repossessions increase the losses for the banks. I want to say in all cases, but there might be some technical situation I have not thought of.


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## Brendan Burgess (4 Apr 2015)

Stephen Donnelly said:


> 5. Repossession with negative equity, when bank successfully seeks full repayment of residual, when arrears have been incurred (which they almost always have), increases the NPV of the loan;



No, such a repossession doesn't.

It's the same as repossessing a house in positive equity. If the loan is a profitable SVR, the lender would much prefer it to run its full term.


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## Brendan Burgess (4 Apr 2015)

Stephen Donnelly said:


> 6. Interest-only periods increase the NPV of the loan;
> 
> 7. Reduced capital payments for a period increase the NPV of the loan;
> 
> ...



All of these are variations of "1) Where the term of a Standard Variable Rate loan is rescheduled without any write-off, the lender will indeed earn more interest from that loan."


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## Brendan Burgess (4 Apr 2015)

Stephen Donnelly said:


> we STILL get nearly 40% of all restructures leading to higher profitability to the lender.



Let's assume your figure of 40% is correct.  What does it mean?

In these cases the lenders will make more profit from _that particular customer _than it would otherwise have made.  Had the borrower repaid their loan without rescheduling, the lender would simply have lent the money to someone else. So the lender is not making any additional profits, overall.

Just like a landlord might well be pleased if a good tenant renews a lease for an additional year. If the tenant does not renew the lease, the landlord doesn't just leave the flat lying idle. He lets it to someone else at a higher or lower rent.

And if a landlord evicts a tenant who is not paying the rent, he does not make more money than he would have made if the tenant had paid the rent on schedule.


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## trasneoir (5 Apr 2015)

All of these arguments seem to assume that bankers' time is free. They aren't civil servants- if they weren't busy administering/harassing/holding-upside-down-and-shaking distressed borrowers, they could be doing something else, or be off the payroll entirely.

Bankers love borrowers who pay in full and on time, for the same reasons that insurers like little old ladies who pay tiny premiums and never cause claims: they provide reliable income and cost next to nothing to administer.


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## Brendan Burgess (5 Apr 2015)

trasneoir said:


> All of these arguments seem to assume that bankers' time is free.



Hi transeoir

Stephen may have ignored it, but I certainly didn't. 



Brendan Burgess said:


> *But what about the costs of the arrears crisis generally *
> 
> The lenders have huge expenses in complying with the Code of Conduct on Mortgage Arrears. They have vast teams of people dealing with mortgage arrears and they are constantly reporting to the Central Bank and the Department of Finance. And how does Stephen deal with it?
> 
> _Let us ignore the CCMA and other such considerations,_


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