Irish Mortgage Brokers Blog

One of the great things about the internet is the democratization of opinion (it is perhaps also the downside!), and this piece is an interesting one that one looks at the distortion of certain activities in the area of job creation.

Doing so in a quasi ‘Cat in the Hat’ style, agree or not I have to admire the creative approach towards explaining political/economic dilemmas.

Feasta and the Smart Taxes Network are holding a conference on the 22nd & 23rd of September in the Mont Clare Hotel in Dublin 2. The people who work in Feasta are ideologically diverse (that is one of the things I really like about them!) and a bright bunch, the delivery, debate and data are all sure to be excellent. Hopefully we’ll see some of our readers there! (details below)

It is sure to be a treat, there are great speakers from around the world, to name a few:

Marshall Auerback (Roosevelt Institute Fellow & global portfolio strategist for Madison Street Partners, LLC)
Prof. Charles Goodhart (member of the Financial Markets Group at the London School of Economics & former monetary adviser to the Bank of England)
Bernard Lietaer (author of ‘The Future of Money’ & international expert in currency systems)

And of course we have our home-side team of heavyweights too! Fergal O’Brien (Chief Economist – IBEC), Richard Douthwaite (Sustainability Economist and Author), Dan O’Brien (Economic Editor- Irish Times), Paul Sweeney (economist with ICTU), Prof Ray Kinsella (UCD, Michael Smurfit Business School.), Constantin Gurdjiev (Adjunct Prof. of Economics TCD) and David Korowicz (Physicist and Human Systems Ecologist

Panels will be moderated by David McWilliams (Economist), Peter Matthews TD (Banker and Fine Gael TD), Prof. Terrence McDonough (Economics Dept. NUIG), Karl Deeter (Irish Mortgage Brokers), Graham Barnes (IT Currency Consultant), Deirdre de Burca (Former Green Party Spokesperson on EU affairs) and Emer O’Siochru (Architect and Renewable Energy Developer)

Date:                Thurs & Friday September 22nd & 23rd
Registration:     1.00pm Thursday 22nd Sept.
Conference:     Thurs 2.00—5.30 p.m
Friday 10am – 4pm
Venue:              Mont Clare Hotel, Merrion Square, Dublin 2.
Conference Fee:  €80 full conference, €60 one day,
€250 Corporate Fee,
concessions for Feasta and IEN members.

Please submit enquiries to conference [AT] feasta.org. Advance booking is essential.

I put on my thinking caps last week and drafted a paper called ‘Designing a Debt Relief programme with minimal moral hazard to address the Irish household debt overhang‘.

We were every happy with the write up it got in the Sunday Independent via Carol Hunt.

There is far too much talk of ‘moral hazard’ in the public debate to date, instead we should be also considering ’separating equilibrium’ (which is kind of the opposite of moral hazard - it’s the ‘pain’ that comes with moral hazard ‘gain’).

To do this you have to create a programme which works within some of the parameters of the existing laws (new legislation must still take account of what exists before it), look at the operational aspects of the scheme (how it functions in real life), design a general algorithm of the process and most importantly have an ‘incentive alignment’ which means that neither party voluntarily makes an action to the intentional detriment of the other.

So I failed if you take every metric together, but what does come out of this is that you could have a somewhat prescriptive debt solution that works rapidly, uses established methods and that is fair to both bank and borrower.

The statement that we ‘can’t afford the cost’ is a legitimized fallacy, one that if you repeat it often enough becomes true. Contrary to that is the fact that loans that cannot be repaid will not be repaid - if you accept that then there is a cost, the question is whose lap does it land in? The banks via writedown/writeoff or the taxpayer via additional welfare costs?

An easier way to think about this is as follows: A cost is a cost, and the question is really about who bears it rather than whether it exists or not. This is just another example of the banking system hoping to offset their costs on other parties, it is the ultimate rent-seeking behaviour.

I am hopeful that a few people will read this and critique the heck out of it (please critique here or post a link to where we can find the critique), because this is HOW the subject advances, to date it has all been on subjective stances as to what is ‘right’ or ‘wrong’. On the cost front we used a simple comparative cost rather than a macro-economic one.

If nothing else, this paper will cure insomnia!

I had a wonderful debate today on Newstalk where we discussed the rental market, Threshold sent in their Chairperson Aideen Hayden. The debate was very informed, in particular Aideen was very sharp in the area of tenancy laws, I learned a lot during this interview.

