Central Bank telling the truth some months and lies other months about mortgage rates

[Brendan Burgess]

Astonishing. 18 months after I discovered that they were including renegotiated trackers in calculating the new business rate, they actually highlight the true rate without renegotiated trackers. Up to December 2014, they pretended that mortgage rates were lower than they actually were, by classifying renegotiated trackers as new business. From January 2015, they kept publishing and highlighting the misleading rate, but at least, they gave the true rate somewhere in the small print of their press release.

For the first time, they highlight the true rate and relegate their misleading rate to the small print.

 

[Brendan Burgess]

By comparison here is what they said only last month:

So what might explain this conversion to telling the truth? The tracker inclusive rate has risen this year as fewer trackers are renegotiated. The fall in the true rate was not enough to compensate.

It will continue to rise as fewer and fewer existing trackers get renegotiated. Showing a rising rate is not in keeping with their message that competition will reduce mortgage rates.

But the true rate has fallen as lenders have cut mortgage rates. So as the true rates now suit their message, they show them instead.

Of course, it might also be due to the fact that I wrote to Governor Lane and asked him to stop publishing misleading information. Although he did not reply on the point, maybe he asked his minions was there any truth in what I was saying. As an economist, he was probably shocked that the CB was misleading the public and the ECB.

 

[Clonback]

Of course, it might also be due to the fact that I wrote to Governor Lane and asked him to stop publishing misleading information. Although he did not reply on the point, maybe he asked his minions was there any truth in what I was saying. As an economist, he was probably shocked that the CB was misleading the public and the ECB.

Well done Brendan.Obviously Govenor Lane got the message at last.

 

[Sarenco]

It will continue to rise as fewer and fewer existing trackers get renegotiated. Showing a rising rate is not in keeping with their message that competition will reduce mortgage rates.

Except that it hasn't risen - the new business floating rate (including renegotiated loans) has actually fallen on a year-on-year basis. Also, I can't see any evidence that there has been a material reduction in the volume of loans being renegotiated - if anything the opposite would appear to be the case.

It's worth noting that the Central Bank are compiling these statistics pursuant to new ECB guidelines. However, the ECB still includes renegotiated loans in its definition as to what constitutes a new lending agreement.

Aside from the fall in new variable lending rates for PDH purposes over 2015, I think it's interesting that around 50% of new mortgages are fixed rate products, which might indicate something of a structural change in our mortgage market.

 

[WorstPigeon]

Aside from the fall in new variable lending rates for PDH purposes over 2015, I think it's interesting that around 50% of new mortgages are fixed rate products, which might indicate something of a structural change in our mortgage market.

Might just be that fixed rates are usually cheaper than variable at the moment (especially if you happen to be with a bank that hasn't passed reductions to existing customers on variable rates...) This is probably a temporary phenomenon, though; presumably sooner or later fixed rates will be above variable like normal.

 

[Brendan Burgess]

Except that it hasn't risen - the new business floating rate (including renegotiated loans) has actually fallen on a year-on-year basis.

The tracker inclusive rate has risen this year as fewer trackers are renegotiated.

I said very clearly that the tracker inclusive rate has risen this year. (By this year I meant 2015 - the year under review). In January it was 3.22% . In December it was 3.3%.

But the overall point is the same anyway. The use of the meaningless tracker inclusive rate was not serving their message. The underlying new business rate has been falling but the Central Bank stubborn insistence on a meaningless tracker inclusive rate came back to haunt them. So they quoted the correct rate, because it now suited them.

I can't see any evidence that there has been a material reduction in the volume of loans being renegotiated -

I had assumed that there were fewer trackers being restructured - without checking. Here are the total numbers of restructures:

So total restructures each quarter have fallen. It's reasonable to assume that the numbers of trackers restructured each quarter have fallen at the same rate. I suspect that there are even fewer trackers being restructured as the rise in house prices and improved financial position of people have probably encouraged them to get their mortgages back on track.

if anything the opposite would appear to be the case.

Have you some other source which contradicts these data?

