Irish Mortgage Brokers Blog

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.

When making a mortgage application this is a question that many first time buyers want to know, how much money do I must I have for a deposit? Well, that kind of depends on which bank provides the mortgage finance!

Lending criteria is different for every bank/building society/lender, this goes for rates, the general underwriting criteria as well as the ‘loan to value‘, the deposit you need is 100% minus the Maximum LTV and that will give you the deposit amount you require.
For instance, ICS have a maximum LTV of 92% so the deposit you need - if you are obtaining finance through them - is 100% - 92% = 8%.

What is interesting in that example is that when you go ’sale agreed’ on a property the estate agent will ask for a security deposit and the balance of 10% at the signing of contracts, this is an example of industry lingo being so embedded that it becomes separate to reality. The fact is that if you obtain 92% finance that you don’t need to give a security deposit plus the balance of 10% at the signing of contracts, it would be the balance of 8% - your solicitor will talk to the other side and organise this.

The mortgage criteria on deposits required by each bank is listed below. We have put them in the order of the banks that are actually lending.

Banks Lending Normally:
AIB, ICS, BOI all require at least an 8% deposit.

Banks Drip Feeding Lending:
EBS 8%
Haven & KBC 20%

Banks That are essentially Not Lending:
INBS 10%
NIB 20%
BOS 20%
PTsb 10%
First Active (Not doing any new mortgages)
Ulsterbank 10%

The banks that are currently lending in a regular fashion all provide 92% finance, it will be no surprise that they are headed for the maximum market share on lending in 2009, obviously the €1,000,000,000 that we gave each of them earmarked for first time buyers helps a lot too! In any case, there are plenty of banks and lenders to choose from, the issue is currently more about ‘who’ is lending as opposed to what prices or options are available, if you can’t get approved with one of the current primary lenders then you may have to wait up to 3 weeks for an initial response or find yourself with the option of a variable rate which is 400 basis points above ECB.

We have been saying for some time that interest rates on mortgages must rise, you can look at supply and demand, or you can look at the types of products that have ceased to exist such as tracker mortgages (removing fixed margin loan products) and then there is the proliferation of variable LTV products which set the stage for the ability to manipulate margin on more loans. The question is ‘what all of this means’, and the purpose of this post is to explain how deposits, business lending and mortgages are all interconnected parts of the banking system and how margins are set based upon them.

Last week PTsb finally came out and said that they were considering an increase in margins on variable rates. This came partly as a relief, not because we relish the idea of people having to pay more for their loans but because it means that Irish banks are slowly going to start taking the necessary steps towards recovery. These steps are (in a nutshell) higher margins, more prudent lending, and deleveraging. Irish mortgages have had some of the lowest margins in Europe, this is in part due to the propensity for Irish borrowers to easily research what is a small market and their willingness to show no loyalty in lending - although we are extremely loyal when it comes to day to day banking. The IMF even commented on this in their report on Ireland.

While foreign owned banks get into nationality based credit retrenchment it will set the stage for lending to return to higher margins, Bank of Scotland who shook the market up in 1999 with low rates and trackers is now charging the highest rates on the market for variable rates. Thus, there is no meaningful competition on the rate front and with only two or three banks open for business it gives two vital ingredients, firstly is scarcity value and secondly is decreased competition.

If we want to have strong banks then they have to charge higher margins, margins in Ireland are so low that if a single lender defaults it can literally have an effect of (not actually but in terms of damage to the lending book) taking down two performing loans with it.

Rates must rise in order to allow businesses to access credit, that might sound crazy but in fact it is due to margin compression linked with banking rules such as ‘revenue neutral’ balancing when rates change. The blog on margin compression tells you all you need to know as to why banks have to pay more for deposits and not earn more on mortgages when rates drop. However, the side effect is that the balance of income when you get margin compression must come from somewhere else, and the revenue neutral rule [basically when rates drop a bank can't make a sudden increased profit because of it] means that companies cannot access credit except at high costs -because they are in essence paying the margin that deposits are eating and borrowers are not paying- illogically we are saving consumers but not saving the firms they work for!

