Is there 'wriggle room' in tracker contracts?

copacetic

Don't want to be scare mongering, but I heard this on the radio yesterday and wasn't surprised. I've had a good look at my contract a few times and it appears pretty solid but I'm sure the banks can find some loophole in them if they really want to.

Has anyone had actual legal opinion on their tracker contract?

http://www.independent.ie/business/personal-finance/lenders-deny-claim-theyre-seeking-to-alter-tracker-mortgages-2140419.html

Lenders deny claim they're seeking to alter tracker mortgages
THERE were warnings yesterday that some lenders may be examining tracker mortgage contracts to see if they can find ways to raise rates ahead of any changes in the European Central Bank rate.

Tracker mortgages are based on a commitment by lenders to only increase rates when the ECB moves its rates.

However, head of Compliance Ireland Peter Oakes warned that lenders' lawyers are looking at tracker contracts to see if they can find ways to change the terms of tracker deals.

He says the question really was whether any of the banks that have ECB tracker rates will try and look at the fine print of the mortgage contracts which might allow them some "wriggle room", Mr Oakes said on RTE's 'Morning Ireland'.

A number of lenders contacted yesterday, which have large numbers of trackers on their residential mortgage books, dismissed the reports that they were planning to tamper the promise to only move rates on trackers when the ECB moves.

Increase

As revealed in the Irish Independent yesterday, KBC Bank Ireland has confirmed that it is to increase its mortgage rates for new and existing customers.

The bank said it would increase its standard variable mortgage rate for owner occupiers from 3.24pc to 3.65pc from May 1. For investors, the standard variable rate will increase from 4.29pc to 4.5pc.

The bank is also bringing in a discounted variable rate for new home buyers, which will be 3.1pc for the first two years of the mortgage term.

KBC is also raising some of its fixed rates from Monday, but it says this will not apply to existing fixed-rate customers for the rest of their term.

Ciaran Phelan, of the Irish Broker Association, said the moves by lenders to hike their rates comes just as consumer confidence is starting to show signs of recovery. "When it comes to increasing profit margins, consumers appear to be fair game for our banks, though at least KBC are actually open for new business, in stark contrast to most other institutions."

- Charlie Weston Personal Finance Editor

Irish Independent

D3PO

It wont happen. what may happen is banks might look to buy people out of their trackers but they wont try to find a contractual loophole.

even if there is one theres plenty of precedent of awards being made against finincial institutions in this country by the ombudsman when finding that a person has been "mislead" by the institution.

Legal loophole or not that would be the finding when cases are brought against the banks and it would cost them more money than they would save.

copacetic

Business Post has a story today on the efforts the banks are putting in to get out of what they agreed to.

http://www.sbpost.ie/themarket/banks-seek-loopholes-to-escape-tracker-mortgages-48629.html

Banks seek loopholes to escape tracker mortgages
18 April 2010 By Kathleen Barrington

Banks are examining the fine print of their tracker mortgages to see if there are any circumstances in which they can wriggle out of the promise to track the European Central Bank rate of interest.

A source close to one of the banks said it was looking at provisions in mortgage contracts that could get the banks off the hook in some cases. Some tracker mortgages sold to buy-to-let investors included a provision which entitled the bank to review its arrangements with the borrowers after five years, he said.

It might also be possible for the bank to revoke the promise to track the ECB rate if the borrower had breached the terms of the contract, for example if the borrower had missed repayments, the source said.

His bank was not the only one looking at ways of reducing the number tracker mortgages.

‘‘They are all at it," he said, speaking on condition that his bank not be named. The issue of banks trying to wriggle out of the promise to track the ECB rate was raised by Peter Oakes of Compliance Ireland on RTE’s Morning Ireland last week, but several lenders denied contemplating any such move.

A spokeswoman for the Financial Regulator said it ‘‘would appear to be a matter of contract between the provider and the consumer, and customers should carefully examine their terms and conditions to see what is permitted under their contract’’.

She said the Consumer Protection Code states that ‘‘a regulated entity must ensure that all information it provides to a consumer is clear and comprehensible, and that key items are brought to the attention of the consumer. The method of presentation must not disguise, diminish or obscure important information."

copacetic

More today from the Irish Times:
http://www.irishtimes.com/newspaper/pricewatch/2010/0503/1224269584985.html

Trackers under threat
MORTGAGES: Financial institutions say they are losing money on tracker mortgages, and could try to force borrowers on to higher rates, writes FIONA REDDAN


IT HAS BEEN A turbulent time for homeowners. On top of collapsing house prices and negative equity, mortgage holders are also facing interest rate hikes. Last year people who were on fixed-rate mortgages were stuck paying the price of high interest rates while, more recently, those on variable rates have found themselves staring down the barrel of higher repayments.

