Fianna Fail Private Member’s Motion on mortgage arrears, SME credit and Permanent tsb SVR rates
13 March 2012
I note that Fianna Fáil is bringing forward a motion to admonish the Government on commitments in a Programme of Assistance to which they signed this country up to. One of the core elements of the Programme of Assistance was that the State owned banks must be run on a commercial arms length basis. This has been explicit from the troika’s very first involvement in the Irish programme. They have consistently stated that the pricing of loans and deposits had to be a commercial decision for the banks.
Despite the Programme necessity to separate the banks from the State, the Government is fully aware of the increasing stress that some households are facing arising from difficulties in meeting their mortgage commitments. The problem of mortgage arrears is an issue of the utmost importance for the Government and is being treated as such. We have and are continuing to introduce additional measures to support those who can not pay their mortgages. We are significantly expanding on the measures that were in place under the last Fianna Fáil Government.
One of the important steps taken to protect mortgage holders who are experiencing difficulty in meeting their mortgage commitments is the Code of Conduct on Mortgage Arrears. This is now an important framework that governs the relationship between a borrower and mortgage lender who is experiencing difficulty and provides a number of protections to the borrower.
Forbearance is a very worthwhile and an appropriate response to most people experiencing mortgage difficulty. The approaches set out in the Code of Conduct on Mortgage Arrears can provide a household experiencing temporary mortgage difficulty with the necessary and important breathing space to enable that household can get back on their feet and resume meeting their full mortgage commitments at a future time.
However, the Government also recognised that, in certain circumstances, other approaches may be required. In view of this, the Government’s Economic Management Council decided last summer to establish an Inter-Departmental Group, which was chaired by Mr Declan Keane, to consider what additional measures could be introduced to assist people who are dealing with more significant mortgage difficulties. Two main objectives were set for the group. The first was a desire, where appropriate and possible, to assist people who are experiencing real difficulties with their mortgage commitments to remain in their home and secondly incentives should not be created that would encourage people who can pay their mortgage to stop doing so.
Deputies will be familiar with the recommendations outlined in the report.
The main ones include:-
oearly reform of personal insolvency legislation
odirect engagement by banks with their customers and the development and provision of more structured and sustainable options – such as trade down options, split mortgages or other options – for their customers who are experiencing mortgage distress
othe development of mortgage to rent schemes as a social housing back stop for those households that have the most unsustainable mortgages and which would qualify for social housing support
othe provision of a mortgage advisory function to assist householders assess the sustainability of their mortgage and to consider the options that may be offered to households to resolve their unsustainable mortgage position.
The Government has accepted these “Keane Report” recommendations and has put in place an implementation framework to advance this work agenda. The Government attaches a very high importance to this work. This is evident from the fact that a high level Steering Group was established to oversee and drive the overall implementation of the report’s recommendations. This group was chaired by a very senior official in the Department of Finance and also included senior representation from the other relevant Departments and from the Central Bank. To reaffirm the high political priority assigned to this work, the Government has also established a temporary Cabintet committee to oversee the implementation, on a cross-departmental basis, of the Government’s overall response to this problem and to ensure that a high priority is assigned to the delivery of the implementation measures across relevant Departments and agencies. The committee will be chaired by An Taoiseach and will include all relevant Ministers and the Minister of State for Housing and Planning.
While I appreciate and understand the concerns that Deputies will have regarding the speed of implementation of the various measures, it will also be necessary to acknowledge that this is a complex problem for which there is no immediate or one size fits all solution. A number of different Departments and statutory bodies have roles in addressing particular aspects of the mortgage arrears problem. The individual banks also have a major contribution to make to the resolution of the problem that is arising from the lending that they initiated in the first instance.