To understand this consider all the elements of a bank, deposit rates are unnaturally high in an effort to attract and retain capital, you can’t drop deposit rates when a rate cut comes through or depositors flee, and political pressure and contractual obligations (eg: trackers) mean you have to pass the rate cut to borrowers, thus you create a losing position and the only customers left to take up the slack are commercial borrowers - but they often have euribor trackers, and businesses who are now paying much higher margins and being denied access to credit.

Unless we want to live in a society where banks are constantly bailed out then they need to be able to make enough money to offset losses and unfortunately they are unable to do that at present, raising margins and curtailing lending is key to them doing this, it makes life miserable for many (mortgage brokers in particular!) but in a market where competitors are charging ECB+5% it doesn’t make any sense to sell scarce capital for less than half of that amount!

Imagine a sale on gold for half the price the physical gold is worth and you start to get the picture, its just not good business practice. The solution is screaming ‘increase rates!’ but banks are slow to do that in the current climate because it is so distasteful to the Irish taxpayer who bailed them out, obviously foreign owned banks have no issue (their loyalties lie with other sovereignty tax bases) but they are still part of the market so Irish banks shouldn’t try to tow a ‘low cost’ line when it doesn’t make sense, isn’t reflective of the value of credit and when it may lead to more financial assistance being necessary.

We want cheap loans but we don’t want to bail out banks, take your pick.

If there is one useful piece of information you can take from this post it is this: if you are on a variable rate then switch to a low cost fixed rate, fixed rates are dirt cheap at the moment and you don’t have to switch lenders, you can do it with your existing borrower if you want, the reality is that variables have no price promise or protection, and if lenders are going to start to raise variable rates then it would be best to get the protection that a fixed rate offers now rather than after the rate increases occur becuase it will happen in fixed rates at the same time meaning you won’t get a chance to jump ship in time.

We have been touting fixed rates for quite some time on the basis that people needed to fix at the time rates were heading for historic lows, not after the fact, as well as that, the indications from the ECB that they would not go below 1% and instead would seek alternative options (such as QE) meant that once we got close to the 1% the forward market would price that in, but when we actually reached the 1% base that equally the forward market would price in rising rates.

That is exactly what has happened, it wasn’t front page news when we said it, although the Sunday Times did do a big story in their business section in mid-February, but now that banks are starting to raise their interest rates it certainly is!

It gets back to planning, without exception every client we had that deliberately went for a fixed rate in the interim is in a good position, some who have opted for variable rates are doing well for now but with the avoidance of further rate drops clearly stated by the ECB and the margin increases we saw through 2008 on variable rates then it quickly tells you that there is virtually no inherent value in a variable rate without guarantees on the margin, this was precisely the thing that made tracker mortgages attractive.

Having said that, you can still buy into a fixed rate at a really great price, the one and two year money might sell ads or get your attention but it is really the 5 & 10 year money that is where you can beat the curve.

We talk about ‘getting ahead of the curve’ a lot on this blog, what we mean (because I get a lot of emails saying ‘I didn’t understand that bit’) is the yield curve, of trying to see where that is headed to help you make a decision. Considering rates in the long term is like driving down a road at night, you can only actually see the things that are say, up to 100m ahead, that’s the short term market, but if you were on a road that other people were travelling on, going up a hill, you might see there lights way off in the distance and realise there is a hill up there, the road you are actually on might not be that road but it indicates a hill is there. That visibility is the forward market.

So we can see short term rates easily, Euribor tells you that, mortgage rates etc. also do some interpretation, but when you move out a bit, then it’s market interpretation and that is the right hand side of the yield curve.