Now, those with tracker mortgages are starting to look nervously at the terms and conditions of their loan documentation, fearful that banks may look for “get out of jail” clauses to rescind these attractive products.

“Banks are looking for every chance to get out of tracker mortgages,” says Frank Conway, a director with the Irish Mortgage Corporation. That sentiment is echoed by Karl Deeter, operations manager with Irish Mortgage Brokers, who says banks are starting to “either increase inducements or look for loopholes” to escape their trackers.

There is no doubting the attractiveness of trackers for homeowners – repayments on a €300,000 mortgage over 30 years cost €231 less a month on a tracker (ECB plus 0.75 per cent), compared to the standard variable rate (3.23 per cent). As Deeter notes, trackers offer a price promise, “something rare in this day and age”.

Bank of Scotland, which introduced tracker mortgages into Ireland, is offering borrowers more than €1,000 if they switch lenders and the expectations are that the other lenders may introduce similar incentives, or look to invoke a clause in borrowers’ contracts which would let them switch people on to more expensive rates.

The banks argue that trackers are uneconomical because they now have to borrow funds at a higher cost than they are lending them out at (to those on tracker mortgages). Although three-month Euribor rates (the rate at which banks themselves borrow money) have fallen dramatically from their highs of 2008, down to nearly 0.5 per cent, “very, very few banks are able to fund themselves at Euribor”, says Oliver Gilvarry, head of research with Dolmen Stockbrokers. Irish banks in particular pay considerably more for funds.

Gilvarry adds that trackers look expensive when compared with deposits, given that banks are sometimes paying as much as 3 per cent for deposits, while lending out trackers at about 1.75 per cent (ECB plus 0.75 per cent). He also notes that banks pay very little interest on funds deposited in current accounts, so there could be a substantial margin on what they make on these funds, and what they lend out in trackers. So, the banks’ argument that trackers are costing them too much might be misleading.

Nonetheless, speculation is mounting that the banks may step up their action on trackers. According to Deeter, the most likely action banks might take is on the loan-to-value (LTV) covenant inherent in many tracker contracts. If, for example, you got your tracker on the basis that you had an LTV of 80 per cent, whereby the mortgage represented only 80 per cent of the value of the property, the bank could look to switch you on to a higher rate. They would do this saying that because of the decline in house prices, your LTV may now be closer to 100 per cent, and so you might no longer qualify for the lower rate. “It won’t be fair, but it would be a fair argument that they could present,” says Deeter.

And don’t think that administrative issues could stop the banks from requesting new valuations of properties on their loan books. “If I was a banker, I’d say, we’ve looked at property prices in your area, we think they have declined by 40 per cent, we’ll give you three months to come back to us with a valuation,” says Deeter. “The banks will offset the work on to the individual.”

If the banks were to go down this route, homeowners would then have two options: either inject a lump-sum to pay down the mortgage to the required level and stay on the lower tracker rate, or be switched to another rate, which would probably be a tracker in a higher LTV band.

While Conway believes most tracker contracts are “very tight”, and thinks it unlikely banks could look to change their terms and conditions, he warns that homeowners might nonetheless “open up their own vulnerability”.

“Homeowners should remember that they needn’t provide the banks with any reasons,” warns Conway. For example, if you look to extend an interest-only period, the bank may only do so if you give up your tracker.

“The bank will say ‘we’ll renegotiate’ but will do so out of the tracker mortgage,” says Conway, citing the example of an investor who was given two options by the bank when he asked for an extension of an interest-only period: either switch to a fixed or variable rate and pay interest only, or stick with the tracker but pay both interest and capital.

Homeowners looking to rent out their property should also be aware that this may come at the cost of their tracker, because banks may look to switch such customers on to investment property mortgages. Given that such rates now start at more than 4 per cent, it would mean a dramatic increase in funding costs for those on trackers, so those interested in becoming landlords should first check the terms and conditions of their mortgage contract.

Not only that, but any violation of the mortgage contract, such as going into arrears, or allowing a life assurance or home insurance policy to lapse, may give the bank reason to move on your tracker.

And, if you’re looking to top up your mortgage, you might find that the bank will take the opportunity to draw up a new contract and move you off the tracker rate. Instead, ask the bank to set it up as two different loans – so you won’t lose your tracker rate on the older part.

