Road Traffic Accident Versus mortgage Mis-selling

I was in Court recently, helping two pensioners take on the might of a European Bank.  We had a strong case and the Respondent’s barrister was struggling and, as a result, started comparing the situation in hand to a Road Traffic Accident.

The barrister’s instinct to compare were correct, in that both the “Road Traffic Management” and “Consumer Mortgages” are similar in that they both operate in a heavily regulated environment.  There are clear rules and everything is well sign posted or at least most of the time.

Now, for the record, the barrister did stop as he realised he was digging his own case grave with an unrehearsed story line. However, it got me thinking that he was on to something.  Is there a difference between being hit by a car and being mis-sold a mortgage. Both result in injury, both involve real people and both can have life changing implications that are not always obvious at the time of injury.

In a Road Traffic Accident, when people are hurt, the first responder, the ambulance service focus on the injured parties.  The next responder, the police, secure the area, manage traffic flow to avoid further accidents, and try to work out what happened.  Was it an unfortunate accident, did anyone break the rules, speeding, running a red light, weather conditions, visibility, drug taking, etc. etc.

When a consumer defaults on a mortgage, the first responder to the scene is the bank who sold the mortgage.  There is no second responder, no police. 

The bank does not investigate the cause of the accident, why the default arose, they just want their money back, and as soon as possible. Usually a default is caused by a change in the borrower’s circumstances such as job loss or illness, but sometimes a default arises because the loan was unsuitable from the start; a mis-sold mortgage.  Consumer mortgage mis-selling was summed up well by the UK’s financial services regulator:

“if  your circumstances have not changed and you struggle to pay your mortgage, it is likely that the mortgage was not suitable for you”.

Every “Interest Only” home mortgage that I have witnessed, defaults at the end of the term.  The borrowers, usually in their sixties, receive a letter stating the full amount is now due and failure to pay will result in default.

Who in their right mind would sell Unsuitable Products?

Now, why would a bank want to offer you an unsuitable product.  You could ask the same of an infamous second hand car salesperson, withholding some facts.  To fully appreciate how such an issue can arise in a bank, you only have to look at the US property crash of 2007 (reference “The Big Short”), where salesmen offered consumers cheap money without a care in the world, knowing that the mortgage will be sold to another bank or pension fund within a very short period, and that ultimate buyer has no sight of the underwriting.  [Underwriting is the process of assessing the product to ensure it meets both the customers’ and the bank’s risk appetite and that the return is adequate for that risk]

By the way, the salespersons and their overseers have pocketed their commissions and bonuses when they sold the mortgage and certainly within a year of the drawdown.

The underwriting is always carried out by a group separate to the mortgage sales force and that segregation is a fundamental control in banking.

Why was the Irish Consumer Mortgage Market so attractive to European Banks given its size

Ireland in the mid noughties, became an attractive venue for foreign banks, as the Celtic Tiger roared.  The introduction of low interest rates, thanks to EU membership, Foreign Direct Investment leading to increased number of well paid jobs, young educated English speaking population, all looking for homes and mortgages.  All this despite our relative tiny market size, made the numbers stack up back at head office.

Bankers and their Capital

Why is the consumer mortgage market so attractive?  The answer lies in capital, which is the banker’s own money at risk.  Bankers borrow most of what they need to fund their loans by using other people’s money –  deposits, international loans, securitisations, etc. but they do need to put up some of their own capital.  How much capital is required against a loan is dictated by the prevailing regulatory rules and strict international standards apply.  If the bank in question has few historic losses on consumer mortgages, then the approved models, that calculate the capital, will produce lower capital requirements.  

Up to 2009, there was a European tradition of not defaulting on your home loan so the models required banks to put up very little capital compared to their commercial lending activity.

An Example of Why Consumer Mortgages are so Attractive

A bank advances €100m commercial loan, the banker’s capital requirement might be €10m.  If, after borrowing costs,  net interest is 3% or €3m, Return on Capital is 30% (€3m/€10m).

If the same bank advances €100m in consumer mortgages, it’s regulatory capital models might produce a capital requirement of €4m.  The gross margin is the same at €3m, however, the Return on Capital goes to 75%.  I’m ignoring all the fixed costs, etc. but you get the maths, same income levels but return goes from 30% to 75% on capital invested.

