Banning mortgage exit fees

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Bravo to Wayne Swan for sticking to his position of a full ban on mortgage exit fees.  Those exit fees are a purely anti-competitive device that exist only to increase the switching costs of mortgagees.  There is no argument for not banning exit fees.

But, aren’t mortgages expensive to establish and shouldn’t lenders be able to recoup those costs?  Yes, of course, they should be allowed to charge whatever upfront establishment fee they wish.  Establishment fees are not hidden and there is no uncertainty about their size.  But won’t the ban hurt small lenders more than the large banks?  Only if they are acting more anti-competitively.  But, won’t it lead to an increase in interest rates or establishment fees.  Yes, but so what?  Those costs to mortagees are not switching costs and their is no uncertainty about their level.  Couldn’t the Government simply insist on better disclosure instead.  Yeah, sure, make the banks add another footnote to the mortgage documentation.  Better disclosure is always proposed as a solution to problems in the retail finance space and it never makes any difference.  Won’t it lead to subsidising of frequent switchers by all other mortgagees.  Not if the real cost of switching is charged upfront.

The banking crisis in Europe provides a nice example of how even relatively small switching costs can cause households to forgo big gains from switching.  If you had a Euro bank account with a Greek bank, then why would you not switch to a German or British bank?  You face a real danger that your Euro deposits will be converted to Drachmas if the Greek Government pulls Greece out of the Euro.  Your Drachmas won’t be worth nearly as much as the Euros.  Greek depositors can freely switch to British banks.  But they don’t because even small switching costs block switching in financial services.

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