Last Wednesday the Financial Regulator confirmed to the Oireachtas Committee on Finance and Public Service that it would be expanding its investigation of high fees charged to customers who break their fixed-rate mortgage contracts to switch to variable rates.
A preliminary investigation of three banks had turned up no evidence that banks were charging too much. That's right: no evidence. So instead of concluding the probe, the regulator is redoubling its efforts and conducting on-site inspections at three other banks. Just to be sure.
This is the same regulator that is snowed under in weekly liquidity reports, at least two major investigations involving Anglo Irish Bank and a major proposed restructuring; the same regulator that was so overwhelmed by the onset of the crisis last year that it somehow missed what was going on in Anglo in the first place. So why is it now wasting precious time and resources on a wild goose chase?
There really is no mystery about why banks charge customers to break out of a fixed-rate mortgage. It costs banks money to guarantee the rate. This is spelled out in the contracts.
But fixed-rate borrowers have missed out on all the nice cuts in the European Central Bank rate since October and are now paying far above the typical interest rate because they fixed their payments before the cuts started.
One reason the fees seem so high – depending on the term left on the loan, the charge can reach into the tens of thousands – is that rates fell so far so quickly.
Predictably, TDs began squealing about this supposed "injustice" and finance minister Brian Lenihan, to appease the populist angst, ordered the investigation in April. Now that the regulator has found nothing, it is going to keep looking.
This isn't regulation, it's regulatory theatre. It's the equivalent of frisking someone in the airport security queue and then strip-searching them once you've found nothing incriminating.
Fixed-rate borrowers may have missed an opportunity, but they are not losing any actual money. In fact, they're paying exactly what they thought they would be paying. The only cost to these borrowers is rate envy.
But the cost of the government's dalliance with know-nothing finance may turn out to be dear. To repeat: banks charge customers' redemptions not to make money, but to recoup the funding costs of the original loan. Any bank that could fund fixed-rate mortgages for less would be likely to lower its fixed rates to take more business from its competitors. That's because mortgages themselves are a more reliable source of income than overcharging the handful of people who break the fix despite the high cost.
However, if the regulatory and political interference in this simple product becomes too troublesome, banks can always withdraw it from the market. As the regulator's head of legal told the committee: "You may be back here in three or four years wondering why there is no fixed-rate market."
Ironically, all this negative attention is being focused on fixed-rate mortgages at precisely the time when mortgage brokers and bankers are saying customers should consider switching to a fixed rate to protect themselves against future ECB rate rises. The reasoning goes like this: a base rate of 1% is far below historical averages and was just an emergency measure anyway; as soon as there is real recovery in the big eurozone economies, the ECB governing council will start tightening rates to ward off inflation.
Anyone who gets a fix now would at least be insulated from higher mortgage payments in the future, which is the whole point of the product, after all. That is if they're not scared off by bad publicity. Those who stick with their variable rate mortgages, on the other hand, could eventually see rates climb back up to the 4%-4.5% range and beyond.
When that day comes, expect politically-motivated demands for theatrical investigations into "excess margin" on behalf of that stubborn constituency which refuses to accept that rates can rise as well as fall.