Irish Mortgage Brokers Blog

If you go into arrears on your mortgage or you talk to your lender because you believe you are a ‘pre-arrears’ candidate then you will be asked to fill in a ‘Standard Financial Statement‘ or SFS which is part of the Mortgage Arrears Resolution Process (MARP) which started last year.

Engaging with the lender is a key tenet of this and filling in the SFS and liaising with the lender on aspects of it. The information in this is what will be used to negotiate the repayment that you will pay in cases where lifestyle adjustment does not allow you to make the full payment.

We have made a few more bold predictions in our ‘Mortgage Market Trend Outlook 2012′ and reviewed how wrong many of our 2011 forecasts were as well.

Some of the main points thus far are:

1. That mortgage lending bottomed out in 2011.
2. That IBRC may take on some tracker loan portfolios to de-risk state owned banks (as the state already owns these loans entirely anyway).
3. That rates for existing AIB borrowers will have to go up but that for new borrowers rates may come down with changes to how prices are charged depending on risk of the proposed loan.
4. That deposit rates will start to drop.
5. That up to 25,000 mortgages will be deemed ‘unsustainable’ and that the ‘won’t pay’ contingent of arrears cases may be as high as 1 in 5.

We hope you enjoy this report, we in turn hope that we get some of the calls right!

Many thanks,

Irish Mortgage Brokers

RTE interviewed Karl Deeter in this clip about the recent CSO report, it was on the 20th of December 2011.

This is the usual update of rates available at the moment. As you’ll notice, AIB is the leader in almost every section. However, they are not necessarily lending to every client hoping to obtain finance with them - to know if they’ll be the lender of choice you need to construct the application in a manner that will ensure it shows the best aspects of the case to them.

There are lots of other lenders out there too (we deal with the pillar banks and many others as well), so looking at ‘best rate’ is perhaps different than ‘best attainable rate’.

Anyway, here is the list, if you ever want mortgage advice give us a call! 016790990

Best variable rate mortgage: AIB 3.24% (with one for 2.84% < 50% LTV)

Best 1yr fixed rate mortgage: AIB 4.15%

Best 2yr fixed rate mortgage: PTsb 3.1% < 50% LTV, otherwise AIB 4.65%

Best 3yr fixed rate mortgage: AIB 4.88%

Best 5yr fixed rate mortgage: PTsb 3.7% < 50% LTV, otherwise its AIB 5.35%

Best 10yr fixed rate mortgage: n/A 12/2011

Oh, one final thing, AIB called everybody into a meeting at their head office about two weeks ago, the resounding message was that they are going to be lending more in 2012 but prudence will remain and prices will change (upwards to more comparable market rates).

Yesterday the Examiner broke a story about tracker mortgage holders potentially missing out because they are not reading their terms and conditions. This is an issue we have seen first hand in our company, but it wasn’t due to not reading the terms and conditions, it was down to a bank error.

Recently Bank of Ireland had to put 2,000 accounts back on trackers after they mistakenly took them off and onto variable rates. AIB made the same mistake 214 times and PTsb did it 53 times.

In our own brokerages case we saw something similar recently with PTsb, they insisted to a client that no tracker was available. Then, only after the client remortgaged did they admit their error and offer it back. We represented the client in this case and insisted that all costs were also covered in reinstating the mortgage. This means paying solicitor fees, losses on clawbacks, breakage fees for the fixed rate undertaken etc.

Where this happens has tended to be where people come off of fixed rates and in their ‘rate choice letter’ (a letter you get c. 60-90 days before fixed rate expiration) the tracker is not mentioned. Several banks have made this error and thankfully it is becoming more rare as internal audits have identified and remedied the problem in many cases.

Our advice is (as per interview with Newstalk today) to write a short letter if you are coming off a fixed rate to your lender and ask ‘is a tracker available, if not then please point out the clause that indicates this and why’. This should at least ensure that your loan gets a diligent ‘once over’ by the lender who should be able to tell without doubt what the situation is once they go through your paperwork.

There are two sets of statistics floating around; on one hand you have the banks who claim that they are lending and also that the demand for credit simply isn’t there - a belief further expounded by John Trethowan. Then on the other hand you have the likes of PIBA who counter claim that 80% of applications are being refused.

