May 6, 2013
Do you remember the ad in which a bloke on the top floor of a Dublin bus stands up and admits to all the passengers: “I don’t know what a tracker mortgage is”? He stands up, unsure of himself, and makes his public confession, half-petrified. You can see the relief on his face as he admits that he hasn’t a “rasher’s”.
The magic of the ad is that it captured the confused thoughts of the average punter on the bus going to work in an era when everyone was using financial jargon, pretending they knew what it meant, but was scared stiff to confess that they had no idea what they were talking about. No one wanted to admit that they weren’t up to date with the new lexicon at a time when they were being bamboozled by incessant financial propaganda.
Once one guy stands up, he gives permission to others on the bus to admit that they are equally confused. This became a cult ad, with people all over Ireland standing up randomly on buses, confessing that they had no notion what was going on around them financially.
By locating the ad on the top floor of a bus, it reinforced the notion of ordinary people making extraordinarily important financial decisions without full knowledge. People were borrowing multiples of their incomes to buy houses because they were constantly warned about being left behind. And right in the middle of this madness was the tracker mortgage, which was marketed as the solution to the lack of affordability because the interest rate on a tracker was among the lowest possible. It tracked the European Central Bank rate, with a tiny margin of 1 per cent.
(Most people forget that the purpose of the ad was to reassure us that while we might have been perplexed, the Financial Regulator was in control, so we need not worry!)
The tracker mortgage spread like a virus through the homes of Ireland from 2001 to 2007.
When the tracker virus crossed into the general population, it multiplied extraordinarily swiftly. Today, the figures are startling and reveal the extent of this financial pandemic and how it infected the population.
Today, trackers account for 60 per cent of Permanent TSB’s €26 billion Irish residential mortgages. Trackers make up 54 per cent of AIB’s €27 billion book and 23 per cent of the €16 billion book at its subsidiary, EBS. Some 62 per cent of Bank of Ireland’s €28 billion book are trackers.
All told, that works out at €51 billion, or about 52 per cent of residential mortgages at the four main banks. A higher proportion of buy-to-let mortgages, about 70 per cent, are on tracker rates.
About 85 per cent of trackers were lent between 2004 and 2008 when they financed most of the new estates built in our suburbs.
The trackers were injecting 51 thousand million euro of new credit into the market. This prompted builders to keep building and, as the trackers grew and grew, so did house building.
They moved in tandem, the tracker and the hysterical end of the property splurge.
In my latest book, The Good Room, I term the part of the country financed by cheap mortgages “Trackerville” and, like another of my terms with which you might be familiar, “ghost estates”, Trackerville will be the scene of much financial hardship in the years ahead.
The number of people affected is staggering. The tracker went from 0 per cent of all Irish mortgages in 2001, to 15 per cent in 2004 to more than 50 per cent of all mortgages by 2008.
The banks knew they would lose money on trackers, but were confident that, once they had you on a tracker, they could make money in Trackerville by lending more money to you for car loans, kitchen extensions or holiday finance on top of your overdraft and credit card.
But now that has all gone pear-shaped. The banks are de-leveraging. This means they have to take in more deposits than they are lending out and, crucially, they have to make a big margin between deposits and loans.
This means that, even if their loan book had a normal structure, banks in Ireland would have to minimise deposit interest and maximise loan interest. This implies a huge credit crunch.
Now consider the credit crunch when 50 per cent of the banks’ mortgage books are trackers.
In “normal” de-leveraging conditions, the credit crunch is bad, but when there are trackers involved, it implies that the banks have to charge even more interest on the loans that they make.
On the other hand, they have to try to pay as little interest as possible on deposits while at the same time attracting deposits. The reason they need deposits is because they have to get their loan-to-deposit ratio, which went ballistic in the boom, back to prudent levels. The trackers serve to penalise those people who don’t have trackers, which is why we are seeing variable rates rising all the time, even as the base eurozone interest rate is cut.
In addition, the trackers imply that the rate of interest charged on new business loans, for example, will be higher than might otherwise be the case. This implies that the credit crunch which small businesses are suffering can’t ease as long as the trackers continue.
But, of course, if you have a tracker, you are hardly going to worry about these concerns. For hundreds of thousands of mortgage holders, the cheap tracker rate of interest (which fell last week) is the only thing between them and default and eviction.
Therefore what we are seeing is a type of financial apartheid in Ireland. Those on trackers have special treatment – they are the white South Africans of the credit world. Those who are on variable rates or are looking for credit to keep their businesses going are the black population, discriminated against in banking and credit.
Ultimately, the domestic economy can’t recover under the credit apartheid regime because, for the economy to grow, credit has to be reasonably priced.
In the longer term, the trackers pose a twin dilemma for Ireland. In the short term, recovery is strangled by the effect of tracker mortgages on bank lending and banking behaviour. In the longer term, like the apartheid regime, the day of reckoning for trackers will come.
If the European economy ever recovers, the Germans will insist on interest rates moving up swiftly to pay its savers, who are seeing their income from saving wiped out as interest rates keep falling.
What happens to the ability of hundreds of thousands of Irish people with trackers to meet their mortgage payments when interest rates rise to their long-run average of 4 to 6 per cent?
Clearly we will see mass defaults across Trackerville and these defaults will be unique to Ireland because they will be happening when the rest of the eurozone is recovering strongly.
If anything shows you just how damaging the banking policies of 2000-2007 actually are, it will be the sorry story of the tracker mortgages for the course of their 20 to 25-year life.