Should TDs have say in regulating mortgage market?

Updated / Sunday, 31 Mar 2019 21:33

By Will Goodbody

For four long hours last Tuesday, the outgoing Governor of the Central Bank Philip Lane and colleagues fielded a barrage of questions from members of the Oireachtas Joint Committee on Finance.

The topics were wide ranging, covering everything from bank executives' pay, to the economy and inevitably Brexit.

But one broad topic garnered more attention than most - mortgages and the mortgage market. 

It is an issue that is very much exercising some politicians in Leinster House at the moment, with the result that there are a plethora of different pieces of draft legislation being considered.

The one that is arguably garnering the most attention is the Sinn Féin proposed law that would prevent the sale of mortgages to so-called "vulture funds" without the express written consent of the borrower concerned.

The No Consent, No Sale Bill would also force the lender to serve a statement to the borrower to help them make an informed decision, and it would require the existing arrears and interest rate setting policy to follow the loan.

It’s aim is simple - to give mortgage holders the option of stopping the sale of their loan to a vulture fund.

It has so far passed second stage in the Dáil and is awaiting further scrutiny by the Oireachtas.

But there is other legislation in the works too.

Independent Alliance Minister Kevin Boxer Moran has put forward draft laws that would force courts to take into account the circumstances of borrowers and their dependents when making a decision on whether or not to grant a repossession order to their lender for the property.

The Land and Conveyancing Law Reform Bill, which has the backing of the Cabinet, would also require judges to consider the efforts made by the parties to resolve arrears problems and to take into account a lender’s refusal to engage in attempts to do so.

And then there is the thorny issue of rates.

Fianna Fáil has tried to bring in a law that would limit increases in variable mortgage interest rates, in an effort to tackle the problem of inflated rates here, which are among the highest in the eurozone.

All three of the above proposals, on the face of it, appear to be laudable.

After all, they only seek to redress some of the perceived imbalance of power between banks and the customers they are supposed to serve.

But sometimes, even if intentions are good, throwing something small into a big pond can create ripples that can spread far and wide with unintended consequences.

And it is exactly this type of effect that has many experts concerned about the politicians' proposals.

For instance, Mr Lane said last Tuesday that the Central Bank has "grave concerns" about the No Consent, No Sale Bill.

He warned it could severely damage the resilience of the financial system, could limit the ability of banks to obtain liquidity, and do all this without actually improving consumer safeguards.

Strong claims from the mild-mannered economist, who chooses his words in a measured careful way.

Governor Lane also said the Central Bank shares the concerns expressed by the European Central Bank (ECB) about Mr Moran’s Land and Conveyancing Law Reform Bill.

Last weekend, the Sunday Business Post reported that the ECB chief, Mario Draghi, had expressed worries about the plan, because he feared it could drive up mortgage rates, cause an increase in bad loans clogging up the financial system and lead to moral hazard.

Once again, a warning that certainly pulls no punches from the man responsible in large part for ensuring the good health of the European financial system.

The Fianna Fáil proposal on limiting variable mortgage interest rate hikes has similarly met with opposition from both the Central Bank and Department of Finance amid fears it could be unconstitutional.

The Competition and Consumer Protection Commission has also said in the past that it has serious concerns about the party’s plan, which it claims could limit competition and increase pricing, thereby hurting the very borrowers it was designed to protect.

That draft law is currently on hold, awaiting a hearing at committee stage in the Oireachtas, which may or may not be forthcoming.

But it isn’t just official state and EU bodies that are expressing concerns about some of these proposals.

Brendan Burgess, founder of online consumer forum Askaboutmoney.com, has written to the Oireachtas Finance Committee seeking a hearing in relation to the No Consent, No Sale Bill. 

He argues there is a direct correlation between the fact that Irish mortgage holders are the best protected in the world and also pay the highest mortgage interest rates in the eurozone.

"This is not a coincidence - the first leads inexorably to the second," he wrote to the committee.

"We need to reduce mortgage interest rates, not increase them. We need to reduce protections for mortgage defaulters, not increase them."

"We need to persuade new lenders to enter the market, not dissuade them."

The organisation representing the banking industry here is also dead set against the bill for similar reasons.

Maurice Crowley, the acting CEO of the Banking and Payments Federation of Ireland, wrote in the Irish Independent during the week that if enacted the legislation would make it harder for banks to raise funding, increase the cost of funding and make the market less attractive to lenders.

Although none of the above interested parties would ever say it, for fear of overstepping boundaries or seeming impolite, what all their observations seem to amount to is a call on politicians to stop meddling with mortgages.

And it raises an interesting question. Should politicians have a say in the regulation of this most fundamental of consumer lending markets? Or should it be left to independent regulators and the market itself to sort out?

Dr Tom Conlon, Associate Professor of Banking and Finance in the UCD School of Business, believes the latter should be the case.

"If you have politicians involving themselves in areas like this, it is very hard to see how we can have independent governance," he said.

The role of government is that they set the criteria under which independent bodies should monitor the banks and financial institutions, he claimed.

But those criteria should not be subject to constant political change and interference, he added.

"We learned in the not-too-distant past that doesn’t work," he said.

He also pointed out that banks have already gone through huge regulatory change over the past decade or more, at vast cost, which ultimately is picked up by customers.

But that view is, as you’d expect, not shared by politicians.

"The reality is that Irish mortgage holders are paying the second highest rates in Europe," said Michael McGrath, Fianna Fáil’s finance spokesman.

But he doesn’t think those rates can be justified, as the market conditions for banks are favourable now.

Mr McGrath does believe it would be better if the market resolved the issue itself.

But while that isn’t happening, politicians have a role to play, he said.

His opposite number in Sinn Féin, Pearse Doherty, agreed.

"We let regulators do the regulating in the past and look at the mess they made of it," he said.

"The Central Bank is independent of the Oireachtas, but the Oireachtas gives the Central Bank the tools."

"The Oireachtas has a clear duty to legislate and it is up to the Central Bank to apply those rules."

Clearly then, the pressure of potential new laws is not going to dissipate any time soon.

Time will tell whether such interventions have a positive effect on leveling out a still partially broken mortgage market.

Or whether they just go to prove that dangers can arise from the law on unintended consequences.

Comments welcome via Twitter to @willgoodbody