It's worth noting that the Central Bank are compiling these statistics pursuant to new ECB guidelines. However, the ECB still includes renegotiated loans in its definition as to what constitutes a new lending agreement.

Correct. But that does not get away from the fact that this ECB definition is meaningless in Ireland where cheap trackers are restructured without the rate being renegotiated. The Central Bank knew that they were providing meaningless information and didn't put up a note to show that it was meaningless until I discovered what they were up to.

Brendan

 

[Sarenco]

Brendan

At the end of December 2014 the new business floating rate (including renegotiated loans) was 3.64% and by the end of December 2015 this rate had fallen to 3.3%. During the course of 2015, this rate fell, then rose, then fell again but stayed within a relatively narrow range of 3.1% to 3.5%.

I am not arguing that this rate is particularly meaningful and I don't know why this is the rate required to be returned to the ECB.

The volume of renegotiated home loans is provided, on a month-by-month basis, in Chart 2 of the Central Bank's retail interest rates publication. The volume of renegotiated loans was clearly higher in the second half of 2015.

 

[Brendan Burgess]

The volume of renegotiated home loans is provided, on a month-by-month basis, in Chart 2 of the Central Bank's retail interest rates publication. The volume of renegotiated loans was clearly higher in the second half of 2015.

Thanks Sarenco

I had not seen that.

There is something strange going on here.

If you go into Bank of Ireland and say 4.5% is too much, I am moving, and they reduce the rate to 3.7% and you stay, that is a renegotiated loan and is correctly included in new business as it reflects the new business rate.

If, on the other hand, you have a tracker at 1% (or indeed an SVR), and they restructure it, then it is meaningless including it as new business, as the loan rate is not renegotiated.

I am guessing that the Central Bank is classifying both as renegotiations although the rate is not renegotiated on restructured mortgages. (If the borrower gets a rate lower than the market rate, they are not allowed to include it as new business.)

So the restructurings have declined, but the people asking for lower rates on the threat of switching must have increased and exceed the declines in restructurings.

In any event, the point is the same. The meaningless information published and highlighted by the Central Bank no longer suits their purposes so they publish and highlight the correct information for the first time as it now suits them to do so.

Or, maybe Governor Lane, while ignoring my letter, took action on it?

 

[Brendan Burgess]

Well a month is a long time for the Central Bank's policy of honesty to last.

They are back to misleading the public about mortgage rates.

[broken link removed]

This month, they don't even bother to publish the true rate for mortgages i.e. the rate excluding trackers. (Or if they do, I can't find it.)

The variable rate in the rest of the Eurozone is now less than 2%

while Irish borrowers are paying from 3.25% to 4.95%

Brendan

 

[Brendan Burgess]

Anyone know how the Finns have such low mortgage rates?

 

[Sarenco]

It's certainly bizarre that the Central Bank has not given the new business floating rate, excluding renegotiations, this month - they really should be consistent.

Given our elevated default rates, I think it's surprising that the median rate on all outstanding home loans in Ireland remains at the Eurozone median. Obviously I appreciate that is of no consequence to a borrower taking out a mortgage today but it is relevant to the amount of aggregate disposable income within our economy.

As regards the position in Finland, I gather from this Commission document that mortgage rates predominantly track the 12-month EURIBOR rate, which is currently negative.

http://ec.europa.eu/economy_finance/publications/country_focus/2013/pdf/cf_vol10_issue6_en.pdf

 

[PadKiss]

The current deposit requirement for first time buyers could be resolved with a mortgage product that gives a fixed rate of interest for the full term of the loan thereby giving certainty of the cost of the loan and this will not need to be stress tested as the rate remains constant for the full term. However the issue, again, will be what rate the lenders here will charge when compared to similar products available in Europe. A rate of around 3% would help resolve a major part of this problem. Will lenders do it, I doubt it, but will continue to lay the issue with the Central Bank rather than bringing a progressive approach with workable solutions to the issue. Thinking outside their comfort zone (or how mortgages have been done to dates) and bringing appropriate products to suit the current climate will help while also delivering enough profit on the loan to the lender. THis will likely only occur when another lender brings the product to the market place. Then all will follow suit as a pack. Padraic

 

[Sarenco]

Long term (25-year) fixed-rate mortgages were introduced by a number of UK building societies in 2007 but the products never took off due to a lack of demand. You can't really blame lenders for not offering products that borrowers don't want.

