The ECB holds the key on tracker mortgages

Article by Brian Hayes MEP which appeared in the Irish Independent, Saturday 4th October 2014

Cleaning up the Irish banks’ balance sheets has taken a long time. It has been painful especially for the public who bailed them out. But as much as we complain about the banks – they are central to our recovery.

The banks and the Irish economy have a kind of symbiotic relationship in that they are both heavily intertwined with each other. As the economy comes back, so too will the banks after a period of necessary downsizing. They became too big and over dependent on property, and their mistakes, with a lot of other institutions, were central to the crash that happened.

But one thing is clear. The sooner the Irish banking sector returns to long term profitability, the quicker we’ll get our money back as taxpayers.

Remember we’re the crowd who had to bail them out – at enormous cost to the entire country. Both of our futures are unfortunately tied up with each other.

So we need to get it into our heads that, as far as the Irish taxpayer is concerned, making the banks profitable again is obviously good for the banks, but good for the economy as well. That’s where the issue of the tracker mortgages comes into sharp focus.

Without a resolution to the overhang of tracker mortgages in the Irish banks it is hard to see real progress being made to either the banks or the real economy. The exposure of trackers mortgages, representing almost two thirds of the total number of residential mortgages, is holding back the bank’s profitability and the potential for lending into the real economy.

The tracker mortgage situation in Ireland is a very particular example of winners and losers. The winners are tracker mortgage holders who have seen their repayments fall dramatically as ECB interest rates declined towards zero. The big losers have been the banks and other mortgages providers.

The Irish banking sector is heavily exposed on the trackers front. It is believed that close to €50 billion of trackers exists within the Irish banking sector. A solution has to be found and I believe that the ECB could hold the key.

Two weeks ago I asked Mario Draghi in the European Parliament to consider including tracker mortgages as collateral for the ECB in their new Asset Backed Securities (ABS) programme, so that Irish banks can then obtain new funds which the ECB is attempting to make available throughout the European wide banking system. The ECB have said they are prepared to accept mortgages, for the purposes of what they describe as mezzanine finance but obviously need some guarantees.

Whether trackers might be included is a central point that I have asked the ECB to consider. Whether they would require a guarantee from the Irish government is another matter. We have a bad experience with guarantees but we shouldn’t rule it out when bargain basement lending is available from the ECB to the banks.

The questions that have to be asked are relatively straight forward.

What are the risks with trackers now that the Irish property market has not only bottomed out, but is in some parts of the country, rapidly moving forward again? The CSO said recently that the Dublin property market is up 14% over the last year. The negative equity problem is a real one for thousands of families, but the amount of negative equity is diminishing as the economy picks up. Therefore the risk to the borrowers, in this case the banks, has become less pronounced with the improved economic climate.

And as the banks approve new mortgages, although approval numbers are pitifully low, their exposure with trackers should also reduce as the percentage of trackers to the total of other mortgage products goes down. The prospect of getting tracker mortgages off the balance sheets of Irish banks would be ‘transformational’ to the Irish economy as described by Ciaran Callaghan, senior credit analyst at Merrion Stockbrokers.

The ECB’S recent Asset-Backed Securities programme, announced last week is by its nature short term lending – i.e. central bank to local bank lending money.  By making available a wall of money to the European banking system, the objective is to stimulate the very slow recovery that is taking place. The Irish growth story is top of the class by comparison to other euro zone economies.

But our recovery is still dependent upon a dramatic improvement in business investment which has fallen 20% since 2008. New lending is critical to SMEs and corporate growth in the Irish economy. Banks make their profits in the difference they charge between the money that is lent to them and the money that they then loan to others. Without getting new lending into the banking system, there won’t be new loans on the high street. That’s the problem for banks and for the Irish economy.

By taking on the trackers, the ECB could unlock the potential of the Irish banking sector to become a powerhouse of growth. In collateral terms it would represent a tiny fraction for the ECB in holding onto the trackers for a relatively short time.

Mario Draghi told the recently told the European Parliament that just €82 billion was drawn down so far by European banks in the first TLTRO instalment – €400 billion is available for two instalments this year. I want to know how much, if any, of that flowed into Irish banks. We need clarity on this issue.

We need the help of the ECB to constructively engage with our government in trying to find a solution to the tracker problem. In my view this issue, if unlocked, holds the key to unleashing the potential for even further growth in the economy. While trackers have genuinely helped families weather the worst of the economic storm, because of course the ECB interest rate has been so low. And at some point rates will go up again, and logically the performance of tracker mortgages will improve for the banks. Either way, solving this problem must involve the ECB and potentially some guarantee being provided.

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