Only ECB can help cut mortgages, but don’t bank on it

The appearance last week of Central Bank of Ireland governor Patrick Honohan before the Oireachtas finance committee was both revealing and somewhat depressing in relation to mortgage interest rates.

The governor told the committee that the average rate being charged by Irish banks is 4.51 per cent rather than the 3.47 per cent that has been stated previously in official figures. The latter number included restructured mortgages.

The 4.51 per cent is a full two percentage points dearer than is being paid in other euro zone countries at a time when ECB interest rates are almost zero.

And this is despite the cost of funds being between 1 per cent and 2 per cent for the banks. And there’s nothing the Central Bank can do as it doesn’t control interest rates.

Irish MEP Brian Hayes said the governor's figures exposed the "rip-off" that Irish mortgage holders have to deal with.

“If I walk into a bank in Germany or France, I can get a 20-year fixed rate mortgage at less than 3.5 per cent interest. Our mortgage system needs a major overhaul,” he said.

Last month Hayes told the national conference of the Banking & Payments Federation that the variable interest rates being charged in Ireland were a “disgrace”. Hayes has made mortgage rates a key policy issue since his election in May and plans to lobby the ECB on the matter.

Exposure

The conundrum for Irish banks is their large exposure to loss-making tracker mortgages, which are being subsidised by those on variable rates. These bloated interest rates are also necessary for the banks as they seek to return to profit, an important consideration for taxpayers who want to get their money back from

AIB

and

Permanent TSB

.

Earlier this year, Permanent TSB chief executive Jeremy Masding said the funding drag from trackers was €75 million. It's a chunky sum for a bank with annual revenues of €252 million.

Honohan also blames “insufficient competition” for the elevated mortgage rates. His “perception” is that Royal Bank of Scotland’s decision to commit to Ulster Bank in the Republic reflected the fact that it “sees a market here that is not being constrained by rates being held down. It sees that there are good profits to be made”.

AIB’s recent rate cut is a welcome development but there is no sign of its rivals following suit and there are no new entrants to the market queuing up for a licence.

Bundles of mortgages

A possible solution might be for the ECB to find a mechanism to relieve the Irish banks of their legacy trackers. The Frankfurt bank has started buying bundles of mortgages. But it is doing this at the market price, which is not high as they are yielding only 1 per cent or less. So the Irish banks would be no better off by selling them to the ECB.

And there is little likelihood of a big bang deal being done.

“Officials at the Department of Finance and at the Central Bank worked with the [EU-IMF] troika, including the ECB, for months, to try to come up with some device for the tracker mortgages which would be acceptable,” Honohan revealed.

“The best plans that we came up with would involve getting the agreement of the ECB as well as all of the national parliaments. A judgment was made that the gain to the banks was not sufficient, even with the best-designed scheme available.

“If someone wanted to give us a gift and just take them that would be fine but we know that is not going to happen.”

Unless Hayes can prise a solution out of the ECB (and I wouldn’t hold my breath), the depressing reality is that nothing will change.

Twitter: @CiaranHancock1