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).

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.

Section 23 properties have had their tax treatment changed, in effect the buyer honoured their side of the contract from the outset and after the initiation of this the Government reneged on their side of it. This is contrary to the idea of fairness, the concept of contractual obligations, and it undermines the faith any taxpayer can have in the state.

The state recently cut many people with income tax and reductions in entitlements, but these were never contractual and people certainly didn’t leverage up to obtain them. Landlords may not be a group worthy of sympathy, but at the same time recent changes to taxation on rent (Case V income) mean the amount of financing expense the business can offset has dropped by 25% (mortgage interest you can offset has gone from 100% to 75%), this is contrary to the rules of accounting when you look at any other business.

The only solution is a reversal of this policy, and perhaps the only way to ensure this is to apply the idea of mutual assured destruction. If there were 10,000 section 23 owners who all signed up to a commitment to go into 100% default on the 1st of April if this is not changed then you would see that the state would reverse this policy because it is flawed and because the 60-100m in savings that they would make would be eradicated by the ensuing mess the banks would be left in because of it.

When default becomes discretionary then a solution becomes necessity, and at this point, for many landlords default is becoming an option because they are being hit from all sides. Banks are looking for capital and interest payments at a time when rents are dropping, subsidizing the capital payments is often coming from earned income which is being subjected to more taxation, landlords are making imaginary profits because they can’t offset their expenses fully and now a lasing commitment regarding property taxation has been grabbed because it was easier than making the right decision.

The right thing would be to tax all property rather than just attacking those who hold investment property, they made this move before with the NPPR tax (€200 p.a.), and there was no resistance despite the fact that a flat tax of this nature was grossly unfair and didn’t distinguish between a mansion and a one bed apartment. Now there is an extension of this approach because it’s easy, because landlords don’t fight back, but that forgets the fact that you reach a certain point and people simply roll over or opt out, Atlas can always shrug.

Perhaps it was time that the Government found out that we do have an ace up our collective sleeve, and that it can be used to destroy the system they have fought so hard to save.

We have been saying for quite some time that banks would start to find ways to induce people away from their loan book. The first mention is from a post here back inn 2008 where we mentioned ‘early redemption bonuses‘  and then we also said something similar which Niall Brady from the Sunday Times picked up on in July of 2009.

The basic premise is that banks want rid of certain types of borrowers and loans in particular, and in some cases loans in general. We’ll take a look at the loans that bother them the most below.

1: Sub-Prime loans: this is definitely the clearing house recently Fresh Mortgages sold their loan book in a private deal believed to be well below 30c on the euro. This was for a book that was secured on sub-prime mortgages and serviced via a centre in Northern Ireland, something Fresh did was to offer their borrowers an inducement to go elsewhere or pay off their loan. You can take it that for all the hard talk about sub-prime lenders, that they will be the most generous when it comes to inducements.

2: Tracker mortgages: Bank of Scotland recently offered incentives to borrowers to get off their loan book and at €1,150 it ain’t chump change either (see picture below)

This is the first time a definite incentive has been offered to get people (in prime lending) to go somewhere else, and it is most certainly directed at tracker holders (which represent the bulk of their loan book). Bank of Scotland have a legacy issue to deal with in leaving, for a start, they have to continue to service these low margin products which comes at a cost, and secondly, they are not producing the kind of profit they had hoped for, so an ideal end game for them is for people to switch and go elsewhere.

The current incentive will likely be followed by greater incentives in the future, I’m not saying this will be a bonanza, but it could well be a five figure sum eventually.

3: Other loans: There are other loans which banks would like to be rid of, people who have full contract interest only options (rather than for a set period with reviews stitched in) are going to become persona non grata. These loans do very little to facilitate additional lending if the securitization market is not functioning correctly. And in an era of collapsed property values it also makes things worse for a banks asset position because repayments are not reducing the level of loan versus the value of the property. These loans will be the last ones that a bank can sell on, and that means the best solution (from a banking perspective) is if the borrower goes elsewhere, what’s worse is that in many cases the people on these contracts also have low margin trackers!