Nevertheless, it should also be recognised that significant progress has in fact already been achieved in key areas of the mortgage arrears implementation strategy. The Minister for Justice, Equality and Defence has published the draft heads of a Personal Insolvency Bill. This draft Bill was submitted to the Joint Oireachtas Committee for Justice, Defence and Equality and their findings were published on 6 March 2012. Their views, and the views from other interested parties, will be taken into consideration in the further drafting and finalisation of the Bill which is due before the end of April in line with a Troika commitment. The Central Bank has now received mortgage arrears resolution strategies and implementation plans from all licensed mortgage lenders and has engaged with the banks on these initial plans. In his speech of 2 March last, the Deputy Governor of the Central Bank, Mr Matthew Elderfield, set out the current status of this work. While much work has been done in this area, the Central Bank has indicated that further action is still required. From the Government’s perspective, more measured and progressive action is required to deal with those households in an unsustainable situation. Work has advanced on the mortgage to rent scheme with one such transaction agreed. In addition, a number of potential cases are now being developed in a pilot scheme that involves AIB and the Cluid housing association. The Department of Social Protection is examining the issues relating to the establishment of the mortgage advisory function but must do so in the context of the role envisaged for Personal Insolvency Trustees as outlined in the Heads of a Personal Insolvency Bill, to ensure that there is no duplication of services.
We also should not forget the recent implementation of the Programme for Government commitment to increase the rate of Mortgage Interest Relief to 30 per cent for first-time buyers who took out their first mortgage in the period 2004 to 2008 will also be of more general assistance to people are most likely to have the greatest affordability challenge on their mortgage.
Turning to the issue of mortgage interest rates, neither the Central Bank nor the Department of Finance has a statutory function in relation to interest rate decisions made by individual lending institutions at any particular time.
Interest rates are determined by a broad range of factors including ECB base rates, deposit rates, market funding costs, the competitive environment, and an institution’s overall funding. Ultimately the pricing of financial products, including standard variable mortgage interest rates, is a commercial decision for the management team and board of each bank, having due regard to their customers and the impact on profitability, particularly where the cost of funding to each bank, including deposit pricing, is under pressure.
The cost of wholesale funding for Irish banks, when available, remains elevated as does the cost of deposits. The competition between domestic and foreign banks for deposits has resulted in deposit pricing increasing significantly in order for those institutions to retain or grow market share. While this competition is of benefit to consumers it is resulting in increased cost of funding for the banks and further pressure on margins.
The Deputy Governor of the Central Bank has stated to the Government that, within its existing powers and through the use of suasion, the Central Bank will engage with specific lenders which appear to have standard variable rates set disproportionate to their cost of funds.
You will be aware that permanent tsb passed on both the interest rate cut of 25 bps announced on 3 November and the 25bps cut announced 8 December 2011 by the ECB to all mortgage customers. In addition, on 8 December 2011, the bank also reduced the rates applying to a number of variable rate mortgages held by both residential and investor customers by as much as 71 basis points including the impact of the ECB’s reduction of 25 basis points. The PTSB standard rate now applying to variable rate mortgages for owner occupiers is 5.19%.
The majority of the outstanding balances on Permanent TSB mortgages, 65% of the total are tracker mortgages, which are to the advantage of the borrower. The vast majority of these tracker mortgages were issued during the boom years and thus are very competitive. Almost all of the other mortgages are on variable rates and the average balance on each of these individual mortgages is under €90,000.
Permanent tsb is very conscious of the difficulties facing its customers and is currently in the process of reviewing its long term strategy with a view to agreeing a way forward with the Authorities by the end of April 2012 as agreed with our external partners in the latest Memorandum of Understanding dated 10 February 2012.
All of us recognise that this problem is complex and that it will not be solved by a single solution or in a very short period of time. It will take a range of responses from a number of different bodies and will also take time to fully implement and take effect. However, the Government is committed to making the sustained effort that will be necessary to address the mortgage arrears problem.
Turning to credit for SMEs, the government recognises that the SME sector is a lynchpin in the recovery of the economy and has directed a number of policy initiatives to ensure an adequate supply of credit to the sector.