The Irish consumer mortgage market became very competitive as more and more foreign banks arrived, driving down the cost to consumers. They chased market share and deals for the Irish consumer became cheaper and easier to obtain. The local banks joined the madness, as their traditional market share was obliterated. The building societies were also flexing their muscles and competing with the banks, now run by individuals with ambition to challenge the old model.

The Outcome

All this competitiveness culminated in a mortgage product not anticipated by regulators or the Consumer Credit Act (CCA) 1995.  For example, the CCA addresses Endowment Mortgages, which are Interest Only loans with an insurance policy and that policy provides sufficient funds at the end of the term to clear the mortgage.  The Endowment Policies have had their own mis-selling issues, however, they did have a repayment of capital vehicle.  It is clear from the rules in place that no one anticipated a home loan that did not actually pay off any capital. The banks, lazily, used the same documentation for their Endowment Loans (without the Endowment) and Buy-to -Let loans to offer this Interest Only product.   If the CCA or regulators had anticipated such a product, then the following associated warnings might read as follows:

WARNING: This in an interest only loan and the entire amount borrowed will be outstanding when you are close to retirement.  We have ignored the regulatory rules in place which require us to establish how you might repay the capital sum in 20 years-time but we don’t care as that’s a very long time away.

WARNING: This in an interest only loan and is effectively a rental arrangement, as we will rely on you to sell your home at the end of the term unless you have come up with some great plan all on your own. By the way, banks are not permitted to own consumer property and this is a great solution for us to avoid those rules while enhancing profits.

As competition for market share increased, other banking best practices were ignored and might have required the following warnings:

WARNING: The repayments on this mortgage go beyond your retirement date and neither the bank nor you have any idea how those payments will be met when your income naturally falls.

WARNING: We have not evidenced your income and relied upon aspirational statements from your accountant or yourself.

Was anyone watching? Was there a policeman?

The Irish regulator at the time had concerns and relayed its actions in its annual reports:

Central Bank Annual Report 2002: “detailed analysis carried out on home mortgage lending policy and practice identified some areas where mortgage lenders could improve their lending assessment and a set of characteristics of prudent home mortgage loan assessment was circulated to the mortgage lenders in February and July 2001.”

Central Bank Annual Report 2002: “the Governor has written to all mortgage-lending institutions to stress the need for the highest lending standards to be applied.”

Central Bank Annual Report 2003: “A directive was issued to credit institutions to improve their internal controls in the area of: (1) client income verification and…”.

The regulator was so concerned that they eventually published the detailed document entitled “Consumer Protection Code 2006”, for financial services companies. In the previous year, the regulator recognised the need to protect consumers and noted in the report Consumer Protection Code Regulatory Impact Analysis of December 2005:

“Consumers are far less well informed about financial products than the providers of those products. In fact, many potential buyers of retail financial products may not even know what it is that they do not know.  In the absence of complete information necessary to make informed choices, competition alone will not produce optimal outcomes for consumers”.

The Consumer Protection Code, published in August 2006, encapsulated what had already been communicated directly to banks with respect to mortgages and it continued with the principles set out in the Code of Practice for Credit Institutions, 2001.  Those principles set out the standards expected from a bank that it:

“acts honestly, fairly and professionally in the best interests of its customers and the integrity of the market; acts with due skill, care and diligence in the best interests of its customers; does not recklessly, negligently or deliberately mislead a customer as to the real or perceived advantages or disadvantages of any product or service;”

The 2006 Code specifically covered items previous communicated directly to the banks such as “Suitability”, “Know your Customer” and “evidencing of income” in detail and requested credit institutions to comply with “the letter and spirit of this Code”

Consumer Mortgages had its own section in Consumer Protection Code 2006

“Where a mortgage is offered to a consumer for the purpose of consolidating other loans…………………must provide the consumer with a written indicative comparison of the total cost of continuing with the existing facilities and the total cost of the consolidated facility on offer.”

“Before a mortgage can be drawn down…………………. and other supporting documentation evidencing the consumer’s identity and ability to repay.

