Brendan Burgess
Founder
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Former Governor of the Central Bank has a rambling opinion piece in the Irish Times:
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www.irishtimes.com
As with most other European countries, Ireland has largely relied on competition to keep the mortgage “standard variable rates” in line with commercial realities. The standard variable rate was never a very satisfactory contract, though, given the amount of discretion it left with the lender. Several years ago, the Central Bank of Ireland began to insist that banks be a lot more transparent about their method of adjusting interest rates. But at what point does exercise of such discretion by lenders on the rates they charge amount to an abuse?
It is likely that these funds have experienced a bigger increase in their own interest costs than have the banks. But that would not have given them any leeway to raise rates higher than their competitors – if they had any competitors. The problem is not just that bank competition is increasingly limited, with the exit of Ulster Bank and KBC. Funds that are not actively seeking new borrowers are unaffected by competitive concerns. They are simply focused on maximising the return on the portfolio of loans they have already bought. Some of the borrowers whose loans are now owned by such funds may be able to find an alternative cheaper provider, but many have poor credit records and will not be able to move. This is a trap that deserves close regulatory attention.
Patrick Honohan: Can we ever expect to see a return to cheap money?
The IMF says low interest rates will return in the medium term but in the interim the Government needs to mitigate some of the undesirable consequences of high rates
Lender discretion
One category of Irish mortgage borrowers seems to have lost out, though, namely those whose loans were acquired by some of the funds who came in when the banks needed to shrink their portfolio after the financial crisis. These borrowers do have the same legal and regulatory protections as bank borrowers, but that protection doesn’t extend to controlling interest rates.As with most other European countries, Ireland has largely relied on competition to keep the mortgage “standard variable rates” in line with commercial realities. The standard variable rate was never a very satisfactory contract, though, given the amount of discretion it left with the lender. Several years ago, the Central Bank of Ireland began to insist that banks be a lot more transparent about their method of adjusting interest rates. But at what point does exercise of such discretion by lenders on the rates they charge amount to an abuse?
It is likely that these funds have experienced a bigger increase in their own interest costs than have the banks. But that would not have given them any leeway to raise rates higher than their competitors – if they had any competitors. The problem is not just that bank competition is increasingly limited, with the exit of Ulster Bank and KBC. Funds that are not actively seeking new borrowers are unaffected by competitive concerns. They are simply focused on maximising the return on the portfolio of loans they have already bought. Some of the borrowers whose loans are now owned by such funds may be able to find an alternative cheaper provider, but many have poor credit records and will not be able to move. This is a trap that deserves close regulatory attention.