Obviously this is likely to be high in Ireland given the arrears profile
Whenever I see the word "obviously" I get worried.
It is not remotely obvious to me at all. Why would the arrears history matter today? Why would it matter on 60% LTV mortgages?
Brendan
Banks have to take historic losses into account in determining the approprate level of impairment provisioning to apply to new loans.
A borrower with a low LTV may well exhibit greater repayment discipline but, ultimately, if a lender cannot enforce their security in a cost efficient and timely manner, a low LTV will provide limited additional protection to a lender if the borrower defaults.
The average rate on all outstanding variable rate mortgages in France (3.08%), to take one example, is actually higher than the comparable rate in Ireland (2.77%). Obviously the large low-yielding tracker books of most Irish lenders impact these figures significantly.
Given the limited (or, in the case of PTSB, non-existent) profitability of Irish banks, it is difficult to conclude that our lenders are somehow profiteering in the current environment.
This makes no sense to me at all. It would make sense if the current lending practices were the same as the lending practices when the losses arose.
But the lenders went crazy between 2002 and 2007. They lent high multiples of income. They lent high loan to values. If they were lending 6 times income and 100% LTV now, then they would have to plan for a much higher risk cost.
But consider a new entrant to the Irish market lending a maximum of 60% LTV and 3 times income. They history of losses is simply not relevant to them and they should price their loans accordingly.
The difficulty in enforcing security is a valid reason for charging Irish borrowers with high Loan to Values a higher rate. I have always argued that and I have always argued that facilitating repossession would be good for all borrowers, because it should bring down the interest rates generally.
I have watched a few cases where there is plenty of positive equity and the bank is trying to repossess the house. Take a mortgage of €200k on a house worth €400k. The lender should be charging 2.5% on this loan, but they are charging 4.5%. So they are making €4k a year in excess profits. It may take them three years to repossess the property, but they will have made an additional €12k in super profits in that period. The solicitors charge around €2,000 for a repossession case. So the risk premium for low LTV loans should be tiny.
I can understand the lenders and the Central Bank making this argument. But I can't understand anyone else making it.
The Fair Mortgage Rates Campaign is arguing that the rate on non-trackers is too high. It's clearly too high. It is this rate of 4.2% which you should be comparing with the French rate of 3.08%.
It's clear that the lenders have sunk costs in the trackers, but a small group of non-tracker mortgage holders should not have to pay for them.
The profitability of separate products should be judged separately.
No one seems to argue that current account holders should pay €2,000 a year in fees to compensate for the huge losses which the lenders incurred on development loans.
Say my local Spar shop has entered into a deal with half its customers to provide goods at cost for the next 20 years. Do you think that they can compensate for this by charging the rest of us double the price? We would simply go to the Centra across the road. As a customer, I couldn't care less about the profitability of the Spar shop or the mortgage lender.
Well, whether or not it makes any sense to you, it has always been the case that banks have to take historic losses into account in determining impairment provisions for new loans. You would certainly hope that stricter underwriting criteria will result in lower impairments going forward but only time will tell whether this actually proves to be the case.
A new entrant to the market without such historic losses will obviously have a lower cost of capital and can offer more competitive rates to attract new business.
In my opinion, public policy should be directed to encourage (and certainly not discourage) new entrants and capital into our banking system in order to drive down the cost of credit. Do you disagree?
I don't understand how a non-performing loan could ever be profitable for a lender, never mind super-profitable.
Has the SVR campaign changed its name and objective? It would also be helpful if you could set out its demands or its policies for pursuing its current objectives as this is entirely unclear to me.
Why would you compare the average variable rate on all outstanding mortgages with average new lending rates? That makes no sense whatsoever.
Average new variable mortgage rates in France, for example, are currently around 2.08%, which is obviously far lower than new variable lending rates in Ireland.
Why would you compare discrete bank products in isolation from all other bank products? Again, that makes no sense whatsoever.
However, there is an obvious public policy interest in ensuring that banks are sustainable - bear in mind that the primary reason for regulating banks in the first place is to ensure, so far as practicable, that depositors are protected. Ignoring the financial position of our banks when determining banking policy would be totally irrational and counter-productive.
I have never accepted the argument for anything "It has always been the case." That is simply not a justification. It might suggest that there is a good reason for something, but it is not in itself a good reason.
The historic losses are simply not relevant. Let's take an analogy. AIB has historic losses in Ireland. It starts lending in Denmark. So it prices its risk based on its Irish losses? No it would not. Likewise lending today is a different country from lending 10 years ago. The risk is much lower and it so the rates should not reflect the losses caused by the reckless lending of 10 years ago.
You talk about a new entrant to the market. If Santander enters the Irish market and starts offering low LTV loans at 2.5%, those customers of the other banks who can move, will move. As soon as that happens, all the academic arguments about historic losses will disappear and the banks will lower their new business rates to 2.5%.
