# would deposit offset mortgage debt in financial institution collapse



## laila (9 Sep 2008)

If I owed 100,000 on a mortgage and with the same institution had a deposit account for 100,000. In the event of that financial institution going bust I understand that only 20,000 of my deposit would be guaranteed. Could the other 80,000 not just cancel out some of my mortgage debt?? Would seem fair enough to me but I suspect they would have some way out of it


----------



## Sunny (9 Sep 2008)

As far as I know it doesn't work like that. It does in some countries like the Netherlands but not here. At least I have never heard of it.


----------



## LDFerguson (9 Sep 2008)

Sunny said:


> As far as I know it doesn't work like that. It does in some countries like the Netherlands but not here. At least I have never heard of it.


 
I'm not so sure. On the Financial Regulator's website, it says the following about the Deposit Protection Scheme. (Click [broken link removed].) 



> Setting-Off of Debts
> In normal circumstances, debts owed to the institution by the depositor will be deducted from the aggregate deposit balance in calculating the compensation payment to be made to the depositor.


 
I have a First Active Offset Mortgage as well as funds on deposit with First Active (offset) and am currently trying to get clarification on this point from them. Unfortunately, I've been trying for the past three weeks to get a reply, but I will persist.


----------



## NorfBank (9 Sep 2008)

Surely this just protects the bank as debts owed by depositor (i.e 100k in the OP's case) will be deducted from the deposits (again 100k in OP's case) so that leaves €0 guaranteed?
Or am I reading this wrong?


----------



## LDFerguson (9 Sep 2008)

Hi NorfBank, 

I never really thought of it that way.  I had considered this provision to be a benefit for the consumer in a sense.  This was my way of looking at it: - If I have €100,000 on deposit and €100,000 mortgage with the same bank and the bank goes bust, one cancels the other out and I am left owing nothing but owning nothing.  Which would be better than my neighbour who has €100,000 on deposit with the same bank but no mortgage.  He loses €100,000 but claims back just €20,000 from the Deposit Protection scheme.


----------



## Bronte (10 Sep 2008)

Yes Ravima, I'd like to know this too and LD when you get the answer from First Active please share it with us.  I don't like the phrase you quoted from the financial regulator 'in normal circumstances' that's a get out clause.  We don't live in times of normal circumstances.  Methinks it may be time to put everything under the mattress or the post office.  But then again the UK and USA have stopped banks collapsing.  Norfbank I too never thought of it that way.  Another question I have is if a bank goes bust and the liquidators come in, they distribute the money that's left to who and in what order.  Shareholders first or to the banks the banks owe money to?  Once the max 20K has been paid out to depositors do they have any right to x cent in the euro from what's left if they had more than 20K deposited.


----------



## Sunny (10 Sep 2008)

Bronte said:


> Another question I have is if a bank goes bust and the liquidators come in, they distribute the money that's left to who and in what order. Shareholders first or to the banks the banks owe money to? Once the max 20K has been paid out to depositors do they have any right to x cent in the euro from what's left if they had more than 20K deposited.


 
Shareholders are last to get anything. The rest depends where in particular you are in the food chain. I would imagine deposit holders after getting their 20k are in the same boat as other unsecured creditors such as other banks etc for the rest of their money.

I think Norfbank is right in the way he is reading that phrase from the regulator. I can't see how people can use their mortgage to offset any losses from deposits. I really only know the system from a securitisations point of view and I have never heard this in relation to Irish RMBS deals which you would as it is a risk to bond holders if people can reduce what they owe on a mortgage by what they lost on a deposit.  Having said that, I have seen it in Dutch deals but can't remember off hand how exactly it works.


----------



## Sunny (10 Sep 2008)

LDFerguson said:


> I have a First Active Offset Mortgage as well as funds on deposit with First Active (offset) and am currently trying to get clarification on this point from them. Unfortunately, I've been trying for the past three weeks to get a reply, but I will persist.


 
I think this is different. You probably would be able to net the two on an Offset Mortgage as that is the way the accounts are set up but I haven't read the terms and conditions so couldn't be sure.


----------



## LDFerguson (10 Sep 2008)

Sunny said:


> I think this is different. You probably would be able to net the two on an Offset Mortgage as that is the way the accounts are set up but I haven't read the terms and conditions so couldn't be sure.


