Central Bank could seek cap on rate rises

THE CENTRAL Bank will go to the Government if necessary to seek new legislation to allow it put a cap on standard variable mortgage rate increases which are pushing more people into arrears, deputy governor Matthew Elderfield has said.

Mr Elderfield said the Central Bank would engage closely with banks on the issue of mortgage arrears and would seek a detailed strategy from them by the end of November on how they propose to deal with the issue of mortgage arrears.

He warned yesterday that if banks did not address the issue of unsustainable mortgages and continued with increases to standard variable rate mortgages, then they would run the risk of the Central Bank seeking a policy intervention by the Government through fresh legislation.

Mr Elderfield said that, previously, variable mortgage rate rises occurred when the cost of funds increased. And while there was still some pressure on the cost of funds, it seemed in many cases banks were using variable rate rises to compensate for unprofitable tracker mortgages.

He said the banks should realise that variable rate mortgage increases can become self-defeating if they push more customers into arrears, adding to the arrears problem and ultimately costing the banks more in terms of capital.

“What I’ve said is really a warning for the future. The banks need to act responsibly on this and not take advantage of what I’ve called this dysfunctional competitive landscape. But if they don’t, then I think they court the risk of an intervention to cap rates,” he said.

"That would be quite extraordinary, but in extremis – if that's what has to happen, it's something Patrick and I will ask the Government to do," he told The Irish Times.

The intervention could take place through the Competition Authority becoming involved in policing issues or through the Central Bank itself and its power to sign off on bank charges – or some mechanism could be constructed to facilitate intervention, he said.

Any such intervention would apply to all retail banks operating in Ireland and not just the covered banks either guaranteed or controlled by the State.

It would also include foreign-owned banks such as Ulster Bank, which is a leading mortgage provider, he said.

Speaking at the Association of Compliance Officers of Ireland briefing at University College Cork, Mr Elderfield also addressed the issue of unsustainable mortgages and urged borrowers in arrears to engage with their lenders as a first step towards resolving the problem.

He said defining unsustainable mortgages was not simple, but the Cooney Group had proposed a simple rule of thumb that being in arrears for more than 18 months with accumulated overdue interest, where the property was in significant negative equity, were strong indicators of an unsustainable mortgage, he said.

Standard rescheduling or forbearance measures were unlikely to be successful and it could be argued that forbearance was actually making the position worse for the homeowner if default or loss of ownership is inevitable as interest continues to mount up, he added.

There was a need for evaluation on a case-by-case basis, he continued, but the Central Bank’s analysis of loan data had revealed that, of those mortgages which were 90 or more days in arrears, some 70 per cent were at least 180 days overdue and 40 per cent were 360 days or more overdue, he noted.

While the Irish banks had more capacity to address individual arrears cases following their recapitalisations this year, it was important to remember neither banks nor taxpayers had unlimited financial resources, he said.

Mr Elderfield said the forthcoming bankruptcy reform would also help address the arrears problems. But care was needed to ensure the calibration of the framework for non-judicial debt settlement did not incentivise behaviour that would place unnecessary costs on taxpayers.