So it is important to break down the vital components. First of all, the debate often centres around Small Medium Enterprise (SME) lending; even if demand for that type of credit isn’t there it doesn’t automatically translate into a reduced demand for mortgages. The point being that we can’t compare SME loans/business loan demand to that for mortgage credit.

Secondly is ‘what constitutes a refusal’, and this is where common sense diverges. Even the bank accept that if you seek €200,000 and are only offered €100,000 that it is a loan not fit for purpose, this even goes for SME loans - imagine trying to borrow 80% of a machine purchase at 200k and then trying to come up with €60,000 you can’t raise? Mortgages are no different, if people don’t have the ability to bridge the difference between the purchase price less their deposit and the loan sanctioned then it is an effective refusal.

If one wanted to be cynical, they would advise the banks to say ‘yes’ to absolutely everybody and only offer them €100 maximum. This ruse would be quickly seen for what it was, and yet when you add in a few zero’s and

Having given the banks support to the point of no return it now seems acceptable for even the Credit Review Office to use the ‘reduced demand’ argument to tacitly approve the strong chance that BOI & AIB will miss their combined lending target of €6,000,000,000 to Irish companies over two years.

If you have no demand in one area then why not funnel those funds which ‘must be lent’ to wherever the willing borrowers are? That our vested interest comes into this is evident - but it is frustrating to see a market down 95% and the issue of loan supply being a strong driver in the lack of transactions.

The vast majority of people who want to purchase a property simply cannot get past the underwriting hounds who have gone from being puppies in the last decade to being dogs at the gates of hell over the last two years. And the blurring of lines between different types of credit and the gathering of statistics give two totally different stories, but much like any cake, you have to look at the ingredients going into it, and in our opinion at least, the way ‘approvals’ are counted and accounted for is wrong, meaning credit is nowhere near as available as we are told it is.

David McWilliams hit an interesting point in today’s piece in the Independent about having ‘too much regulation’, and how it may repel new banks from coming here.

in late 2009 I was picked as part of a team that approached PostBank with a view to turning it into an SME business bank - our proposal never even made it as far as board meetings because they were determined to close down rather than continue, we found the whole process perverse at best.

Instead the same investor group will be setting up in the UK, meaning SME’s in Ireland lose out on funding.

It isn’t that new banks don’t want to come here, it is that they are routinely put off from doing so via the Central Bank and the way in which we grant banking licences in this country.

The other regulatory issue is Basel III.

Asking a bank during a time like this to hold more capital makes sense from a risk perspective, but from every other angle it is a noose.

Banks are being asked to deleverage (have fewer loans versus deposits), market forces are making them pay more for deposits than is healthy, they have huge tracker mortgage books that even when they perform create a loss and at the same time we want them to lend.

Simply put, these are not compatible objectives.

Banks HAVE to become zombies in order to continue because it is only with huge liquidity & capital injections at low prices that they could hope to work normally again - and we have already spent all of the money we have on saving them; so their alternative is to grind along trying to make whatever money they can and in a very very long time they will eventually be breaking even (think Japan)

That is the true tragedy of the crisis, if we had let Anglo close (I argued for this here) and only tried to save a few good banks (even though AIB is a banger it is still the owner of half of the payments system that the likes of EBS sit on top of) then we could have had a chance - it would have also required going right down the order of liabilities as follows:

Sharholders - wiped out
Preference Shares - wiped out
Mezz & SubOrd - wiped out
Senior bonds - turned into new equity
Depositors - saved (in order to maintain confidence)

Then we could have given 25bn in low cost money to the banks to make them healthy. Naturally hindsight is 20:20, we are never so prepared for anythin we are for yesterday!

But the new point is clear - regulation in itself is actually a risk, and a systemic one. Regulatory Risk will be a common word in banking vernacular of the future.

The entire justification of regulation and the bearing of its cost on the financial system (which ultimately gets built into consumer prices) is the avoidance of the systemic risk it is meant to mitigate. It didn’t and it won’t in the future so why is more of it now the solution?

Mainly because it sounds good…

When a bank creates a loan that becomes an asset, the property it is secured upon is the collateral (sorry my teaming millions, I know I repeat this eternally). So if NAMA decide to become a brand of lender this October as we saw from an article in today’s Independent; then how does it work? Where does the money come from?