Remember that if you’re eyeing up some of the deals available on properties around the country, moving house will mean you will lose your tracker, as your mortgage ends with the sale of the house.

For homeowners interested in availing of incentives such as the Bank of Scotland offer to switch, the advice is to think carefully. “You shouldn’t give up your tracker unless you have a really strong argument for doing so,” says Deeter, while Conway urges homeowners to “protect it at all costs”.

While it is expected other lending institutions might follow the Bank of Scotland and incentivise mortgage holders to leave their books, the issue remains as to which bank will take them on.

With so many borrowers in negative equity, and LTVs of more than 100 per cent, there simply “mightn’t be anywhere for them to go”, says Conway.

seamus

I'll happily jump out of my tracker...if the bank will drop €50k off my mortgage

I'll have a look at my documentation this evening, but I'd be fairly confident the bank can't touch it - the banks spend a lot of money getting solicitors to make sure the mortgage contract is airtight, they never considered that they would be the ones looking to void it.

dan_d

http://news.eircom.net/breakingnews/17813253/?view=Standard

Saw this story this morning, and my heart sank even further when I read this thread. I know the banks are in trouble, but this is a step too far for me....I'm all for accepting that everyone played a part in this mess, but there's no doubt that people who are qualified to understand this stuff allowed things to happen that they knew would never work long term.
I have no idea what legal standing there will be on either our part, or our bank's part, but I can safely say I will fight tooth and nail before I let anyone tell me that I cannot stick with my tracker mortgage. I have met all my payments and continue to do so, and I went into this with my eyes open, turning down the extra 100,000eur they were prepared to lend me to buy property...how dare they think they can do this. (and i'm not one for blind anger!):mad:

D3PO

People need to stop panicking. This rubbish is there to sell newspapers.

Unless you need to change some of the terms yourself i.e go interest only, extended the term etc the bank wont touch you. Like I said earlier in this thread there is so much precedent of individuals getting awarded payouts by the financial ombudsman where arbitration finds that the bank has missold or misled somebody about one of its products.

If anybody here thinks that finding a loophole (if one exists) wouldnt be considered misleading joe public into purchasing a financial product (i.e a tracker) there bananas.

so bank finds a loophole incresed your mortgage payments you lodge a complaint to the ombudsman he finds in your favour. Bank are ordered to pay you multiple thousands in compensation.

They wont bother trust me.

seamus

D3PO wrote: »

so bank finds a loophole incresed your mortgage payments you lodge a complaint to the ombudsman he finds in your favour. Bank are ordered to pay you multiple thousands in compensation.

That's kind of what I've been thinking about it. *if* a bank does find a loophole in your contract, then they mislead you about what was being sold as there's no way Joe Soap (or his cheap solicitor) could be expected to spot an obscure legal loophole in the contract.

ZYX

seamus wrote: »

That's kind of what I've been thinking about it. *if* a bank does find a loophole in your contract, then they mislead you about what was being sold as there's no way Joe Soap (or his cheap solicitor) could be expected to spot an obscure legal loophole in the contract.

Most contracts have a very simple get out clause however. It is quoted something like "we reserve right to change the terms of contract should unforeseen financial circumstances arise" although usually in more legalise words. There is absolutely no doubt we are now in "unforseen financial circumstances". The legal discussions they are having at present is not to find the loophole. It is to make sure the loophole stands up in court. Both in actual court and in court of public opinion.

Most contracts for mobile phones, utilities etc contain similar clauses

seamus

ZYX wrote: »

Most contracts have a very simple get out clause however. It is quoted something like "we reserve right to change the terms of contract should unforeseen financial circumstances arise" although usually in more legalise words. There is absolutely no doubt we are now in "unforseen financial circumstances". The legal discussions they are having at present is not to find the loophole. It is to make sure the loophole stands up in court. Both in actual court and in court of public opinion.

Most contracts for mobile phones, utilities etc contain similar clauses

Are you sure? One the central pillars of contract law is that a contract cannot be amended by either party to the detriment of the other party, without the express agreement of both parties.

You cannot write self-amending clauses into contracts because that would be an attempt to override contract law.

If it was possible for banks to claim "unforeseen" or "extraordinary" circumstances and cancel our tracker contracts, they would have done it already.

