Central Bank denies deserting vulture fund mortgage customers as rates soar

The Central Bank of Ireland was accused on Wednesday by members of the Oireachtas Finance Committee of deserting holders of more than 100,000 mortgages that banks sold to overseas investment funds in the wake of the financial crisis, as many deal with above-the-odds interest rates of as much as 7 per cent.

About 38,000 of those borrowers are on variable-rate mortgages priced at the “higher end” of rates in the Irish market, Colm Kincaid, director of consumer protection at the regulator, told the committee.

Sinn Féin finance spokesman Pearse Doherty said the regulator was “washing its hands” of these borrowers, many of whom are unable to switch to mainstream lenders offering lower rates because they had problems with their loans in the past.

Aontú leader Peadar Tóibín said a “two-tier” mortgage system had developed in the market, where day-to-day servicers of loans owned by investment funds – or what are often referred to as “vulture funds” – have moved more proactively to increase home loan rates than banks since the European Central Bank (ECB) started to hike official borrowing costs last July.

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[ Bank of Ireland increases interest rates on fixed-rate mortgages ]

“I think you’re being unfair to say, Deputy, with all due respect, that we are washing our hands,” Central Bank governor Gabriel Makhlouf said to Mr Doherty, adding that the regulator was engaged in a “pretty intensive process” within its mandate with service providers behind the loans.

Mr Kincaid said the Central Bank was in a “very, very live engagement” with the service providers to ensure they stick to regulatory codes, that they proactively assess the impact of rate decisions on customers and have a proper “suite of solutions” in place to help borrowers facing the risk of running into problems with their loans. He said the regulator was taking a “challenging” approach.

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However, regulatory officials highlighted that they did not have powers to intervene in commercial decisions on the setting of interest rates. The weighted average new Irish home loans rate was 2.57 per cent in November, according to the Central Bank, a fraction of some of the rates being charged by investment fund servicers.

Mr Makhlouf signalled on Wednesday that while the ECB was on track to increase interest rates by a further half percentage point in both its February and March governing council meetings, there was a degree of uncertainty over policy decisions beyond that.

“We need to continue to increase rates at our meeting next week – by taking a similar step to our December decisions – and also at our March meeting, although our future policy decisions need to continue to be data-dependent given the prevailing uncertainty,” Mr Makhlouf told the Oireachtas finance committee. Still, he said it would “not be surprising to see us continue on this path of interest rate rises beyond the first quarter”.

The ECB increased its deposit and main lending rates each by half a percentage point in December, to 2 per cent and 2.5 per cent, respectively. The main lending rate was at zero before the ECB started increasing in July.

[ Permanent TSB ups fixed mortgage rates again following ECB hikes ]

“Raising the policy rate also signals our commitment to price stability. It sends a clear message that we will not allow inflation to stay above 2 per cent and helps to contain inflation expectations, guarding against the emergence of self-reinforcing inflation dynamics and tackling the risk of a persistent increase in inflation expectations.”

In addition to the automatic effect of ECB rate hikes on tracker mortgages, mainstream banks including AIB, Bank of Ireland and Permanent TSB have passed on some of the official increases for new fixed-rate business.

Mr Makhlouf added that it would be “concerning” if banks held off for a “long time” from increasing rates, as it would mean that ECB monetary policy was not “being transmitted” to the wider economy.

“It is essential that we get on top of inflation,” he said. “Ultimately, if inflation is not brought back to our target the consequences will be damaging to the whole economy, to the whole community over the medium to long term.”