Serious non-performing loans would also fall into this category, in an ideal world the borrower would pay off their loan in full or go elsewhere but as that is not possible in an impaired loan it means banks will be stuck with loans that are not performing which, at the same time they can’t move on (due to the new code of conduct on mortgage arrears) and also which they are afraid to move on for fear of realizing market values when they do.

All said, there are many borrowers that the banks want off their book, the question is how will they do it and how can you make sure to benefit from it when the time comes? De-leveraging can only be partly achieved by the institution through repayments, so they’ll need to find a way to encourage quicker repayment/prepayment, the stick will be rates, the carrot will be incentives, watch this space!

The Examiner carried a story about the number of options available to borrowers in the present market and the fact that they have dropped over 50% since 2008.

In 2008 there were 380 different mortgages available on the market across all banks and all rate suites, today, that number rests at 179 meaning that at least 50% of the choice is gone. That is also reflective of the fact that so many lenders have exited the market. Below is a list of several who are no longer lending here.

Halifax
Fresh Mortgages
Springboard
Stepstone
Nua Homeloans
First Active
GE Money
Leeds

Many of these providers were in the non-prime/specialist/sub-prime category, however, a drop of 50% in choice doesn’t mean that there are no options left. Certainly tracker mortgages are a thing of the past as are Standard Variables (referring to new business for these products, existing clients will keep their existing product).

The other factor that makes this less spectacular is that many lenders replicate offerings, so when each lender pulled out, their two year fixed rate product being discontinued means that there were 8 less two year fixed products available, but it isn’t the case that the market leading 2yr fixed was necessarily with any bank that quit the market.

The idea that the more mortgages there are, the wider the choice is true in respect of their being more ports of call, but if you wanted baked beans does it matter whether the shop you go to stocks 6 brands or 70 brands of the same thing? Mortgages are not rocket science, there are intricacies and nuances that a practitioner understands better than a day to day consumer but in terms of choice there are still plenty of options and navigating your way through them is perhaps made easier given that there are fewer choices, even if all of the players remained in the market tracker mortgages and standard variable mortgages would not be on offer, so it doesn’t mean that the consumer is definitely gouged when one or more banks stop lending or close up shop.

I can’t help but think that if Bank of Scotland had stuck to the broker channel that they wouldn’t have been in the mess they are in now, and there wouldn’t be 40 odd branches of Halifax closing (they wouldn’t exist), in my mind it is an example of how a large bank got it terribly wrong and ultimately failed to understand their customers.

Their distribution customers were brokers, and via brokers their end customers were Irish consumers, in the end they have alienated both of the groups they set out to serve.

Halifax, who were the retail side of Bank of Scotland Ireland, came about as a follow on from an expansion in the Irish market that was introduced and lead by mortgage brokers. In 2006 it was decided that a greater presence was warranted and they began creating a street presence via branches.

Entering a competitive and mature market with a high-cost/low-margin retail proposition is bound to have its problems. Bank of Scotland mistook the market signals they got from broker lead expansion as a genuine appetite for their entire offering (retail banking etc.), turning off the intermediary tap can be done overnight with ease,  I would wager that within the general population that almost nobody could state the time when BOSI essentially shut down the broker channel, it barely made news, and it didn’t cost the bank much to do. On the other hand when you want to shut down a retail channel it is a mess, lots of jobs are lost in the process, hence the current fiasco, affecting staff (job loss), customers (many will have to make alternative arrangements for credit cards/current accounts etc.), and intermediaries.

Yesterday on Drivetime I was making this point, because the other prime bank banks that stuck to their original intermediary distribution model (KBC) also shut off lending, and can now return to market armed with billions to lend. They didn’t go out and try to break into a well established retail market with low attrition rates.

The head-space of the Irish consumer when it comes to financial products is a strange phenomenon, ask anybody from any town around the country if they are angry with our banks and you’ll likely get a ‘yes’ response, but then ask them ‘have you done anything about it? Like moving your bank account to a different institution?’ and you’ll probably get a ‘God no! Sure I’ve been with the AIB for 20 years!’ or something to that effect, ultimately, Irish consumers, when it comes to retail banking are mainly all talk and no action. They will shop around for insurance, for mortgages and other financial products, but they don’t do the same for their current accounts and Halifax hadn’t bet on this. Sadly, people who did switch will likely return to the old banks and only further reinforce their hold on the Irish market.