Where the rules ignored?

It’s safe to say that a lot of these rules, controls and guidance were ignored as time progressed as banks fought for market share in the run up to the 2008 crash.  In 2016, US private equity firm Lone Star warned buyers of bonds, containing €564 million of loans issued by Irish Nationwide, that it cannot stand over original commitments tied to the home loans in their statement:

“No assurance can be given that the lending criteria of [the provider] in respect of the mortgage loans were applied at the time of origination of the mortgage loans………..” according to a bond prospectus for a vehicle called European Residential Loan Securitisation 2016-1 DAC, a Lone Star affiliate used to sell the mortgage-backed securities.

In other words, the issuer of the bonds cannot confirm that loans were granted in line with the mortgage provider’s lending criteria, that each loan has the correct documents attached, and that the lender carried out sufficient borrower background checks.

Contact us

Financial products are usually “mis-sold” in order to make an individual complete a purchase that does not properly suit their needs, and the product or service was recklessly misrepresented.

If you feel you are a victim of mortgage mis-selling prior to 2009, please complete the questionnaire on our website at https://misselling.ie at the APPLY tab, for a free review of your mortgage.

Dear John McGuinness, Chairman

I listened with great interest to last week’s Oireachtas Finance Committee where you, as Chairman, asked Ger Deering (the Outgoing Ombudsman for Financial Services) his view on culture in the Public Service and that you believed there was a culture issue within the Civil and Public Services. You went on to list many individuals that you felt had been abandoned by the Public Service.  

I have, since the start of 2021, attempted to appear before your Committee about an issue that affects thousands of individuals in this country. Thousands that I believe have been abandoned by the State and suffer in silence. They are individuals that were mis-sold mortgages prior to 2008 and now live in fear of the future. These individuals can only obtain justice through the services of the Financial and Pensions Ombudsman as mis-conduct by banks cannot be tried in the normal court system and the Ombudsman was set up for this purpose. 

I have made the case that the Financial Services Ombudsman has been preventing a significant number of complaints to proceed to investigation. Many are rejected as the Office of the FSPO deems them as out of time. The banks, the subject of the complaints, have not raised any objection that the complaint is out of time and Mr Deering’s Office has made this determination on his own initiative. It contrasts with the situation and position held by some banks over the tracker mortgages. To understand the scale of the matter, in 2020, Mr Deering rejected c. 2,000 out of 6,000 complaints that his Office “Closed”.

I have submitted many papers to the Committee and also sought help from opposition parties to get in front of the Committee. The clients who I currently assist with their complaints have also submitted pleas to their local TD(s) and the answers that come back are similar and drafted by the appropriate Civil Servants. Thousands of people struggling with their inappropriate mortgages, with a fear for their future or who have already lost their homes, are being denied their only channel to justice and Mr Ger Deering is ignoring them due to the irrational interpretation of banking matters made by legal staff in his organisation. However, he is seen as doing a great job and is wished well in his new role. I believe he is part of the problem by limiting complaints and protecting the banks from their past behaviour.

In effect, I am a whistle blower in that I am an experienced banker who was working overseas when this misconduct was carried out and can see it for what it was. As part of other work with the (advocacy) group “Right(2)Homes,” I came across thousands of these mis-sold mortgages.  

The legislator had the foresight in 2017 to amend the FSPO Act to allow the Ombudsman to investigate past misconduct by the banks if the consumer complained within 3 years of becoming aware of the misconduct. Mr Deering continually holds the position that the consumer should have known of the misconduct when they signed the loan documents – that is an irrational interpretation as consumers have no banking knowledge of what conduct is expected within the banks and conduct driven by regulatory guidelines, consumer protection codes and good credit policies.  

You listed 16 people ignored by the State over the last 10 years. I implore you now to allow me to put the case for the thousands of our citizens who continue to struggle with potential homelessness or the fear of becoming homeless. Many have had their loans sold to overseas investors who now seek the highest possible return and unjust enrichment on their investments. 

