Irish Mortgage Brokers Blog

This is an interesting debate on Public Healthcare v.s. Private v.s. Co-Operative healthcare, the most pressing point is that medical costs have outstripped inflation in developed countries, oddly, average cost has increased with greater output, and marginal cost is higher than average cost - which go against the normal rules of economics. The issue therefore must be something else surely?

Dan Mitchell of Cato (and the Centre for Freedom and Prosperity) is a guy I enjoy speaking and listening to as well, he is a great Libertarian thinker and regular commentator on Bloomberg, CNBC, CNN and Fox News. Here are two of his latest video’s, the first is on debt and the second is about money laundering laws.

In providing a blanket ban on repossessions our regulator has deployed the bluntest tool in the box with all of the grace of a Rhino on ice skates.

We brought in a new Governor and Regulator with a view to creating real change, but it seems that populism reigns supreme given that Mr. Elderfields first major move since taking office was to give a one year blanket ban on repossessions - that is a textbook mistake.

Everybody accepts that the incentives in life are carrot on one hand and whip in the other, when it comes to arrears the carrot is that of getting your payments back in order, keeping your home, and feeling secure, the whip is that the bank will take your house. When there are no repossessions allowed there is neither whip nor carrot, you will keep your home, securely protected by unthoughtful legislation, and payments…. if you don’t make any you can still walk away after 12 free months.

When deposit rates drop and mortgage rates rise, you can thank the person who doesn’t pay their mortgage in part for this. Cruel? Yes, but banks wouldn’t be taking drastic measures if people were repaying their loans, and the frustrating part is that you can’t really hammer a bank with a ‘NAMA’ argument because those assets are removed from them and are not the root cause for rate hikes/deposit drops.

Essentially you may as well pay your neighbours mortgage, and the problems don’t stop there.

If people don’t make payments in a year, what incentive is there for the people who are struggling to repay to stay up to date? When you have several creditors hounding you the one shouting the loudest gets the response, really, people should be telling their credit card and unsecured debt holders to get stuffed, now they can do the same to their mortgage provider and not risk being kicked out.

That sends the wrong message out to everybody. It also shows that the regulator is willing to use carpet bombing in a situation where precision bombing would be more suitable. It isn’t a solution, in fact, you are likely hurting many borrowers even more by letting this happen (more on that later).

If banks have collateral that they want to repo’ out (for funding) then there are certain arrears/non-performance levels, above which counter-parties don’t want to take the collateral - that is what brought down Bear Stearns. If our banks are forced into allowing arrears to fester it will increase their risk, their credibility suffers as does their credit-ability: namely, they will be reliant even more on a state guarantee which is ultimately a cost to the taxpayer.

The sub-prime lenders were actually very honest in some respects, if you don’t pay your mortage they take your house, now we are forcing them to be part of the process, and yet they are not guaranteed by the state, nor are they getting a bailout and their clients will find it hard to bounce back from their arrears.

That will make it worse, you see, there are (right now) over 6,500 mortgages in terminal default, more than a year behind, the survival rate for mortgages at that point is negligible - without outright debt forgiveness. With another year of compounding (bearing in mind that now ALL lenders are subject to the new rule) that number will swell impressively to the degree where we have to bail out borrowers, the only question is who, and how much.

If you go into arrears and then move out in two years, you don’t owe your current balance, you owe the balance, plus the arrears, plus penalty interest - and that means a person is deeper in the hole come the end of it all, in fact, it would be more merciful to kick a person out and they could then avail of cheaper rent and get on with their lives without the life-burden that defaulting debt brings with it, in essence, our state wants to keep everybody on the hook come hell or high water and the sole beneficiary is the banking system, not the individual. One year down the line many borrowers will owe even more, they will be deeper in debt, and probably deeper in negative equity as prices reach bottom, they will be stuck, and far from having helped them, we will have made them worse off, where is the sense in that?

It is vital to see through the lie, and the programming, you see, most would have you believe that everybody wants to ’stay put’, but that is a default answer when there are no options, if people were told ‘you can get out of this and walk away with a different solution’ you might find their attitudes changing, because now it isn’t choice of ’stay put and deeper in debt’ or ‘get kicked out onto the road’, rather it addresses other elements of the problem.

I am reminded of the song 16 Tonnes, in which a guy tells St. Peter not to call him because he owes so much money to the company store. I’ll put that in perspective, the ‘company store’ used to be a general store run by mining companies, they were often the only place to buy any supplies in the remote areas where mines would be found, they extended credit, expensive credit, and you could pay it back with work, well, for many people, they didn’t have enough to afford the prices so they borrowed and borrowed until they literally owed their soul to the company store. We are doing the same thing, but we’ll tell St. Peter not to call because we owe it to the banks.

Haven’t any of you wondered why the banks are not protesting at such a measure? They cry quite publicly when they are forced to take write-downs, they have every excuse when they jack up rates, and yet not collecting on mortgages that are owed, even after a year of arrears and we hear nothing? The truth is between the lines on this one, I’m not saying its a conspiracy, but it definitely stinks.

There are literally hundreds of solutions to our crisis, the most meaningless medicine would be the one we are seeing utilised, it doesn’t actually solve anything, it just puts the problem off for another year (winning votes in the process) and furthers my personal belief that we don’t actually have a plan, rather we have a hope, and all of that hope is predicated on a recovery happening sooner rather than later.

I pray for the knowledge economy, because the one we are currently being put through certainly lacks it.

I have maintained for some time that new world orders don’t occur overnight, and that even trends that may appear to be secular don’t necessarily work out if you extrapolate them into the future. Let me explain, in the 70’s everybody said Brazil was going to rule the world by the late 1980’s, they came up with all of the reasons for this, demographic, growth, the education and markets in place etc. then it just didn’t happen.