The banking system restructuring plan creates capacity for the two Pillar Banks, Bank of Ireland and AIB, to provide lending in excess of €30 billion in the next three years. SME and new mortgage lending for these banks is expected to be in the range of €16-20bn over this period. This lending capacity is incorporated into the banks’ deleveraging plans which allow for repayment of Central Bank funding through asset run-off and disposals over the period to 2013.
As regards the availability of credit for Small and Medium Enterprises, as the House is aware, the Government has imposed lending targets on the two domestic pillar banks for the three calendar years, 2011 to 2013. Both banks were required to sanction lending of at least €3 billion in 2011, €3.5 billion this year and €4 billion in 2013 for new or increased credit facilities to SMEs. These followed on the initiatives taken by the previous Minister for Finance who first set lending targets for the recapitalised banks. I can confirm to the Deputy that both banks have achieved their 2011 targets.
I should stress that the targets are for approvals of credit. Targets have not been imposed for drawdowns and I have no plans to introduce such targets at this time. I would point out that the drawdown of funding is at the discretion of the borrower. There are many factors affecting whether or not funding is drawn down, such as changes in market conditions or company restructuring. Indeed, the Mazars Survey of SME Lending, conducted on behalf of my Department, found that the most frequently cited reason for not availing of approved credit was ‘not needed at present time’.
In terms of the banks imposing strict conditions on loans, if a borrower believes that a bank has attached terms and conditions to a loan such that the loan cannot be accepted, borrowers have the right to appeal through the bank’s internal loan appeals process and this is the first step that should be taken. If the appeal to the bank is unsuccessful, the Credit Review Office (CRO) will review that decision and make an independent recommendation on the refusal. It is worth noting that, of the appeals made to the office, in approximately half of cases the CRO has recommended that the credit should in fact be granted and I would encourage SMEs that feel they have been unfairly treated to use the services of the CRO.
As regards the Governor of the Central Bank’s comments regarding tough credit conditions in Ireland for SMEs, I would point out that the European survey of Irish SMEs is based on a relatively small survey population (in the low 100s depending on the question) and in the case of the data on the successful application rates for bank loans, the sample size for SMEs surveyed for this question appears to be as low as 74. The overall EU survey confirms that the sample is representative for the four largest euro area states therefore firm conclusions should only be drawn in respect of the larger countries.
While the trend in the survey results does raise issues in relation to access to finance which will be explored further, the low numbers mean that it is difficult to draw anything more than high level indicative conclusions.
Another survey of SMEs which has garnered much media attention is the ISME Quarterly Bank Watch Survey which was published earlier this week. The survey has a base of 904 respondents but the means of conducting the survey is not explained. It is understood that the survey is internet based, which has obvious difficulties with self selection of people who have particular gripes, leading to potential bias in the survey. As I mentioned previously, the lending targets for the pillar banks are for loan approvals not drawdowns. ISMEs own figures show that only 66% of firms who were approved for credit have drawn it down either in full or in part. The most frequent reasons cited in the Mazars survey for not availing of approved credit continues to be ‘not needed at present time’, which was cited by 80% of respondents.
The Government’s restructuring of the main pillar banks last year was designed to ensure a better flow of credit to viable businesses. In addition the Minister for Jobs, Enterprise and Innovation is developing two distinct measures to supplement the more traditional sources of credit for business. Work is well advanced to realise our Government commitments in terms of the Temporary Partial Credit Guarantee Scheme and Microfinance Loan Scheme.
On foot of the aforementioned Mazars report, a series of seven regional meetings with local representatives is now underway, hosted by the Minister for Small Business, John Perry T.D., supported by Mr John Moran, Secretary General of the Department of Finance. The aim of these meetings is to examine further the actions which might be taken by the Government to improve access to credit for SMEs.
Under the Strategic Investment Fund initiative, and following an appropriate legislative change to its mandate, the National Pensions Reserve Fund is expected to take the lead role in the development and establishment of investment funds, investing on a commercial basis, in sectors that are of strategic importance to the Irish economy.
In Summary, the Government is making significant but measured progress in dealing with the issues of mortgage arrears and has introduced a number of important initiatives to ensure that SMEs can access credit.