Take a look at this graph, we see the month to month Euribor is virtually matched, and apart from pre-emptive drops in the short term upon rate decrease expectations, the Euribor in short periods has been virtually like this for all of 2009. The short term interpretation has held very few shocks. However, when you look to the right you see mismatch, the margin splits at the 12mth mark and widens right out at 2yrs, it then keeps this disparity for the foreseeable future.

What does that mean? For fixed rate mortgages it means that any fixed rate above 1yr is likely to get more expensive, but mortgages aside (imagine irish mortgage brokers saying that!), it is really telling us that there is inflation uncertainty once we pass the 12 months into the future mark.

So in order to ‘get ahead of the curve’ you need to make a decision now before that possibility of inflation and the increased rates that will accompany it, come along. We are one of the only retail brokerage houses that regularly publish the yield curve and try to consider the implications of it, you can check other articles in our archive.

If you are toying with the idea of a fixed rate and you are on a standard variable rate then take note: your rate has nothing in it which guarantees value in any way, for all the talk of banks ‘passing on the full rate cut’, most of us have short memories, remember this - banks were jacking up variable rate margins throughout the first half of 2008 when the base rate wasn’t even moving. Take an example of First Active, their rates vs the base rate are below, the bottom line shows their margin

Note that the variable rate (yellow line) was rising from mid 2007 to early mid 08′ when the base rate hadn’t actually moved! and the margin line (black one at the bottom) was steadily going from about 1.3% to close to 2% at the end of 07′ and then up over 2% in 08′ [the temporary drop at the end was when there was a slight delay in publishing new rates in July 08' which was the final base rate hike].

Don’t be surprised if you see rates start to rise again, at such a low base rate the increased margin wouldn’t be detrimental to most, and its a perfect opportunity along with several other key measures we will probably see such as the removal of interest on current accounts (or at least ways to really reduce it), decreased margins on deposits, and increased credit costs in other areas (cards/personal loans etc.).

So don’t say we didn’t tell ya what was coming down the line! In a nutshell, higher rates, less benefit from retail banking products and greater cost to the consumer, as always, it pays to plan.

Bank of Scotland recently announced that no longer will support an applicant seeking to borrow 90% for a newly constructed, or second hand property.

In view of the new homes gathering market clearing pace, I feel Bank of Scotland have been a little short sighted here. This profile of the property market accounts for a huge amount of business, especially with builders seeking to offload newly built properties at knock down prices. I don’t think I am being short sighted when I predict fervent activity over the coming months with many first time buyers eyeing dropping prices as an economical godsend, match that with a low rate environment and it gives mobility, choice, and all of this at a price that won’t break the bank.

Paying € 1,100 / € 1,200 for a 2 bed city centre apartment makes sense for people who don’t wish to live with their parents. If we move this on a step further, it makes even more sense to buy. With very low lending rates, you can get a mortgage for less than this amount per month, especially in light of the fact that the Government have kept faith in the First Time Buyer market, illustrated perfectly by the continued investment in the First Time buyer TRS scheme. In case you weren’t aware, this provides financial support to First time buyers for the 1st 7 years of their mortgage. This is a genuine and very welcome offer, if you consider recent tax hikes/ reduced governmental investment. It does prove that the Irish property whilst crippled is still a viable option for many young Irish people.

So why have Bank of Scotland made this dramatic move to only offer 80% mortgages? Realistically, it prices many First Time buyers out of the market as they have to cough up 20% of the market price. Between renting and saving, it really means a deposit of around € 50,000. The only rationale I see is that Bank of Scotland are of the opinion that property will continue to drop in value, hence the property they have security dropping in value.

The 2 largest banking groups in Ireland; AIB & Bank of Ireland have not bought into this and continue to support the home owner market by offering “above 90%” mortgage packages for first time buyers at great prices, that is their way of ensuring that after they were helped by the tax payer that they get money to tax payers who need it in order to purchase their own home.

If anything, property transactions are currently under priced, meaning that many properties are currently sold below their market value. This isn’t ‘random value’ but on valuations based on price per square metre averaged over entire estates, in other words: not ‘vendor’ based prices. Why is this?

