It was all so that we could have “a properly functioning banking system”. What does that mean? It was supposed to mean that there would be money coming out of the “hole-in-the-wall” machines when people put their cards in. That people’s cheques would be honoured. That people could get loans to buy houses, cars and holidays, to pay education fees and other things that are too large to pay at home and get paid back over time. That businesses would get overdrafts to tide them over while they waited to be paid, to allow them to buy stock. That they would get loans for larger investments that could not be made out of profits or savings.
Some of the obvious things have continued “as normal” but overall it hasn’t worked out too well, has it? We have had too many bangs for €64bn of our bucks.
Consumer credit, for example, has fallen by €2.3bn, or 14.4% in the last year, further exacerbating the collapse in the domestic economy. The figures are disputed, but small- and medium-sized businesses claim that over half their loan applications are rejected; what they get is often highly priced, with onerous conditions and less than what they need.
Then there’s the mortgage market. Back in 2011 an American outfit called BlackRock was called in by the Government and the Central Bank and given the lucrative job of estimating what future losses on mortgages would be — and how much additional capital would be required. It estimated that future mortgage losses would add up to €17bn and Michael Noonan, as Finance Minister, ordered what he said would be the definitive, final, injection of capital.
But the losses on home mortgages at the Irish banks could easily be €20bn higher. Projections of losses put together by BlackRock in 2011 underestimated enormously the extent of the home mortgage crisis.
There are more than 100,000 mortgage holders who are more than 90 days in arrears with payments. At AIB €8.1bn of its €39.5bn mortgage book was more than 90 days in arrears at the end of December 2012. At Bank of Ireland the figure is €3.6bn for €27.5bn, while for Permanent TSB it was €5.5bn of its €24.5bn. At the end of December 2012 €38bn of owner occupier mortgages and €10.6bn of buy-to-let mortgages were in arrears, while a further €6.7bn of owner-occupier and €3.2bn of buy-to-let mortgages had been restructured but were not in arrears.
This means there is a real crisis. The €64bn in capital already spent — and which the State wants a refund from the European Union on — may not have been enough. There may be a need for another €30bn in capital when you add in greater than expected losses on commercial property transactions and on loans to small and medium sized businesses. But where is that going to come from? The State simply cannot afford it.
The elephant in the room is the tracker mortgage. The Irish banks are reckoned to have at least €50bn of tracker mortgages, more than half of their mortgage lending. Tracker mortgages give borrowers the legal right to pay off their mortgages at an interest rate linked to the European Central Bank rate. As this was dropped last week to a historic low of 0.5% tracker mortgages are very valuable to borrowers — and a disaster for lenders.
Banks try to match the cost of lending to the cost of borrowing, building in a margin for profit. Unfortunately, the banks recklessly entered into long-term agreements with home borrowers without putting in equivalent arrangements with their lenders.
The ideal solution for the Irish banks would be to force borrowers off tracker mortgages, making them pay variable interest rates on their loans. That would make existing loans profitable to the banks. But no borrower in their right mind — and there are about 400,000 of them in Ireland — would surrender a tracker mortgage.
Myhome.ie has estimated that the latest ECB interest rate cut means that those on trackers may have interest rates as much as 3% less than those for people on standard variable rates. A person with a €300,000 tracker mortgage may be paying more than €500 a month — or €6,000 a year — less than somebody on a standard variable rate. ECB interest rates, when most people got their mortgages between 2004 and 2007, were between 3% and 4%, making mortgages far more expensive then than now. This fall in repayments is all that is keeping many people financially alive.
This is good news for those on trackers, but only to a point. Most of those on trackers bought during the boom, which means that they overpaid for their properties and have very large mortgages. The principal to be repaid exceeds the resale value of the property. In other words these are the people with negative equity.
The banks bear responsibility for their hard sell of trackers, financial doping by the banks of the property addicts who wanted to buy houses but who couldn’t afford to do so. Trackers made things worse by apparently improving affordability; all they did was drive prices higher.
Foreign banks have a way of dealing with the situation. They offer customers the opportunity to write down the loan balances by up to 25% in return for a switch to a variable interest rate loan. If the Irish banks were to do this with all of their tracker mortgages it would cost €12.5bn, increasing the need for new capital. If they were to sell their trackers loans to other banks they would have to do so at a similar discount. Those buyers would then offer deals to customers.
CUSTOMERS should drive a hard bargain, however. Michael Dowling of the Irish Mortgage Advisers Federation reckons that a 25-year tracker mortgage of €250,000 would require a mortgage write-down of just shy of €100,000 to make the switch to a variable rate worthwhile.
The banks might as well get on with it. The current situation is creating paralysis in the property market and is stopping the banks from dealing with their real losses.
Trackers have become so valuable that those who have them are afraid to move home for fear of losing them. But people have to change their housing needs as their family and financial circumstances change. That means upsizing and downsizing. There is a lack of stock coming to the market and a lack of the natural upgrading and downgrading that occurs as people go through various life cycles.
Why would somebody on a tracker mortgage sell and end up paying more in monthly repayments for a smaller home?
What if people were allowed to keep their trackers on a move? Such moves would require imagination and a touch of bravery in acknowledging the reality of the mess of the situation. This is the only way of allowing banks to return to profitability — to help start the process of repaying the Irish taxpayer — but also to treat their customers fairly. Yesterday this newspaper’s front page reported €400m in debt write-offs for those who can’t pay mortgage debts. That is welcome, but only a start.
*The Last Word with Matt Cooper is broadcast on 100-102 Today FM, Monday to Friday, 4.30pm to 7pm.