The total number of mortgage accounts for principal dwelling houses (PDHs) in arrears fell further in the fourth quarter of 2017; this marks the eighteenth consecutive quarter of decline. A total of 70,488 accounts (10 per cent) were in arrears at end
December, a decline of 2.8 per cent relative to September 2017.
The number of PDH mortgage accounts that were classified as restructured at end-December was 118,477. Of these restructured accounts, 87 per cent were deemed to be meeting the terms of their current restructure arrangement, down slightly from the previous quarter. There was a continued reduction in short-term restructure arrangements such as Interest Only and Reduced Payments, which was partly offset by an increase in longer-term arrangements such as Arrears Capitalisations.
Non-bank entities now hold 61,446 mortgage accounts for principle dwelling houses and buy to lets combined. Of this number, 47,820 relate to PDH mortgage accounts, representing 7 per cent of all PDH mortgage accounts outstanding; 5 per cent are held by regulated retail credit firms with the remaining 2 per cent held by unregulated loan owners. Table 1 below further displays the breakdown of PDH mortgages and the arrears profile held by banks and non-bank entities.
Residential Mortgages on Principal Dwelling Houses Arrears At end-December 2017, there were 729,722 private residential mortgage accounts for principal dwellings held in the Republic of Ireland, to a value of €98.5 billion. Of this total stock, 70,488 accounts were in arrears, representing a fall of 2,001 accounts or 2.8 per cent over the quarter. Some 48,433 accounts (7 per cent) were in arrears of more than 90 days compared to 50,688 in the previous quarter representing a fall of 2,255 cases.
Source: Central Bank of Ireland
Amigo loans is a long-established UK sub-prime lender. It operates a business model that targets vulnerable customers with high rate personal loans. And in today’s Irish Independent, it is reported that the Central Bank of Ireland has granted the company regulatory clearance to operate here in the Irish market.
While the UK is still a member of the EU, services in that country are free to operate here as long as they abide by financial service and consumer rules.
Amigo says it lends to people with impaired credit or poor income. In other words, it lends to people that are financially vulnerable, who cannot get credit from mainstream lenders. Some industry people call it risk-based lending.
The key to success for lenders such as Amigo is a practice known as risk-based pricing. In other words, lenders such as Amigo charge their customers higher rates of interest; this is to protect against those that do not pay.
Excessive interest charges
On it’s UK website, the rate of interest Amigo quotes is 50% (49.9% to be exact). That’s 5 – 0 percent, not 5%. 5% is what one might expect to pay for a car finance loan in the Irish market (or lower with many PCP deals). To put this in perspective, Amigo charge 10-TIMES more for a car loan than many banks and credit unions up and down the country. Even credit cards, many of which charge 18% (and are ‘unsecured’ debts) are a bargain by comparison.
Having their cake
It might be a stretch to say that Amigo’s interest rates are a feature of the risk they are taking on board but Amigo itself debunks this notion very, very quickly. Here is why: Amigo eliminates most of the risk that would normally come with such loans through their loan guarantor model. In other words, if the borrower does not pay, the guarantor acts as the final backstop. The answer to this question is not one of risk mitigation but of sheer profiteering. With the risk reduced through the guarantor, the excessive pricing is simply to maximize the company balance sheet and bottom line.
Why did Central Bank approved them
Of course, this is still early days. Amigo may well enter the Irish market with a pricing model that is far cheaper than the UK. However, it is more likely they will seek to replicate much of their UK formula here. This would be a typical maneuver for expanding companies, especially that look to bolster that model. To back this up, Amigo are reported to be preparing for a market float which means they want to expand their business model, not radically alter it!
Which brings the conversation back to the regulatory clearance. Why is the Central Bank approving a lender that operates a predatory pricing model in the UK?
For years now, the Irish pension industry has been actively encouraging Government to take firm action against the ‘low levels’ at which Irish people have been saving for retirement. The ESRI is also a regular contributor to the debate.
By many calculations, roughly half of the population have no pension investments other than what they expect to receive from their contributory pension entitlements; this is about to change.