Naturally there are always a few corrections - she corrected me twice; once on sub-letting and again on a statistic that I took from the PRTB annual report (going so far as to mention that she is on the board of the PRTB and that therefore I was wrong).

Alas, I have to offer a correction in return to a PRTB board member & chairperson of Threshold who is currently undergoing her PhD in Housing and who has a degree in Economics (all of these things were mentioned to me in backing up her argument [on and off air]); see the graph below - taken from page 33 of the PRTB 2009 annual report.

This is not advanced mathematics, just add up the Green and Blue parts of the chart and you get the 65% that I mentioned that I mentioned where part or all of the deposit was kept by the landlord. At the same time her take on the matter was that I was wrong/inaccurate and that in fact in over 70% of cases the deposit is refunded in full or in part.

This is merely taking your figures starting at different ends of the number line.

I did mention this after the show and she still insisted I was giving misleading information and that due to holding a degree in Economics that she didn’t need to converse on the topic any further. My impression of her is that I was both highly impressed with her encyclopaedic knowledge in her field of expertise but dismayed at the lack of engagement when challenged on simple numbers by a practitioner - because the point made was both fair and accurate depending on which side of the fence you read it from - I actually tried to raise this as we were leaving studio (about the blue part of the chart being a crossover in both stat’s) but it was not taken up.

The other correction was when I said that you can’t just sub-let a property, I write this condition is written into leases based upon my interpretation of the 2004 Act. Aideen said that this was not true that you could sublet if you wish. Which brings us to (2004 Act S16 sub section k)  Tenant may not assign or sub-let the tenancy without the written consent of the landlord (which consent the landlord may, in his or her discretion, withhold).

My interpretation was that this had to be written into the lease as a clause for them to be able to do it automatically [or they would need permission] - in this case (quoting law) it shows that you cannot just go ahead and do this without consent.

I have to admit, I don’t often walk away from such debates disappointed, in fact they are often a great education (even if it comes at the expense of being wrong a lot of the time!), but Aideen’s statements that my points are wrong/invalid simply do not hold when challenged, and as both a board member of the PRTB and Chairperson of Threshold I would have expected more.

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

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

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

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

The other regulatory issue is Basel III.

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

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

Simply put, these are not compatible objectives.

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

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

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

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

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

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

Mainly because it sounds good…

If you look at the dynamic of the crisis to date you see the following flow (broadly but not exactly)

1. Sub-prime mortgages in the USA started to go under
2. Interbank lending froze as banks liabilities were unknown & collateral was of unknown quality
3. Interbank rates shot up
4. The crisis was not contained, culminating in the fall of Lehman which triggered a series of world events
the most substantial aspect of which was a loss in confidence.
5. Markets fell rates were dropped to record lows in the EU, USA and Britain.
6. Recovery began with several bailouts in the majority of nations affected.

and then….

7. This is critical - bank and private debt effectively became public debt, in Ireland’s example this was via our banks, in other countries it was in the same manner or via quantitative easing. Across Europe the ECB was a key facilitator of liquidity.

The debt has now, in many countries become a public debt issue, in Europe specifically it is a Sovereign debt issue, the like of which the US is not immune to having been downgraded by Standard & Poors rating agency.

This means that there is only one fall-back left… namely Central Banks.

We are at a cross roads in which about four outcomes are available

1. Default
2. Inflate (default via the back-door)
3. Extreme austerity - which hurts the poor/middle class the most
4. Grow your way out

In Ireland the fourth option is not available as it would mean getting growth above the rate of interest we pay on debt (because otherwise the trajectory of debt does not change). While we may run a current account surplus the issue here is of a Fiscal deficit that is still weighing down on the country.

The second option is unavailable because we don’t control our currency as do any of the PIIGS.

Austerity in the absence of growth has a negative growth affect on a nation, this may or may not be in our future - while it doesn’t make sense, it is also not an option that is or isn’t within our control so it may be the road we find ourselves on; it may make our Debt/GDP ratio worse, but it may also solve our debt/revenue ratio which could in time service the former.

While we often look at the macro-picture, it is worth considering the micro. Households are the ultimate economic unit and if we examine total private sector debt over private sector income we can get a picture of the ability of the private sector to endure…

If total private sector credit is c. €335Bn and there are about 2m people in the work force earning €35,000 per year then your average person is leveraged almost 4.8 times. Using mortgage criteria - you would be hard pressed to get a loan. Then strip out the unemployed and the situation looks worse.