Firstly, as this applies to the newly constructed market, some builders have found themselves under huge financial pressure and as such have elected to shift properties in an effort to keep their debtors at bay. If anything you can buy a property at a slightly undervalued price.  Joe Builder in the current depressed market can only sell at a below par price, and therefore the First Time buyer has the opportunity to get a real bargain, worst case scenario, the purchaser gets a great deal, the bank have a more favourably weighted asset and the builder finally gets to pay off his new Mercedes 500sl.

The second hand market is largely dictated by the occupant in the house… is there enough equity to sell and move on, is there mortgage more than what the house is worth?

This value is nearly pre determined by these factors, and simply ratified by an Auctioneer/ Valuer who comes to value the property on behalf of the lender. Throw in market demand and you have the value, so why wouldn’t a bank support this applicant for 90% of the value if it is a true valuation?

I understand that “Loan Book” considerations are paramount as far as a bank are concerned, but property has be known to fluctuate over time, so that outlook is inconsistent. They weren’t lending 120% mortgages in the better times, so why do the reverse?
This post was written by Keith Sheeran, a mortgage specialist with our firm, if you would like to contact Keith you can reach him on 01 673 0418 or email him at keith dot sheeran at mortgagebrokers dot ie. Keith has been specialising in mortgages for nearly a decade.

William K. Black a former US regulator talks about the fraud and calculated dishonesty of people in charge of the banking system that he believes is at the heart of the current financial crisis.

There is 30 minutes of viewing in total, but this is footage well worth watching.

I was asked by a colleague in the UK to provide an overview of the Irish mortgage market, he has often advised the Bank of England in the past on the UK buy to let market, however this time it is in relation to a talk he was due to give to an international financial services group on the Irish economy. Below are the contents of my correspondence which is a no holds barred view of the mortgage market in 2009.

Remortgage: This area is finally starting to see some life again, the rate drops are filtering through and many of the people on fixed rates taken out in 2005/2006/2007  are shopping around, as always new business attracts better rates than existing customers so there is once again an argument for switching.

However, the many people who took out trackers are basically out of the market in the long term as every single lender has removed tracker mortgages from the market, in fact, if you know of a lender willing to do tracker mortgages in Ireland they could hit the market and win on that basis alone, trackers are consigned to financial history on the emerald isle - at least for now.

The one area that seems to be getting some transaction speed is that of top-ups for improvements, people are not gearing up to buy a new house, instead they will improve that which they have already. The one downside is that many Irish lenders will not do a totally separate second mortgage top up - keeping the original at its rate/term etc.- and the reason is because there are so many negative margin loans out there, almost every residential tracker is currently negative margin when you consider cost of funds [although that's doing better for now], cost of distribution, and then margin. The crunch hit the banks bad on these loans, some were as low as ECB+0.5% so you can only imagine what Euribor cost of funds being at over 1% above ECB during the bad days was doing to the book and liquidity of same!

Buy to let: This end of the market is basically dead, the issue is acute on the supply side but mainly on the demand side, there are estimates of between 45,000 and 100,000 empty units (some unofficial sources cite even more than that). The industry economists all figure from 60-100k of empties, that means the supply side is swamped for a population the size of Ireland. Prices will fall and residential sales are going to be a slaughterhouse for some time to come.

On the demand side the issue is that paradoxically prices and rents are falling in tandem, a damnable situation, prices fall due to oversupply and confidence/credit crunch etc. the rental prices are falling because of oversupply of stock, competition for tenants, a need to meet payments even if it is loss reduction rather than meaningful yield, as well as that many of the Eastern European renters are returning home. Completions are still flowing  through, on the issue of attracting a tenant the competition for tenants is high, i had to drop rent by c. 45% on my Irish investment property to get it occupied.