While PTsb have had some success with current accounts, it has to be remembered, they are an incumbent with a long presence via the TSB, and for all the accounts they say they open, how many subsequently leave? The fact is that it is the younger generation who know no loyalty to their banks (this is a good thing in my opinion) but the older generation - where the real money rests - are not keen to change.

I feel awful for the people who work at Halifax, I have many friends there, people I know and respect, they have the same hopes and concerns as the rest of us, husbands, wives, children, and mortgages to pay, this will be a testing time as there are virtually no jobs to be had in the financial industry at present. I got several phone calls yesterday from some of them and its hard to stomach, especially as some of the talent there was induced away from jobs in other institutions that, if they had stayed, would still exist.

On the other hand, for Halifax in particular, I have almost no empathy, they went to great lengths to cannibalise their existing distribution via dual pricing in favour of branches and , hoping to circumvent it for higher returns and now that it has failed they have failed, they weren’t upset as brokerages closed and the effects of their decisions shattered the intermediary channel, so it is only right that in return we feel nothing for them, that is merely equal emotional recourse.

People will mourn the loss of competition, the fact is that it wasn’t operating competitively, they were operating at a loss, and loss isn’t competitive - its unhealthy. Halifax was literally buying in business on both mortgages and savings, they didn’t have huge levels of zero-rated funds swashing around in current accounts because they were paying high interest rates on current accounts and that funding approach is unsustainable.

There is also the issue that HM Treasury (and ultimately the UK taxpayer) had bailed out HBOS/Lloyds, and it would surely be unpalatable for the UK taxpayer to learn that a loss maker was being kept alive in a foreign jurisdiction? If we were to find out tomorrow that BOI was operating at full capacity in the UK at a loss would it not bring about similar pressure on them to close operations there?

Everything was in alignment against Halifax, even when they wanted to sell their branches and book nobody was interested, nor were any other institutions interested when they put themselves forward as being part of a ‘third force’, executives in at least one organisation said ‘they’d rather walk away’ than pair with them.

And thus it culminates in closure. Halifax were the first branch retail banking entrant to the Irish market in decades, perhaps we will have to wait several more before another entrant dares test the Irish retail banking waters.

I should state from the outset that I am against a banking enquiry if it is the ‘9/11 style public enquiry‘ it was originally billed by Patrick Honohan as (pic related). I also believe the primary failure in Ireland was one firstly of regulation and governance over and above what went on within the banking system, it is after all, the responsibility of regulators to exert their control over the systemic aspects of banking rather than vice versa, however, it seems to be the popular choice to have an enquiry and thus I have outlined how a relatively cheap investigation might be set up.

The people of Ireland are calling for blood and it is no surprise that various powers now want to deliver on it, they join other leaders from antiquity such as Titus, Nero and Caesar in wanting to please the masses with blood-letting, sadly, we have a history of making any investigation extremely expensive (it would actually be cheaper to have a real life gladiator tournament than a tribunal) often with little result - the tribunals are largely testament to this, in particular when they involve white-collar issues and not criminal ones. The fact is that in Ireland after an investigation find you guilty, that if you are rich enough you tend not to go to jail, and the only hardship might be having to cover your own legal bills.

So in advance we have several aims.

1. clearly define what it is that we are trying to ‘investigate’, much of the activity in banking is well documented and there is a large and clearly defined audit trail, for this a knowledgeable auditor can do
the job if there are specific issues known in advance that need to be considered. So if the issue is that ‘bad loans were intentionally placed’ or that ‘underwriting requirements were avoided’ or ‘legal requirements circumvented’ then it is all right there in the audit trail, oddly though, the feeling I get is that people want a general ‘explanation’ with a motive attached, I don’t know that we will ever get one, even if we stopped the entire nation to focus only on this enquiry.

2. define the parameters of relevance, is this about breach of regulation, irregular practice or outright illegal activity, depending on what you opt for (or indeed if we opt for all of them) it may be a case that we don’t need to do much research at all. This ties in with point 1, because banking is such a paper-trail intensive industry there is very little that cannot be uncovered with relative ease, if however it has more to do with conversations in board-rooms and the like then we get into a softer brand of evidence.