Government has now earmarked 2022 as the year where it plans to introduce ‘auto enrollment’. For those not familiar with the term, this is where a deduction is automatically taken from gross wages and invested on behalf of workers. The concept is simple; people need to be protected from themselves and their lack of pension planning so Government will do the auto-enrollment and investing for them.
The logic to auto-enrollment, according to behavioral economists suggests that once enrolled, workers are highly unlikely to take action to exit ‘auto enrollment’ in significant numbers. In other words, people are simply too lazy and won’t be bothered walking over to their HR or payroll department to fill out a form instructing HT / payroll stop auto-enrollment.
While the intention of Government is good, it has an enormous duty to citizens to ensure it trims the full cost of managing such money along with the various investment strategies employed by investment managers.
In his 2018 letter to investors, Warren Buffet lauded ‘The Bet’ which he won hands down. That bet of course was the 2007 wager that a virtually cost-free investment in an unmanaged S&P 500 index fund would over time, deliver better results than most investment professionals.
What Mr. Buffett was saying is the cost of investing money can be so high that any potential returns can be destroyed to a point where the investor gains very little in the long term, other than perhaps the original tax benefit provided by Government.
Here in Ireland, there has been a long history of investment fees that are opaque and completely out of kilter with modern fees arrangements. Too many pension investment fees have resulted in way too many mediocre returns. Additionally, the level of opacity on how fees are charged means that only seasoned actuaries really understand the true cost of management to the individual investor.
This high-fee culture is a legacy of the Defined Pension era. Defined Pensions are also known as final salary pensions. Regardless of their name, this was an era where few people were really concerned with the cost charged by investment managers to manage pension funds. This was because funds were simply replenished by those that funded them, be it Aer Lingus, RTE, the Irish Independent or even, the State. As long as employees retired on two-thirds of final salary and the money flowed, nobody really asked too many questions about the nitty-gritty of day-to-day management; nobody really cared!
But as more and more people live longer swelling the ranks of the retired, Defined Benefit pension arrangement were exposed. Many ceased being offered to new employees, many converted to Defined Contribution arrangements, handing lump sums and investment headaches to confused employees. Some schemes simply went bust!
I find it so sad when I talk with confused individuals that work hard and are suddenly presented with having to make highly complex investment decisions that will have massive life consequences in their post-employment years. This is typically what happens when a DB pension scheme converts to a DC and the investment risk is transferred from the employer to the employee.
But what is most concerning of all are the poor choices many Irish people face when it comes to their pension investment options. Without the faintest hint, many are often presented with sub-standard investments choices carrying inflated management and investment fees; these destroy investment wealth.
Here in Ireland, while the official 5 & 1 arrangement is often the fee structure presented to those doing the right thing by setting up PRSA or AVC or participating in an Occupational Pension Scheme through their employer, this is not the full picture. The 5 & 1 refers to the allocation rate; maximum allowable is 5% of the invested amount and 1% Annual Management Charge.
But how investments are managed will impact workers enormously. For example, if the investment is made in some bog-standard series of low yield funds without annual rebalancing, then growth is sure to be anaemic and the only real growth will come from the tax-benefits given by Government and the individuals own contributions. This by definition is not investing, it is saving and the value of any potential investment yield is lost to the fees charged by the manager. In other words, it just becomes a zero-sum game purely for the benefit of the manager, not the investor. In a nutshell, this is the reality for many Irish people investing in various pension plans at present.
This is precisely what Government needs to avoid if it is committed to convincing more workers that it really has their long-term financial well-being at heart. It cannot explore the simple 5 & 1 figures. Instead, it should force a radical new approach to investing here in Ireland, one that goes much deeper, one that looks at a head-to-tail trail of fees that have plagued pension trustees for decades and one reason why low-cost leaders including Dimensional and Vanguard have captured such a significant percentage of market share in recent years; their low-fees, high growth strategies create more wealth for families and workers.
Frank Conway is a Qualified Financial Adviser and founder of MoneyWhizz.org, the financial literacy initiative.