In an ideal world, competition would sort out the problem and there would be no need for regulatory control. But guess what? It's not an ideal world. The banks run a cartel and fleece their customers by charging low-risk new business far more than than they should. There is no sign of a competitor coming in so, unfortunately, there has to be some control while the market remains dysfunctional.
It's not acceptable to tell the 300,000 variable rate borrowers who are paying around €250 a month in excess interest to wait until a new lender enters the market.
A lot of people and, indeed, a lot of banks don't understand this either. But think about it. The total cost of the inputs and cost of capital (allowance for profit) for a low LTV loan in Ireland, excluding risk, is around 1.5%, but let's say 2%. While they are charging above 2%, they are making supernormal profits. They continue to charge this rate during the 5 year long repossession process. So they continue to make supernormal profits. Banks make money by lending money. The longer they charge, the more money they make.
Yes, we have adopted the name The Fair Mortgage Rates campaign. Thanks for the suggestion on publishing the objectives. We have agreed them. I will set them out in writing, get the agreement of the others, and publish them.
There is a bit of confusion here. I was using your figures. I was objecting to your comparison of all outstanding variable rates in France 3.08% with the equivalent rate of 2.77% in Ireland. The rate in Ireland is an average of 1% on trackers and 4.2% on non-trackers. You should compare the 3.08% with the 4.2%.
But the real comparison is in the new business variable rate which is the main figure I have been campaigning on. In France, it is 2.08%. In Ireland it is over twice that at 4.2%. There is simply no justification for this. Why should a First Time Buyer or a switcher pay 2% points more? It's completely unjustified. And I repeat, I accept that higher LTV mortgages in Ireland should be charged more while we make it difficult for lenders to repossess.
Not sure what you mean by that. In Ireland products are generally discrete and are priced separately. The exceptions are KBC and Ulster Bank who give discounts for those who hold current accounts. I don't have a problem with this, but they are still charging excessive rates after the discounts.
There are conflicting interests. I do think that the requirement to treat borrowers fairly has to be taken into account. I am not suggesting that the banks should not make profits on their variable mortgage rate products. Clearly they should. When AIB and BoI were charging 3% and were paying 3% on deposits, I advocated that they should raise mortgage rates.
AIB and BoI and ptsb can charge fair rates and their variable rate mortgage book will contribute to profit.
They have fully provided for the historic losses and are now writing back the provisions, so they no longer need a margin for that.
BoI has a small margin on its trackers
AIB is making a small loss of margin on its trackers.
ptsb is the big problem. The margin on its variable rates is not enough to pay the costs of administration of the whole book and the small loss on its trackers. But that is the shareholders' problem. The shareholders should put in sufficient capital. It should not fleece its non-tracker customers to cover all the costs of operating the book and building up capital.
If a new lender were to enter the market, all the arguments you , the banks , the government and the Central Bank have put up will fall apart. New business rates would fall to 2.5% to 3%. We would still have a problem of 150,000 borrower who cannot move so we would still need some legal mechanism to protect them. If we don't, then you will be back here justifying a margin of 6% on these loans so that the banks will be profitable.
As we now know, mortgage lending in Ireland is very risky and hence rates are high - we all wish this wasn't the case.
I don't understand your point about what shareholders in PTSB should do with their money. Surely investors should simply seek the highest risk-adjusted return on their capital. To do otherwise would be very odd.
"dems de rules"- if you disagree with the current regulatory requirements you can certainly raise your concerns with the Basel Committee but, in the meantime, our banks are required to comply with the current regulatory requirements.
Hi Sarenco
I am not an expert on Basel II or III, but this does surprise me. Can you link me to the section where it says that history which is no longer relevant must be taken into account in determining the risk of lending today? I had a quick look but could not find it.
Thanks
Brendan
High LTV lending is very risky. But low LTV lending simply is not risky and is extremely profitable.
I am not sure that a company should simply seek the highest return to the exclusion of everything else. ptsb is in a very difficult position. It is bust. It can only survive by fleecing a small number of its customers. This is not a sustainable business policy in the medium to long term. Either a new entrant will force down the rates or legislation will force down the rates. I would prefer if it were a new entrant, but in the absence of a new entrant, unfortunately it will have to be done by legislation.
Brendan
Not necessarily true! Should such a borrower default & ultimately the property is re-possessed and sold the lender can re-coup the full amount other together with all accrued interest and expenses of re-possession. I.e. No loss incurred and a profit on the interest margin on the loan!Well, a low LTV loan is obviously not profitable if a borrower defaults!
Well, a low LTV loan is obviously not profitable if a borrower defaults!
Not necessarily true! Should such a borrower default & ultimately the property is re-possessed and sold the lender can re-coup the full amount other together with all accrued interest and expenses of re-possession. I.e. No loss incurred and a profit on the interest margin on the loan!
Well, a low LTV loan is obviously not profitable if a borrower defaults!
as well as ongoing funding and capital costs related to the non-performing loan
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