There is no way that a court would *ever* rule that it is legal for a bank to change the terms of a mortgage contract to the financial detriment of the customer, while locking the customer into accepting this change.

iguana

seamus wrote: »

Are you sure? One the central pillars of contract law is that a contract cannot be amended by either party to the detriment of the other party, without the express agreement of both parties.

I believe ZYX could be right. I read an article on this 1 or 2 years ago suggesting that this would be happening over the coming years. It stated a lot of tracker contracts have clauses in them stating that the bank reserves the right to change the agreement in certain economic circumstances. I'll try to find it, but I can't remember when and where it was, just the jist of it.

iguana

I've been googling. You should check your contract for something like a "material adverse change" clause. This will allow the bank/building society to change the terms in certain, undefined circumstances. It may allow them to switch to tracking the EURIBOR rate as opposed to the ECB base rate. Not all trackers will have them, but if I had a tracker I'd be getting it checked out now so I was sure of my contract.

If the banks decide to use these clauses they could. If the case is made to the courts that the survival of the banks is threatened if these clauses aren't adhered to who do you really think the courts will side with? The clause is in the contract, the change would be legal and I just don't believe that the courts will care about what's fair to the mortgagee in those circumstances.

This clause has been on PTSB mortgages since early 2007.

IF,
FOR WHATEVER REASON, AN EVENT OCCURS WHICH FUNDAMENTALLY AFFECTS THE USE OF THE ECB RATE AS A REFERENCE RATE FOR LOAN PERMANENT TSB, IN l'TS SOLE DISCRETION, SHALL BE ENTlTLED TO USE SUCH OTHER REFERENCE RATE OR OTHER METHOD OR BASIS OF CALCULATION AS IT DEEMS FAIR AND RESONABLE AND NOT WITHSTANDING THE USE OF SUCH OTHER REFERENCE RATE OR METHOD OR BASIS OF CALCULATION.

This has been on IIB mortgages since mid 2008.

In determining the interestrate applicable to this loan facility, the Lender retains the right at it's sole discretion to substitute one month EURIBOR (as
determined by the Lender on the first business day of each calendar month) for the REFI rate where one month EURIBOR is more than 0.25% above the REFI rate for a period of longer than 30 days. This substituted rate would no longer apply from the first day of the month following a continuous period of 30 days where the one month EURIBOR is less than 0.25% above the REFI rate, and the REFI rate would then be used in determining the interest rate applicable to this loan. One month EURIBOR means the rate at which the Lender shall determine to be the rate at which the Lender is offered funds of like amount on the Euro Interbank Market for a period of one month.The Lender may at it's sole discretion vary the percentage margin above the REFI
rate referred to above at any time between the date of this offer and prior to its acceptance by the Borrower. Any such variation will be notified in writing to the Borrower.

seamus

Thanks Iguana, definitely worth checking out.

iguana wrote: »

This clause has been on PTSB mortgages since early 2007.

IF,
FOR WHATEVER REASON, AN EVENT OCCURS WHICH FUNDAMENTALLY AFFECTS THE USE OF THE ECB RATE AS A REFERENCE RATE FOR LOAN PERMANENT TSB, IN l'TS SOLE DISCRETION, SHALL BE ENTlTLED TO USE SUCH OTHER REFERENCE RATE OR OTHER METHOD OR BASIS OF CALCULATION AS IT DEEMS FAIR AND RESONABLE AND NOT WITHSTANDING THE USE OF SUCH OTHER REFERENCE RATE OR METHOD OR BASIS OF CALCULATION.

I'm no law-speaking guy, but that reads to me to say that basically if the Euro collapses or the ECB is abolished, the lender is perfectly entitled to move to some other reference rate. In other words, there is nothing at present which "fundamentally affects" the use of the ECB rate for loans.

This has been on IIB mortgages since mid 2008.

I won't quote the whole thing, but that's a little more obscure in that it allows the lender to choose the better of two rates when one rate (the EURIBOR), goes above the other (REFI -? ECB?) for a significant period of time. Interesting clause, but not a *huge* deal as the EURIBOR will largely be in line with the ECB, or at least be no more than 0.25% above it.

Your point is taken, however I still don't think the banks will find a way to abolish the tracker contracts altogether or to even make them profitable in the short term.

southofnowhere

D3PO wrote: »

People need to stop panicking. This rubbish is there to sell newspapers.

Unless you need to change some of the terms yourself i.e go interest only, extended the term etc the bank wont touch you. Like I said earlier in this thread there is so much precedent of individuals getting awarded payouts by the financial ombudsman where arbitration finds that the bank has missold or misled somebody about one of its products.