A lifetime fixed rate mortgage at ~3% would certainly be wonderful but I don't think it's a very realistic prospect.

 

[WorstPigeon]

A lifetime fixed rate mortgage doesn't really sound like it'd suit many borrowers, though? You could never move, presumably, and could also never pay off ahead of time (I assume that by the time a mortgage is 20 years old many if not most people find themselves in a position to overpay)

 

[Black_Adder]

If you structured Mortgage Bonds to be fixed rate with same duration as a pool of underlying mortgages - that would facilitate the early pay off situation.

This country isn't interested in doing anything about housing / mortgages etc as it takes imagination and effort.

 

[Sarenco]

If you structured Mortgage Bonds to be fixed rate with same duration as a pool of underlying mortgages - that would facilitate the early pay off situation.

Our main lenders previously securitised a fairly significant proportion of their residential mortgage books and/or issued covered bonds and we have fairly sophisticated legislation to support this process.

Technically mortgage backed securities don't have a duration - holders simply receive a pro rata share of the cashflow received by the issuer from the underlying portfolio of securitised loans (including principal repayments) on a "pass through" basis.

The recent experience of the holders of these securities has, unsurprisingly, been far from positive (given the exceptional levels of mortgage defaults in Ireland) and banks have largely reverted to their traditional source of funding - customer deposits.

 

[Brendan Burgess]

The recent experience of the holders of these securities has, unsurprisingly, been far from positive (given the exceptional levels of mortgage defaults in Ireland) and banks have largely reverted to their traditional source of funding - customer deposits.

Hi Sarenco

I was under the impression that none of the holders of these securities lost any money. I had assumed that the banks' losses would be lower due to securitisation, but I was told that the lenders took the entire losses themselves.

When individual mortgages went bad, the lenders just swapped in a good mortgage for the bad mortgage.

Is this not correct?

Brendan

 

[Brendan Burgess]

A lifetime fixed rate mortgage doesn't really sound like it'd suit many borrowers, though? You could never move, presumably, and could also never pay off ahead of time (I assume that by the time a mortgage is 20 years old many if not most people find themselves in a position to overpay)

First of all, you can move as you could port the mortgage to the new property. I think that the lenders already allow this with fixed rate mortgages.

When interest rates rise, the lender should be quite happy for you to pay it off ahead of schedule.

When they fall, you could pay it off ahead of time, but you would have to pay a penalty. Or, the mortgages could be structured so that early repayment was allowed - however, the rate would have to be higher for that.

You can't really blame lenders for not offering products that borrowers don't want.

Irish borrowers don't want to fix at the very high rates charged by Irish lenders. I would expect that there would be demand for long-term fixed rates if the rates were closer to the rates available in other Eurozone countries.

Brendan

 

[Sarenco]

When individual mortgages went bad, the lenders just swapped in a good mortgage for the bad mortgage.

Is this not correct?

That is certainly true as regards the covered bonds issued by BoI and AIB (where the underlying mortgage pools remain on balance sheet).

The Central Bank published an analysis of the mortgage pools underlying the RMBS issuances by Irish lenders:

https://www.centralbank.ie/publications/Documents/Irish%20Residential%20Mortgage-Backed%20Securities.pdf

 

[Black_Adder]

So in effect - had all the Mortgages been sold on by way of RMBS, the bondholders would have been on the hook for the write downs. But as the Banks Asset Covered Securities, there was full recourse back to the Banks. So in effect for marginally better pricing, the Banks were fully liable on the Covered Bonds whereas RMBS would have left the Bondholders on the hook. Is this a fair summary?