Irish Mortgage Brokers Blog

We touched on this topic over on MyHome.ie last Friday in our weekly blog contribution to their site.

It is important to look at this from a few perspectives

1. Regulation and the role of the Regulator
2. Past decisions by the Regulator
3. Politics and policy

1. Regulation and the role of the Regulator: The idea of regulation is not for price control, rather it is about prudential control. As galling as it seems to everybody, the Financial Regulator is not (nor should they be) empowered to tell banks what prices they can charge. This is sickening given that we have spent €10,000,000,000 this year alone via the NPRF in supporting our banks (€8.8bn to AIB and €1.2bn to Bank of Ireland).

Readers, if you know of other jurisdictions where regulators set prices please let us know! The idea of a Regulator is that you pay for them in return you get the avoidance of systemic risk, that is the fundamental reason for their existence and for bearing the cost of having them. The same way that we pay for police in order to have a safer society where there is consequence of actions.

That our regulator has failed and was unfit for purpose is a given, however, placing new powers in them that can force banks to charge certain prices is utilitarian - where the end justifies the means - rather than fair and prudent. If we are to sell our banks they must be profitable, higher rates are one route to that (the others are dropping deposit rates and firing staff).

No investor will want to buy an Irish bank if they cannot control their own pricing, even if pricing is controlled and certain promises given or undertaken not to meddle in the future, the first time you do so it destroys your credibility. And that is where Government erred. They thought that the warning of a stern telling off would make banks change their ways.

It failed, leaving the Taoiseach with egg on his face and the banks with a reputation as bad as ever, while the ball is now in the Regulators hands as they were asked to ‘let the Government know if they need extra powers’.

[Irish Times] “Mr Elderfield has previously stated that his powers of intervention are limited when it comes to forcing the banks to pass on mortgage rate cuts. The Government’s legal advice is that the roles of the regulator and of the Central Bank are independent and the Government cannot direct him to take action.

A source said it has instead “invited” him to consider the outcome of the meeting and, if necessary, make a request to Government for additional powers.

Mr Gilmore denied the Government was powerless in the matter. “No, this has some way to run yet . . . we will take further action if necessary,” he said.”

2. Past decisions by the Regulator: It is interesting to note that the argument about rate setting has already been raised with the Regulator, only it didn’t make headlines the last time. The complaint was via the Professional Insurance Brokers Association and the basics were that ‘dual pricing’ (where prices vary according to distribution channel) was wrong and should be prevented.

The regulator said and did nothing about this, their return comment was that ‘The Regulator has no input into pricing by banks’. So if that precedent is anything to go by then they will not intervene this time either. And that is the key issue- Kenny has passed the ball to the Regulator and now they will be the ones to be made to look bad by appearing impotent. Or worse yet they will seek powers that will make the financial services vista even worse in Ireland.

If the Regulator does get involved in pricing issues it will open a larger can of worms than presently expected, next of all people will dispute their TVR’s based on LTV’s, brokers can bemoan dual pricing etc. etc. It is a downward vortex when you make a Regulator responsible for pricing.

3. Politics and Policy: It is not disputed that people are unhappy, upset and morally outraged at banks getting a cut in cost and not passing it on. However, this is primarily perceived rather than real, because banks are paying more for money than they have existing loans out at (for the most part, and largely due to the 400,000 tracker loans out there).

The question we are asking though is ‘what part of politics requires price intervention?’. The natural byline is ‘well we had bank intervention?’, that that is true (we made a mistake in how we did it, a big one), but mistake ‘A’ is not a justification or foundation for Mistake B if you operate on a rational case by case basis. Furthermore, the likes of AIB who are ‘the bad guys’ are still more than 2% cheaper than PTsb who did pass the rate cut on! So should politicians risk any political collateral they have on diving into this?

Why instead are they not fighting the most expensive providers and asking them to come in line with more competitive banks, this ‘pass the rate cut’ is all about the appearance of power, and the flexing of muscle rather than about genuine leadership and policy, sadly it would seem that our leaders are willing to spend considerable equity in optics when the results are unlikely to be forthcoming.

Perhaps the most pertinent question is ‘what are they hoping to achieve?’.

In this piece we were speaking to Sybil & Martin about the banks passing on rate cuts and what to do if you got flooded recently.

In this piece by Stephen Murphy of TV3 we spoke about the issue of Regulators enforcing pricing and the fact that it is not a common practice.

This piece by Claire Brock of TV3 was about Mario Draghi’s unexpected rate cut of 0.25% last Thursday.

The debate about whether or not it will be passed on still rages. We spoke about that particular issue the following day on both LMFM and Newstalk.

We were delighted to take part earlier this month regarding the Keane Mortgage Report and the Presidential Race

We were happy to comment on the Keane report in this news piece by Martina Fitzgerald in RTE

We were delighted to take part in the making of Richard Currans documentary ‘Property Crash, Where to Now?’. It is the follow up to 2006’s ‘Future Crash’ in which he predicted the demise of the Irish property market.

The full version is available on the RTE player, we just posted the clip that we took part in (showing off for our loved ones basically!)

We were delighted to speak to RTE News at 6 about the state of the personal insolvency in Ireland. Our core belief is that we need some kind of ‘personal examinership’ programme. The piece was covered by reporter Paul Colgan.

There are two sets of statistics floating around; on one hand you have the banks who claim that they are lending and also that the demand for credit simply isn’t there - a belief further expounded by John Trethowan. Then on the other hand you have the likes of PIBA who counter claim that 80% of applications are being refused.

So it is important to break down the vital components. First of all, the debate often centres around Small Medium Enterprise (SME) lending; even if demand for that type of credit isn’t there it doesn’t automatically translate into a reduced demand for mortgages. The point being that we can’t compare SME loans/business loan demand to that for mortgage credit.

Secondly is ‘what constitutes a refusal’, and this is where common sense diverges. Even the bank accept that if you seek €200,000 and are only offered €100,000 that it is a loan not fit for purpose, this even goes for SME loans - imagine trying to borrow 80% of a machine purchase at 200k and then trying to come up with €60,000 you can’t raise? Mortgages are no different, if people don’t have the ability to bridge the difference between the purchase price less their deposit and the loan sanctioned then it is an effective refusal.

If one wanted to be cynical, they would advise the banks to say ‘yes’ to absolutely everybody and only offer them €100 maximum. This ruse would be quickly seen for what it was, and yet when you add in a few zero’s and

Having given the banks support to the point of no return it now seems acceptable for even the Credit Review Office to use the ‘reduced demand’ argument to tacitly approve the strong chance that BOI & AIB will miss their combined lending target of €6,000,000,000 to Irish companies over two years.

If you have no demand in one area then why not funnel those funds which ‘must be lent’ to wherever the willing borrowers are? That our vested interest comes into this is evident - but it is frustrating to see a market down 95% and the issue of loan supply being a strong driver in the lack of transactions.

The vast majority of people who want to purchase a property simply cannot get past the underwriting hounds who have gone from being puppies in the last decade to being dogs at the gates of hell over the last two years. And the blurring of lines between different types of credit and the gathering of statistics give two totally different stories, but much like any cake, you have to look at the ingredients going into it, and in our opinion at least, the way ‘approvals’ are counted and accounted for is wrong, meaning credit is nowhere near as available as we are told it is.