The sensible proposition at present is that the state could buy some really cheap social housing, or if a buyer had enough cash/finance they could likely  bulk buy units at huge discounts, having said that, accurate market valuations are hard to come by, it is in the realm of educated guesses because with many distressed sales due to developer/owner going broke a suppressed price implies the ‘market’ price which is not the case in truth but the market only accepts that as it is the point at which a transaction occurred.

For me, i don’t really care about prices, instead i am watching yields and when they get over 7% investors will go back in feet first. I think the concept of cash flow will be the fundamental in property in the short to medium term, it is going to be viewed the same as bonds currently are - yields yields yields. Really it was continued market strength (when yields stopped making sense) seeking capital appreciation that caused the pendulum to swing so far beyond acceptable values.

Switching: moving lenders is really bunched in with re-mortgaging, the idea of using your house like an ATM is no longer popular [rightly so] thus the movement in the switching market is the same as the re-mortgage market. There are deals being done but a trend we have noticed is that it is primarily people who are on bad value variable deals already, again, the folks with trackers will likely sit tight unless we get the inflation wave [which I personally expect] at the end of this which may entice them onto fixed rates in the future.

New home buyers: an area with at least some life in it! Many buyers realise that prices are much lower as are interest rates, if rates go up 1% you would need to have bought a house for a few grand less on price to make up the difference, its an interesting mathematical approach which people need to be aware of. A house for €300k over 30 yrs. at 4% is actually €6,000 cheaper than a €270k house at 5% and with the long term rate outlook being a rise eventually it is perhaps better to lock in now rather than later, personally that is my intention.

The state is getting on board with a thing called homechoiceloan which is literally like a mortgage bank, they already do shared ownership and affordable housing too, currently even with 20% discounts many banks won’t lend on these, partly due to councils not being in line with the actual market - their valuers price totally differently than independent valuers - and then the profile of the lender who qualifies for this kind of loan. In many cases developers are selling for comparable prices with ‘affordable housing’ diminishing the attraction of the programme.

Developers are slashing prices, one in Kerry is actually doing a 2 for the price of 1, who would have thought you’d ever see that in property!

Niches Markets: The only one I would consider at the moment is distressed debt/portfolios. The confidence is so utterly low that people would literally sell at cost to get out of deals/debts. Commercial property is now taking a spectacular dive, if you had a good tenant arranger and the right finance this may be an option, stamp on this is likely to get changed in the near future, but for now its a total barrier to entry. Unless you were to get into buying properties with motivated buyers and turning them into duplex’s etc. in desirable locations then I wouldn’t have any novel ideas currently but that depends on your timeframe to a degree. The place with the most movement is the first time buyer market and after that the remortgage market.

Product guide:

Homeloans: We are now in a market with fixed rates, variable rates, and LTV variables, where you get a variable [no fixed margin] depending on the LTV, rates are c. 3-6% many banks don’t have the money to lend so they are using the blunt instrument of tranche management and high rates to control the book.

Changes in strategy of lenders: Hardened criteria and industry underwriting are prevalent, for instance, if you work in finance it seems you are persona non grata, in the past 100% mortgages were everywhere, now LTV’s are averaging much less, several lenders - Haven, KBC [formerly IIB] are only doing 80% loans, others are offering 90% but getting the money and approval requires the patience of Job and the earnings potential of Warren Buffet. suffice to say the market is not frozen but a single sentence sums it up

“Banks will lend to very strong candidates, on good collateral at high margins” - almost sounds like an old central bank mission statement!

Who is the best: The Irish banks will be partly recapitalised, as regards balance the best is likely AIB, regarding product they are also top table much of the time, Ptsb is likely to reduce or even remove some offerings, First Active/Ulster [RBS owned] are not very competitive, they are doing some 90% loans but ensuring they get the margin for doing so. Haven/EBS are lending but the press have been releasing many rumours about their financial health, unlike many banks they still have men on the ground though which is a good sign. Bank of Ireland have harsh criteria but decent rates, top end of the mid-table. NIB who don’t deal with brokers are offering a lot of really good deals but at their multipliers - even with low property prices - few would qualify, they are the best for low LTV’s, as regards an ‘approach’ i guess i would say caution is king.