Regards

Ben Hoey

As I sit working and listening to RTE’s Liveline (22^nd September 2021) I realise there is another section of our society that lives in fear; fear of the future as renters. They are getting old, tired and worried and all because they have no security of tenure on their home.  They recant their stories of always renting, never having the opportunity to save for a deposit, being a single parent family. There are those with good jobs and one income while one bedroom properties assume two renters when it comes to pricing the rent.

Like the distressed family home borrowers that I work for, this cohort of citizens uses similar words and phrase such as shame, fear of their retirement; a general feeling of anxiety about their security in old age.

One caller outlined how her parents, on one industrial wage, rented from the council, went on to buy that council home and eventually traded to their retirement home. This caller made the point that this was not possible today for most people and that the system was broken. But in fixing the system, she pleaded that the decision makers ask themselves “would I like or want to rent my home for 25 years?”.  She pleaded that when looking at the problem could the decision makers address the entire system and not just put sticky plaster here and there. “Please  recognise that the entire system has failed”. 

To solve these callers’ problem, we need to understand the history as we, as a nation, moved from being an economic none entity to becoming one of the richest countries in the world and I chose my words carefully “richest countries” not “richest citizens”.  We have yet to start that journey.

As we progressed from poverty and merged with our rich EU founding members and their strong currency, we saw everyone’s boat rise and moved to the “every man for themselves” form of capitalism.  Over two decades we abandoned our socialist approach of ensuring that citizens did not have to rent from absentee landlords. We abandoned the basic need to house our citizens. This period was compounded by cheap money and an exuberance of our society that we Irish could do no wrong. Experienced Irish workers returned in their thousands bringing all that valued FDI with it, the tax rate was lowered to encourage foreign investment.  House prices rose and due to the high ratio of homeowners, many became paper millionaires and all felt great hope for the future.

To fuel the party, the foreign bankers arrived, sniffing around at all this new paper money and confidence, paying locals great bonuses, etc. to fuel the party. They deployed their final weapon of mass destruction, the interest only mortgage to the masses, prices surged and then there was silence.

Homes had become commodities, just like gold, Apple shares, hotels, etc. Homes of our fellow citizens, future homes of our children, our cousins were now fair game in the international world of capitalism.  In capitalist systems, property owners always win, property means ownership, not just bricks and mortar.

Now arrived the second wave of bankers, ready to arbitrage a people who could afford high rents but could not get the cash to buy. When property is freely traded and delivers a steady cash flow then it will attract a particular investor, a profiteering investor who scours the world looking for the strongest yields, the best risk adjusted returns. Furthermore, no local tax to pay on my gains; a no brainer as they say in Corporate America.

The job of the profiteers’ to find strong returns is greatly eased when competing investors are stymied by local restrictions. Who are the competing investors?  Us, the locals, the very people that built the homes, our children, our cousins, our fellow tax payers. 

The Central Bank of Ireland has placed restrictions on the us when borrowing to purchase a home while placing no restrictions on overseas investors; how can that be fair?  The Central Bank’s intentions are good in that that they do not want the Irish citizen to borrow too much money ever again. Coupled with this they have ensured that the Irish banks’ capital is high enough to support further disasters and reflects their past behaviours, i.e. their behaviour preceding 2008 when this place was the banking wild west, not my expression. While this aspect is complicated, all the reader has to understand it’s the reason why interest rates on home loans are so high, sins of the past, etc.  

In layman’s terms, you the citizen place your tax paid savings on deposit with an Irish bank and receive 0%, your kids, neighbours borrow to finance their homes at 3.99%.  The Vultures borrow at levels at least 50% lower in international markets. Who do you think will own the property?

Any idiot can now see that the combination of factors outlined above will make it more and more difficult for ordinary tax payers to purchase a home while they can afford to service the rents on those homes. 

Now putting aside the stress and the fear of the future that this lack of security is having on our citizens, the current system will also contribute to a rise in wage demands as workers need to fund ever increasing rents.  The country and our economy will become uncompetitive as rents rise and that will have consequences for us all.

It is possible to solve this challenge by focusing on how we fund and finance the development of residential homes but it will take different characters than those currently charged with the responsibility. As the Liveline caller said, they have no intelligence.  She was not insulting, merely stating that they do not have the skills or experience to address the problem; intelligence is the ability to acquire and apply knowledge and skills.