Take a property that they are putting up for sale (1st picture: pic not related). We’ll say for the sake of this example that it is worth €200,000.

The NAMA position may be that they paid more or less for this particular property but it doesn’t really matter; what does matter is that for the sake of them selling it the property may as well be unencumbered, there is no lien above that held by the NAMA.

This means they can give a title deed to the buyer when they sell it - but don’t forget, when a person takes out a mortgage there are two sales/purchases, the individual buys from the vendor (1st sale/purchase) then they sell it to the bank in exchange for the money [we call the 'mortgage] to complete the transaction (2nd sale/purchase) and the bank then take the ‘1st lien’ or ‘right’ on the property.

Prior to this they put in their deposit (10% or €20,000) which becomes their own, this is their ‘equity’, which is why ‘negative equity’ is described not as value versus the market (that’s called ‘price’), rather value versus the mortgage secured on the property.

What NAMA have indicated is that they will provide a kind of ‘bridging finance’ for buyers, so a certain portion will be made up of Bank borrowing, just a regular mortgage (we’ll speculate that it will be 60%).

This has a key advantage for the bank who will have 1st lien (because NAMA have said that there is some loss sharing mechanism which would indicate that at best they hope for 2nd lien). First of all they have a low loan to value (LTV) mortgage - considered lower risk because before the property gets into negative equity from the banks perspective (60% of 200k is €120,000) the price would have to fall a further €80,000. Secondly it means that they can lend a little more freely because their risk in this instance is reduced, it doesn’t mean ‘lax standards’ but it shouldn’t be as stringent as the lunacy that prevails now where it is so difficult to obtain credit.

So working through the example: The buyer puts in €20,000 (10%), the bank forward €120,000 (60%) leaving €60,000 (30%) to cover.

Thus we have the NAMA input; but where does this money come from?

Quite simply it comes from nowhere.

How? Because the property is unencumbered so what NAMA do is draw up a loan agreement (that then becomes an asset) and they give you the keys, along with an agreement that (speculating) might say that if prices fall then after 5 years there is some kind of loss sharing mechanism.

This means that they go from a situation of having an empty apartment generating nothing into the following:

Buyers input: €20,000
Mortgage: €120,000
Loan written: €60,000

The first two give a cash input of €140,000 which can then be invested (we’ll assume they get 5% p.a.) and they also have a loan of €60,000 which is a future claim on earnings of the buyer (again, we’ll assume 5% interest rate).

If there is ‘loss sharing’ don’t forget, the buyers equity gets wiped out first so it is not a case that if values fall that NAMA are onto a loser, rather it is if they fall greater than 10% over the next 5 years, and that may well be likely but don’t forget, they have money in hand today which will generate profit elsewhere.

That 140k over 5yrs at 5% will give them €178,679 (compound interest being [M=P(1+i)n]), the 60k loan will bring in €16,567 in cash meaning that they have €60,000 at risk but €55,246 in cash-flow, and let us not forget that if prices did fall and fall that the €120,000 bank loan has no loss sharing and would put NAMA in a better position than if they held out and sold at a later date - but I see that as an Armageddon scenario.

If prices fell a further 20% (which could happen and was hinted at in the Central Bank paper ‘Scenarios for Irish House Prices‘) then NAMA only have €20,000 to worry about and depending on the loss sharing scheme put forward all they do is write down the value of their loan on that basis giving the following:

€120,000 underlying bank loan
€20,000 deposit (now wiped out as buyers equity goes first)
€200,000 - 20% = €160,000 so the €60k loan they advanced becomes a €40k loan from that day forward.

Not a bad deal (for them) all said.

The best rates in the market at present are

Variable (<50% LTV): BOI 3%

Variable (any LTV): NIB 3.4%

1yr fixed: AIB 4.15%

2yr fixed: NIB 4.2%

5yr fixed: NIB 4.9%

10yr fixed: NIB 5.5%

We were delighted to be part of TV3’s ‘The Morning Show, with Sybil & Martin‘. We are fans of the show and enjoy the relaxed nature of the conversational commentary style they are so adept at. In this clip we spoke about the costs of finance and the potential removal of fixed rates, while Marian Finnegan (of SherryFitzgerald) covers housing, her background is in urban economics and she lectured at both NUIG and UL before moving to SherryFitzgerald. We hope you enjoy the clip.