By the end of the 80’s when Brazil was meant to be the new world power they had been usurped, this time by Japan, now it was the turn of the Japanese to be ruling the world within the next 20 years, then far from taking over Japan imploded and they have struggled ever since.

Today we are told that it will instead be China who rule the world by 2020, and frankly, I don’t believe that this can happen without massive painful adjustment that would set them back years, and it also doesn’t accommodate for the fact that the USA views the world as having only one power, theirs, and they will find ways to dethrone any who stand to pass them by.

In this video there is some commentary you may or may not agree with, in terms of the bet on China, time will tell who is right or wrong, but it is important to remember that for every reason ‘for’ there is an ‘against’ and conversations on the Chinese economy are often lacking in the latter.

Labour Department numbers show that the Obama Administrations $787 billion stimulus was a flop. Instead of holding the unemployment rate at 8 percent or below, the jobless rate soared to 10 percent. Now there is discussion of second so-called ’stimulus’, which politicians are calling a jobs bill. However, making government bigger, this CF&P Foundation video explains, is a recipe for long-run stagnation and lower living standards, regardless of what the policy is named. www.freedomandprosperity.org

In the first clip, James Galbraith (son of the famous JK), economics professor at University of Texas, discusses whether a new tax on big banks is justified. Ken Bentsen, of the Securities Industry & Financial Markets Association, and Mark Calabria, of the Cato Institute, share their insight as well.

In the second clip Mark Walsh, of ‘Left Jab,’ and Dan Mitchell, of the Cato Institute, discuss taxing banks based on their risk to the system.

This is a fascinating clip about a concept I am a fan of - that of the emotions of investing, and how we make decisions - only did a post on it yesterday! The full video is available here if you want to check it out (c. 1hr long).

I think that the introduction of postcodes will usher in the foundation for property tax, and that the gains to be had from postal efficiency are not at the heart of the move toward a comprehensive postcode system.

Just to give the background to this post, the Sunday Tribune reported:

Residents in Dublin’s coveted D4 addresses have only two years left until their exclusive postcode is renamed by the Department of Communications, as plans for the new postcode system are finalised by Minister Eamon Ryan. The department plans to issue tenders for the system by Easter, but a delay has meant the code will not be in place until the end of 2011, and not early next year as planned.

Under the new coding system, areas such as Dublin 4 and Dublin 6 will be renamed under a new six-digit system, such as D04123 and D06123. However Labour’s spokeswoman for Communications, Energy and Natural Re­sources, Liz McManus, said the latest estimates for the new system show it will cost a minimum of €40m.

McManus has also said businesses will suffer further financial hardships as they will be forced to change their address records and data.”This is not the time to be implementing this system, and it appears to be nothing more than a vanity project for the minister.”

What does this have to do with Property Tax?…

In the budget speech Lenihan alluded to the coming tax on property, this quote is verbatim ‘In the Renewed Programme for Government we have accepted the recommendations of the Commission on Taxation on the need for a property tax. Considerable ground work will need to be done before a Site Valuation Tax can be introduced. Work will shortly begin on the registration of ownership and the valuation of land‘ (emphasis mine).

The idea of a ‘Site Valuation Tax’ means that a property isn’t taxed on what it will sell for, rather it is taxed based on the value of the site it sits upon, essentially the footprint of the property, and this is where Liz McManus is missing the point - if we have comprehensive postcodes breaking areas down into small parcels then you can start to apply a site value with meaning.

I like to use myself as an example, I live in Donnycarney in Dublin 5, suffice to say the value of the site I live on is nowhere near as valuable as the sites of my not to distant neighbours in Beaumont or Raheny, so you couldn’t have a site value tax for ‘Dublin 5′, but if that were to change, and instead my postal code was me and every house within 100 metres then it would make absolute sense to value them all the same (from a ’site’ perspective).

It would also mean that maintaining a national database on property site values would be far more simple, without them you would have to figure out the actual transactions in an area, see if it was comparable or not and test for proximity and other factors, it would be a quagmire. However, with smaller parcels you can use the average for surrounding parcels as well as transactions and other measures to get a really accurate non-distorting site value (there would be marginal distortion such as where a less-desirable neighbourhood meets a desirable - my own neighbourhood being a case in point where Donnycarney borders Clontarf, it would be important to have some small tinkering to take account for circumstances, but by and large huge tracts of land could have a common postcode and broadly common value).

Far from postcodes being a ‘vanity project’ they are fundamental to a rationally and well working database that can be used to get a letter to you, but also to impose a property tax.

Doubt it? O.k., then be cynical with me for a moment and ask ‘Do we have a badly functioning postal service where letters are regularly lost?’ (if you are in debt collection you might believe that to be the case!), do we need to get post to people quicker than we used to? And with the new codes, will it speed up the process or increase efficiency? Is the post office going to do away with half of their work force due to some new found efficiency? And most importantly, in a year where every expenditure going is being slashed, would €40m not make one hell of a difference to some pertinent project?

Unless you have your eyes closed then the push for postcodes ought to be screaming out the obvious at this stage…. postcodes = property tax.

We don’t need a better postal system, we won’t get to send letters for less due to postcodes. In terms of function, I have tested it several times, it works, really well actually, in fact, if you get an envelope and write on it ‘Karl Deeter, Dublin’ I’ll still get it. That’s how good it is, fact, so why all the effort to re-invent the wheel? Unless it’s really about something else?

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.

I thought this was a brilliant piece, oddly an archaeologist can also have quite valid input into the solution of a long term trend related problem in the same manner that an economist can. I haven’t seen an archaeologist take this kind of slant before, if you are of a naturally curious disposition then this video is well worth watching.