I would not underestimate the numbers that are affected in our small society. I can identify at least 550,000+ citizens in this position. This position of fearing for their future. They range across those that rent in the private sector to those with unsustainable restructured mortgages, most held by the overseas vultures plus the many young people trying unsuccessfully to get on that ladder.   

There is a more sinister reason why we might not want to define and solve the real problem of property ownership.  The more fair the system is, the less profit exists for existing property owners.  There is an enormous conflict of interest right across the spectrum of those charged with this significant societal challenge.  We all need to ask ourselves, can we give up the enormous paper wealth that comes over time by owning our homes. Or at the very least, can we share it?

There is a solution, we just need to look in the right place.

Ben Hoey

Ireland is being mugged over and over again due to our lack of understanding of how capitalism works.  Capitalism is about efficiency of finance and capital is attracted to the most efficient processes; capital chases yield.  We, the Irish, seem to be happy to let our children, our future feed that capital. 

For centuries Irish people were slaves to the land and to feudalism.  The British, in various forms, over the centuries controlled our greatest asset, the land. Their weapon was their military presence.

That all changed in 1922 and we became independent in many ways but did we really gain our financial independence as the country struggled financially up to the 1990s.  The writer migrated to the UK in the 80s like many; my personal tax rate on a low wage was in the 70% bracket and unemployment high, opportunities low.

Then the noughties came, EU membership was kicking in, the Euro was delivering cheap money and we had the first modern day financial invasion.

They arrived from England, Scotland, Denmark, The Netherlands and Belgium. They portrayed themselves as bringing financial competitiveness to the Irish consumer.  They propagated “Interest Only” loans and hired locals to bring them market share. What was their main weapon; cheap finance.  They lashed it out, ignoring consumer codes, code of practices, regulatory guidelines and all good standard banking practices.  They rewarded their local management, our fellow countrymen, with vast financial incentives; anything to grow their balance sheets. 

The previous invasions were funded by military strength; this invasion was funded by easy cheap money and we could not get enough of it.

There is a comparison here to the international crash of 2007/2008 that was caused by fraud as the originators of suspect subprime mortgages in the US passed the risk to foreign investors and pension funds and the supply chain widened and accountability and sight of risk disappeared.  In Ireland the local employees of major banking corporations handed out Interest Only, Self Cert and loans past retirement dates, with no thought or question as to how they would be repaid.  Unfortunately, due to commercial pressure, the local banks followed suit and joined in this “misconduct” in order to save their market share.

These latter invaders lost their cheap money in 2008 and have since slowly departed these shores with the last leaving in 2021.

Now arrives the next invader and their weapon of choice; cheap money. We call them vultures.  We wonder why they can buy everything and our kids can afford nothing.  We wonder why all our building resources (i.e. builders) focus their output to meet the vultures’ desires; it’s simple, guaranteed sales of their output. 

My kids borrow off the bank at 3.9%; the vulture borrowers at 1.2%.  It does not take a genius to work out who can pay the most for the assets. Ask the question:-

“How come my kids can’t afford to buy a home yet they can afford to fund the rent on that very home”

What makes it worse is that the vultures borrow their senior money at ridiculously low rates from the very same banks that we place our deposits at – for zero or less.

The Central Bank has capped borrowing levels for Irish consumers (I hear you applaud) yet allowed others to participate in the housing market with no caps or restrictions.  Their objective was to cap or limit house price growth, however, if you just cap one participant class in a market, all you do is allow the others to arbitrage the situation and f*** over the restricted party.  

We have turned our housing market into a commodities market, a tradeable market with little regulation except over one investor type, our children.  I suspect we like this as it drives prices up and we, the existing home owners feel good and confident about things.  However, we have to realise there are three serious long-term effects of this policy of homes classed as investments:

1. Investors need to drive higher rents, higher prices and these will feed through into our productivity as a country, making us less competitive;
2. If you have a modest house and two or more children, then significant house price inflation makes your family unit less wealthy, do the math;
3. Lack of home ownership disconnects people from their community with all the ensuing social problems, both physical and mental.

Is this the country we want for our children?

Regards

Ben Hoey