Stating that there was "ample evidence" that commercial banks were not adjusting mortgage rates downward as they should, the Central Bank is working on new guidelines that would ensure predictability, transparency and fairness when mortgage rates are adjusted. In an interview at his Port-of-Spain office on Monday, Central Bank Governor Ewart Williams said the Central Bank's intervention to set guidelines for commercial banks mortgages, which will be published in the "fourth quarter of 2010," follows complaints from homeowners with mortgages that they have not benefitted from the downward adjustment in lending rates, which have declined by 350 basis points in the last 18 months.
"We are not into setting the lending rates for commercial banks, but where we see there is a real issue is where the conditions for the adjustments of mortgage rates are not defined," Williams said. He said customers must know exactly what are the conditions for adjusting rates up and down. Two months ago, the Central Bank started sending out surveys to commercial banks seeking information on their policies and practices for adjusting mortgage rates. The information seeks to establish the criteria commercial banks use to adjust mortgage rates. Among the criteria would be the cost of funds, which is the weighted average of the stock of deposit accounts offered by the commercial banks.
Transparency, fairness
He said the country's commercial banks all have different arrangements for adjusting mortgage rates and that those arrangements are often not specified in mortgage contracts. "While our intention is not to set mortgage rates, we certainly want the banks to be more transparent, predictable and fair in how they move adjustable rate mortgages," Williams said. Among the issues that the guidelines will address is the benchmark rate–also called the reference rate–that the banks use to re-price the mortgage rates.
Williams said if the commercial banks are offering adjustable rate mortgages, they will be required to outline how often rates can be changed, the basis of the change and by how much the rates can be adjusted upward or downward. "We are doing this exercise because there is ample evidence to suggest that rates are not being adjusted as they should," he said. Several of the commercial banks have been offering new customers adjustable rate mortgages of 6.75 per cent, but have declined to lower the rate offered to their existing mortgage holders to this level. Asked whether the guidelines would provide guidance for existing mortgages, Williams said: "Absolutely, when these mortgages are to be re-priced."
RBTT responds
The Business Guardian sent a list of six questions (See box) to top officials of Republic Bank, First Citizens, Scotiabank and the RBTT Financial group. Only RBTT responded. In its response, RBTT said: "The residential mortgage lenders that fall under the purview of the Central Bank of T&T (CBTT) have been engaged in collective discussions on this issue as part of the CBTT's Financial Literacy Programme. "These discussions have been taking place with the goal of assisting the public in a general understanding of the terms and conditions of the residential mortgage product, including the pricing structure. As the discussions are ongoing, it would be premature to respond to your questions at this point in time," RBTT stated.
�2 How is it that banks can offer new mortgage customers rates as low as 6.75 per cent but existing customers are still being charged 8.75 or 9.0 per cent?
�2 Do banks fund variable rate mortgages from deposits and what is the weighted average deposit rate currently?
�2 How many of your customers are affected by the reluctance of banks to adjust to the lower prevailing interest rates?;
�2 How do banks in other countries treat variable rate mortgages when prevailing rates fall?
�2 If a customer wanted to re-finance their mortgage with another bank, what fees does your bank charge customers for paying off their mortgage?
�2 Has your bank been in talks with the Central Bank about this situation?