If anybody here thinks that finding a loophole (if one exists) wouldnt be considered misleading joe public into purchasing a financial product (i.e a tracker) there bananas.

so bank finds a loophole incresed your mortgage payments you lodge a complaint to the ombudsman he finds in your favour. Bank are ordered to pay you multiple thousands in compensation.

They wont bother trust me.

Think the papers are actually doing their job here. Not scare mongering to sell papers.

Unless you think banks aren't examining the situation?

I reckon there's probably no way out for the banks either, but at least the publicity this is now getting (heard it on radio 1 earlier too) may help prevent some people from being fooled/tricked/cajoled/'induced' into giving up their tracker mortgages.

Not everyone is as clued in as yourself and many can and will be taken advantage of here as they look for payment holidays, seek to extend terms or are offered a grand for giving up the tracker etc

The banks are technically doing nothing wrong in these cases, bar being a complete shower of.... Anyway, glad this is out there.

With Ulster Bank myself, not heard from them yet about my tracker. Doubt I will either.

copacetic

so tribune today says this is now happening, PTSB first to jump, appears they are going to use a 3/5 year review clause to adjust interest only trackers to capital and interest trackers. If people can't pay, they will be moved to higher rate interest only loans.

It appears to be a small step toward wholesale attempts by the banks to shaft people, but you can be sure that they other banks will be watching closely to see can they get away with it before trying it on themselves.

http://www.tribune.ie/business/news/article/2010/jun/27/ptsb-to-hit-tracker-mortgage-borrowers/

PTSB to hit tracker mortgage borrowers
Landlords and holiday home-owners face higher monthly repayments as bank seeks legal cover to change loan terms
Eamon Quinn
Permanent TSB is plotting the first controversial assault by banks on loss-making tracker mortgages by resetting the monthly payments it charges investment property borrowers, the Sunday Tribune has learned.
From this autumn, thousands of small landlords and holiday home-owners face paying steeply higher monthly payments and higher interest rates.
Other banks will likely follow suit if the leading mortgage lender wins the Financial Regulator's approval for the move.

The bank briefed its most senior managers last Tuesday on plans to renegotiate with residential investment property customers who borrowed money at so-called tracker rates that are linked to official European Central Bank rates.
The bank is understood to have sought legal advice as to whether or not it is within its rights to renegotiate with its tracker mortgage customers by triggering review clauses in the loan contracts.
Permanent TSB is a leading lender to residential investment property-owners. At the height of the housing boom in late 2006, lending by Dublin banks to residential investment buyers amounted to over €27bn, or a quarter of all outstanding mortgage debt.

Customers buying investment or 'buy to let' properties typically borrowed money for 25 years with monthly interest-only payments.
After triggering terms in the contracts to review the home loan terms after the first three or five years, Permanent TSB now plans to write to the borrowers demanding both interest and capital repayments.
If customers are unable to pay, they are likely to be offered a higher tracker rate or a "suite" of variable interest rates at much higher levels.

Borrowers face increases of almost 250% in their repayments and will likely pay higher interest rates because they will be unable to meet the terms, said Michael Dowling of the Independent Mortgage Advisers' Federation.
"It risks a US-style wave of borrowers throwing in the keys because they cannot afford the new repayments," Dowling said.
Borrowers are likely to argue that the bank is using the review terms to push them onto higher rates. Permanent TSB will argue that borrowers always knew they would eventually have to pay interest and capital repayments.

Dowling calculates that an investor who borrowed €500,000 and is currently paying €730 in interest per month will now face a new monthly bill of €2,470 in interest and capital repayments.

June 27, 2010

dan_d

Watching the Financial regulator lately, I'd would be surprised if he let them all just pitch into this wholesale. He seems very aware that while we (taxpayers) can't be paying for everyone who defaults on a mortgage, nor can we just jack up rates wholesale and screw people because the banks loaned money recklessly. It's not that simple.

That is a huge jump in payments however. The fall out from that would be astounding - I would imagine that if enough people simply handed their keys back to the bank, the Gov would be forced to look again at bankruptcy laws aswell.

My own tracker is with Bank Of Scotland. I wonder how that would work.

D3PO

not really a surprised but in fairness theres a big difference in the banks looking to move BTL's from interest only to interest plus capital as a mechanism to remove trackers from them and for them to go after the average Joe.

I would have no issues with this anyway. Somebody purchasing an investment property on interest only just beggars belief, another inditement to the lending proctices of the banks in this country.