Wednesday, 14 January 2009

Brownian Bonkanomics Endgame

Headline piece from Money Marketing 8th January:

Lenders face paying tracker borrowers
Lee Jones - 08-Jan-2009

Lenders may be forced to pay tracker mortgage borrowers if rates continue to plummet.
According to Moneyfacts, as many as 83 tracker products by 33 lenders were offered from July 2007 tracking below base rate. They include BM Solution's tracker at 0.76 per cent below bank rate, and Yorkshire's at 0.61 per cent below bank rate.
The FSA says unless it clearly states in the KFI that the tracker floor is 0 per cent, lenders would have to honour any contractual obligations.
A spokesman says: "Any floor must be clear and must be fair."
Cheltenham & Gloucester, which offered a tracker 0.01 per cent below bank rate from July 2007, says if bank rate does fall to 0 per cent, it would not pay.
There is no mention of any floor in the C&G KFI.
A spokeswoman says: "We will not go further than 0 per cent on our trackers. If it were a savings product, you would not expect the saver to pay the bank. Our contract details the borrower paying us interest, there is no mention of C&G paying the borrower."
John Charcol senior technical manager Ray Boulger says: "I do not know how C&G cannot pay its borrowers if the rate does fall to 0 per cent."

Doh! Why shouldn't savers pay the bank for looking after their money? Secure custodianship is not a nil cost service. So if interest rates are zero or negative, implying deflation - aka money increasing in value - savers should be paying the bank.
Admittedly this would be a disaster for savers, but it also implies that banks would be paying borrowers.
Welcome to the endgame of Brownian Bonkanomics.

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