In proposing legislation to cap mortgage interest rates, Fianna Fáil re-introduced a similar bill this week to one the Dáil rejected less than a year ago. The new parliamentary arithmetic means it is likely to be successful this time round. But will the passage into law of the Central Bank (Variable Rate Mortgages) Bill make a difference? That is unlikely.
Minister for Finance Michael Noonan has opposed the measure for much the same reasons as before. Then the Fine Gael-Labour coalition enjoyed the largest Dáil majority on record. Now a minority administration governs from a position of weakness.
To pass legislation, Fine Gael must depend on support or abstention by Fianna Fáil. Similarly, the latter must win the backing of other Opposition parties and independents to pass its own legislation. In this case, it has secured that support and the Government would have faced its first Dáil defeat if it had persisted with its bid to have the bill referred to a pre-legislative stage.
Mr Noonan has identified what he claims are three flaws in the Fianna Fáil bill. He argues that parts of it may be unconstitutional; he says the European Central Bank has to be consulted before it can be enacted; and, even if enacted, he contends it would not have the intended effect.
Therein lies the crux because Central Bank governor Philip Lane (in common with his predecessor) has said he does not wish to regulate interest rates. And as the Central Bank is an independent body, it cannot be forced to do so. The Bank's fear is that rate caps would hinder newcomers entering the market and stymie rate-reducing competition.
All political parties are concerned to secure a greater reduction in standard variable mortgage rates (SVRs) which are the highest in Europe. At up to 4.5 per cent, they are having a punitive effect on mortgage holders who are paying the price of legacy issues arising from the financial crisis.
Variable rates are high (though slowly declining) partly to make up for losses incurred by banks and building societies on tracker mortgages which account for almost half of all home loans and, partly, to take account of the high overall loan default rate. Almost one fifth of all outstanding borrowings are non-performing loans.
The Government, however, has to balance competing concerns in the national interest, of which one is lower SVRs. Another is protecting the value of the State’s shareholdings in the major banks which it aims to sell at a later stage to recoup for taxpayers some of the €64 billion cost of the bank rescue.
Fianna Fáil finance spokesman Michael McGrath has described the party’s bill as “an effort to force variable mortgage rates closer to the European average”. But the measure is unlikely to succeed since the Central Bank’s hand cannot be forced. At the same time, competition is showing modest signs of working. Regulation, as now proposed, can only add to uncertainty.