An Post mortgages – a business model that requires a lot of scrutiny!

By Frank Conway

An Post is reported to be a conduit for a potential mortgage underwriter.

Whether or not mortgages costing 1% or less than existing lenders actually launch here in sufficient scale to make a real difference is eagerly anticipated by consumers, Government and a host of other stakeholders.

 

The mortgage approval process is complex and carries risks for borrowers and lenders.

It’s just about 20 years since Bank of Scotland (Ireland), BOSI entered the Irish market to lots of fanfare. Back then, there was similar demand for mortgage competition.

BOSI came prepared. Armed with its “tracker” mortgage arsenal, the UK lender meant business. Through the broker network, BOSI quickly gained market share and disrupted the market with what was the closest thing to “below cost selling”. Consumers and commentators loved it. The tracker phenomenon became part of folklore reaching icon status with the “I don’t know what a tracker mortgage is” in a series of awareness campaigns promoted by the Financial Regulator.

It was a Cinderella moment. New arrival makes good for all. Except of course, it wasn’t to be.

The collapse of Lehman in the US and the ensuing global credit crunch exposed financial truths everywhere. Below cost selling in the mortgage market collapsed under the weight of economic reality. And when the financial reality of tracker mortgages hit the drainage ditch, BOSI bolted!

Rather than stick around and work with struggling families, the UK lender high-tailed it out of Ireland for the warm embrace of the UK homeland. Granted, it did get some stick over there for its failed business model but having introduced an unsustainable mortgage market here in Ireland, bolting proved easier than sticking around for the long-term.

Today, there is a renewed call to “take on the banks with competitive mortgages”. Last year, Sparkasse, the Germany public banking network was reported to be exploring entry into the Irish market. Editorials in some national media wrongly stated the German mortgage giant was contemplating mortgages that would severely disrupt existing Irish lenders. But the reports were wrong. Sparkasse quickly poured cold water on the idea of introducing German-based mortgage rates into the Irish market. Their top people pointed out that universal pricing did not exist even in Germany, that mortgage costs varied depending on “local conditions”  and that “local factors would need to be built into the pricing model”; the Germans proved too savvy to fall for this old pricing trap.

Regardless of whoever enters the Irish market via An Post, if they enter at all, they need to carry out extensive due diligence. This will require in-depth analysis of the risks and not merely an expanded version of a glance across the Competition and Consumer Protection Commission (CCPC) website for today’s mortgage rates. Like an iceberg, the mortgage market carries a complex set of risks that endlessly lurk below the waterline; get it wrong and an entire business model can be sunk. Get it right and one might still be lucky to squeeze out a profit…after a lot of years!

Mortgage competition is healthy. Perhaps in the Sparkasse business model, there is possible solution; a State bank! But for now, simply defining the future of a robust and competitive mortgage market through the lens of rates and APR’s puts us all at risk of repeating the mistakes of the past. It is not competition we need, it is sustainable competition!

Frank Conway is Founder of MoneyWhizz, the financial literacy initiative, a Qualified Financial Adviser and former mortgage underwriter. 

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