Borrower integrity: The reduction in lender integrity is there but both pre and post lending but thus far it is down to job loss/redundancy and the things that are killing every economy in the developed world. Certainly the underwriters have developed a new brand of risk aversion where they factor in eventualities that don’t even exist, for instance - successful currency trader refused [we didn't even ask them to consider bonus etc.] because the institution he worked for got downgraded by S&P.

Equity release for retired couples: if you are talking about residential reversions or reverse mortgages then these are gone from the market, the companies offering this have all closed down, they had the double hit of factoring in too much on the potential growth of Irish property, one of them did securitise the loans out one house at a time which I thought was novel but the business model broke irrespective of this.

Regarding a brokers ability to trade: Falling prices, yes, this took confidence and transactions out of the market, we are in the transaction business so if prices dropped it doesn’t ruin brokers, it’s when transactions freeze up that we get hit. Probably the harshest development is the confidence killer that is combination of credit crunch/falling prices/credit criteria - albeit some of these are required to reach market clearing levels. Naturally prices will drop beyond true value on the way down the way they exceeded true value on the way up, the issue is when and more importantly what is the true market value.

Negative equity: The press seem to love to write about this one, I have often argued that negative equity is interpreted rather badly, it only becomes negative if realised, actually being in negative equity doesn’t change anything unless you are also forced to sell and crystallize the loss, however, for those who do find themselves in that position it is catastrophic. And the harsh reality of having paid more for a property than it is worth is a confidence and financial killer. It has turned people off of buying and it gets mentioned virtually every day in the papers.

Reduced lending capacity: This is the other part of the squeeze on prices, we spoke about supply and demand already, the reduced supply of credit is a third factor which is pushing the prices of property down from outside of the property specific supply demand spectrum. There is nothing one can do about this and yet you can only wonder what would happen if credit became easily obtainable again, I don’t know that we would see reflation unless there was a zero rate policy and a huge money supply creation which is a circular proposition as at the root of this crisis are low interest rates, increased liquidity and money supply.

Lenders cutting out brokers: This is key, originate and hold seems to be the route for many banks as they move away from the originate to sell/securitise model, we are seeing dual pricing and it is there to specifically remove the broker, banks say it is so that they can get the cherry on top [life assurance etc.]. The intermediary market makes less sense in a downturn, why pay a broker when you already have to cover branch costs? And in a market as simple - in terms of lenders and options- as the irish one the argument for ‘going direct’ is strong, particularly in advertisements. We are still only at a 50% penetration for broker use for mortgages which is substantially less than the UK.

Reduced commissions are the other side of the coin, and this is the one that may be the rock many brokers perish on, costs have not reduced at the speed that commissions have. Commissions have dropped on average by 30% but the main banks lending dropped by c. 50% so the actual hit to a working brokerage is c. 40%, this when combined with a massive restriction of credit in a falling property market has created what we can only describe as ‘the perfect storm’.

However, we are not being discriminated against, the overall picture in banking is bleak at the moment, I’m an ‘optimistic bear’ for now. The banks are getting hit on both sides as well, impairment charges are high which hurts liquidity, their book, and their ratings. The rush for depositors means they have to offer exceptionally high deposit rates (compared to historic norms v.s. base rates/euribor), and when rates drop they are being pressurised into passing on the rate cuts to the mortgage market. This is actually bad for them though because they can’t do the same to the depositors or they will move their deposits so the compression sets in of reduced mortgage margin and paying out higher deposit margin, it is actually the opposite of the traditional banking model and somebody will go bang due to it, already banks have required capital injections. [since writing Anglo were taken over by the State]

This should be enough to give you the general idea of how it looks in Ireland coming into 2009.