3. set a time frame and make the results public, something the Government fails to do, and when they do they don’t stick to it, not even when its a fairly set infrastructure project (think LUAS, Port Tunnel etc.).

Process: The first thing to do would be to remove the onus of discovery from the regulators alone, they don’t have the resources and it would take far too long, instead we should have a two phase initial inquiry which encourages people to rat out the wrongdoers.

I know (only anecdotally) that there is a huge amount of rage within the rank and file banking staff, they would all be only too happy to make sure that any people at the top that they can expose are given what they see as their comeuppance. There is a precedent there too, most of the public don’t know that former BOI chief Michael Soden was vigorously paring down BOI’s IT department just prior to the precarious information being found on his PC, odd that… You go to chop the IT department then suddenly the IT department brings you down?

There might be a ‘cosy cartel’ or ‘golden circle’, we see that kind of language used to describe many things if you look at some of the books out this year, or the tv/paper headlines, but in these ‘circles’ their strength lies only between themselves, every other rank and file member of financial institutions are likely more than happy to see these people brought down, and they want vindication for the regular Joe’s, this is one course where they might achieve it.

Phase 1: (60 days) anybody who worked in finance within the last decade can send an affidavit into the regulator, they can turn whistle-blower on any activity they know about within any field they have worked within, giving names, rough dates etc. equally, anybody can write in a confession in advance, stating their version of events upon any activity that may have been done with bent rules or contrary to regulation/law. This will provide a large body of evidence for the regulator to read through, they can then tie together the various affidavits to the organisations they relate to and that will be the foundation of further investigation. The obvious flaw is that perhaps nobody will whistle-blow, but this could easily be worked around by ensuring that professional bodies will get involved if any wrongdoing is uncovered

Phase 2: (30 days) The Regulator reads through the statements and filters them into criminal, very serious, serious, breach without serious implication and non-serious strata’s, then they set to work on the biggest ones first.

phase 3: (40 days) there would need to be some precedent set so that people implicated in the affidavits from phase one are placed with a burden of proof in phase 3, all the people implicated from phase 1 will have to defend their position from any implication placed against them in phase 1, rightly or wrongly, the people who come clean in the first instance should be given a precedence of ‘truth’ so that there is no reverse investigation based solely upon their affidavit, so they can’t ’self incriminate’, however, they can eventually be investigated if they failed out outline their own role, if they do confess and help then you do the standard treatment of greater leniency for them.

Finance isn’t like the Mafia, people won’t protect each other, perhaps if there is guaranteed anonymity for the people who make statements in phase 1 (not anonymous submission, but within the investigative process if their identification is protected) then it will encourage a full disclosure from within industry. The fact is that getting people to dob each other in from within is far more effective than trying to get in and pry answers from without. It works in breaking drug rings, criminal gangs, it is cornerstone of the RICO act and history tells us that people have an innate desire to not live in prison, so even the biggest criminals rat others out, they might be competitors or former bosses, it doesn’t matter, its effective.

phase 4: 6 months: All of the information is studied and investigated, the most pertinent being dealt with first and the less important either going into later investigations or thrown out altogether depending on the gravity of same - but with a formal warning issued as a precaution.

The regulator must then have a set level of fines which is relative to the size of the firm and or individual in breach, and professional bodies must also be involved - to the degree that any criminal breach or high level regulation breach results in the removal of professional recognition (eg: Institute of Bankers/ LIA would strip people of QFA, ACCA, ACA, CFA etc.) would all endeavour to do the same, and the regulator would create a ‘black list’ of people from the investigation so that it is known publicly, a further move would be that these individuals cannot be directors of financial firms, or become regulated personally, effectively we need to ‘clean out’ the system, in one fell swoop, not via the slow grinding attrition that we have seen thus far where the culpable are creating their own terms of termination.

The end result is that criminals would graduate to jail, and serious offenders are dealt with in a variety of different punitive manners, but if it must be done, then it must be done quick, with a set agenda. We shouldn’t put the uncovering of some ‘higher truth’ that we won’t ever really obtain above that of running a cost effective investigation in a timely manner.