 
Thanks.  I have read the terms and conditions but can find no reference to bank failure.


----------



## Sunny (10 Sep 2008)

LDFerguson said:


> Thanks. I have read the terms and conditions but can find no reference to bank failure.


 
Hearing wonderful things about First Active Customer Service recently so good look finding someone to answer the question! All their customer service agents have probably been moved on to arrears collections or something!


----------



## LDFerguson (10 Sep 2008)

Sunny said:


> Hearing wonderful things about First Active Customer Service recently so good look finding someone to answer the question! All their customer service agents have probably been moved on to arrears collections or something!


 
Don't get me started on _that_ rant...


----------



## Bronte (10 Sep 2008)

Sunny said:


> I really only know the system from a securitisations point of view and I have never heard this in relation to Irish RMBS deals which you would as it is a risk to bond holders if people can reduce what they owe on a mortgage by what they lost on a deposit. Having said that, I have seen it in Dutch deals but can't remember off hand how exactly it works.


  Sorry, can you put than in plain English please?


----------



## Sunny (10 Sep 2008)

Bronte said:


> Sorry, can you put than in plain English please?


 
Sorry. Banks usually package a load of mortages that they have given to people and sell them on to bond investors. These are called Residential Mortgage Backed Securities. The bond investors are now exposed to you paying back your mortgage i.e. when you make your mortgage repayments to your bank, the bank forwards them onto the bond holders. One of the key points of these type of deals is that they are (should be anyway) bankruptcy remote from the originator (your mortgage lender). Therefore even if the originating bank went bankrupt, the bond holders should get their money back because they are backed by the mortgages that the bank sold off their balance sheet, not the bank itself. My point was bondholders would be very concerned if mortgage borrowers could offset what they lost on deposit with the defaulting bank against the mortgage that they owe because if they are expecting you to pay back a €100,000 mortgage and then that mortgage gets written off because you lost €100,000 in deposits, it means the bond investors have lost €100,000. It means that they are exposed to the credit risk of the defaulting bank which they don't want to be. I was just saying I have never seen this risk mentioned in Irish RMBS deals.

Sorry for the explanation. All that probably makes no sense at all but I don't know how else to put it! I will try and find out for sure if the provision for 'offsetting' exists in Ireland and get back to you.


----------



## Ravima (10 Sep 2008)

'Tis great to be popular!!!

there were two banks that I can recall that went bust. One was Irish trust bank and the other was owned/controlled by the property tycoon, Gallagher. I cannot remember his christian name.


----------



## z101 (16 Sep 2008)

Dont FA have an offset mortgage where the money you have on deposit is linked to your mortgage to offset they interest you pay? 
Normaly, I cant see any connection as to why you would expect money on deposit to cancel out the money you owe, as they may be with the same bank but are completely different products with their own separate terms and conditions, but in the case on the offset mortgage it does pose an interesting question.


----------



## DSN (18 Sep 2008)

I found this article - granted it refers to the UK cant find anything for Ireland but it _seems _positive in that if you have official offset mortgage your savings would go to pay off part/all the debt. where can we find out same for ireland is there someone we can contact in financial regulartory etc?
[broken link removed]


----------



## Strasser (29 Sep 2008)

Did anyone get an answer from First Acive and their offset mortgage on this question?


----------



## LDFerguson (29 Sep 2008)

Not yet, but I'm going to keep trying.


----------



## selfbuild99 (2 Oct 2008)

just been on to first active, and the facility account which is offset against your mortgage account is classified as a deposit account, so its state gauranteed up to 100000, and if the mortgage is in joint names, then its gauranteed up to 200000.


----------



## LDFerguson (2 Oct 2008)

Did you get this in writing?  I've been told several things verbally by First Active staff, which they later had to retract.


----------



## Betsy Og (3 Oct 2008)

lucky I wasnt reading this before the 100k guarantee came in . 

I was working on the 'natural justice' principle (naieve I know) that if the bank went bust and lost my deposit I would only owe them the net borrowings. Havent an official offset mortgage but effectively the same from a cash point of view.

Hard to see a judge ruling you owe them in full/allowing them to re-possess your house after they lost your deposit (again probably naieve).


----------