The clean-up is only part of the greater ongoing issue, now the developed world will have to increase living standards at a time when growth prospects are low and governments are looking to cut deficits and spending.

There is a book called ‘great waves’ by John Fisher Hackett and points out long super cycles, normally inflation is followed by deflation then price stability, if history is to repeat itself we may be looking at a 20yr run of general deflation leading to price stability.

The ‘muddle through’ solutions that will be the likely political outcome, where definitive solution after definitive solution fail to work fully will be the order of the day unless we get the ‘big bang’ solution.

What?

It can’t just be Eurobonds because Europe is one of several key world players that are interlocked with everybody else, it would have to be Europe, the USA, Japan, China, Australia, Britain and Canada and c. 20+ other countries with strong reserve positions.

The USA is the engine of the world, while that may change in the future, it is the case in the here and now - and on a Gross debt basis if you factor in all state and local government debt the US is over 100% debt to GDP. Like all debt this must be balanced against the borrowers ability to service the debt.

Thus it is our belief that only a massive multi-lateral approach by several central banks might work - this is the ‘big bang’ we mentioned earlier. This would involve a multi-trillion swap line with all participants bailing in (lead by BIS/IMF with everybody else taking part - Fed&Treasury/BOE/ECB/BOJ etc.)

In a nutshell, there is too much debt in the world, the only viable players left are central banks, and unless we are going to explore options 1 & 3 listed above (or perhaps worse option 2?) then the massive wall of funding is the only way to do it, stop the panic once and for all, put out every potential fire by flooding the entire land.

Or we can just sit back and watch?

There was an interesting post on ThePropertyPin that I came across on twitter and in reading the analysis I was struck by the statistics mentioned regarding the rent supplement.

For a non-landlord, hearing that ‘rent supplement’ is above actual rents must seem like lunacy, heck, even for a landlord it sounds ridiculous. In particular when the average is 7% above the general asking prices according to the piece. But taking this post on the face of things merely circumvents the truth within the figures.

In fact, in many instance there are several factors at play, such as a local authorities inability to accept ‘asking prices’ as the real price, where these figures are negative it demonstrates that they know the asking price is not the ‘clearing price’ and therefore they can offer the client (rent supplement recipient) far less than that which is dictated by the market.

For instance, in every case given, Leitrim is not giving people enough to rent a property and its the same in Longford. In Longford the average of -22% of the asking rent is not there to make people homeless, rather it is the clearing price for the properties and it is working in terms of getting tenants into good quality buildings.

Am I sure? Yes, because a call to the housing department in Longford County Council verified that (just needed to double check!).

Now that we have debunked the fallacy behind some of Ireland’s worst counties when it comes to property stock why don’t we look at the shocking examples of overpayment which would justifiable whip people into a rage.

A 17% premium in Kerry on a one bed apartment becomes only a 2% premium if you go to 2 or 3 bed apartments. And let us not forget - every example given is for apartments, not houses. How many 1 bed apartments are there in Kerry versus the people who want to live in them who are on rent supplement? If a couple in Kerry lose their jobs do they move to a major urban area to look for work or stay put?

How many owners of 1 bed apartments are in the tourist letting business in small towns rather than the local welfare receipt business? These things don’t translate across, if they did you wouldn’t see such a drop in the premium on 2 and 3 bed apartments.

Wicklow demonstrates the same thing, Wicklow 1 beds command a 25% premium according to what is on the PropertyPin, but think about this: if you are getting money that you don’t have to work for then why would you opt for anything other than the maximum quality you could obtain for the allowance given? Add to that the cheaper properties are not in good locations and welfare recipients don’t all own cars so they need to be close to public transport and that means getting a really good 1 bed, not something halfway up a mountain, if they have children there are also minimum standards that must be met.

In fact, under the housing act changes of last year the local authorities actually carry out inspections now for properties that are to let and if it isn’t up to scratch you can’t rent it to a person receiving rent supplement, so it implies that standards must be kept high and therefore the cheap properties might be eradicated instantly.

Even this flood prone property in Bray is more expensive than the price given as ‘proper market price’ in the comparison so there is perhaps some ‘figure massaging’ in there too.

The majority of 97,000 recipients (people or households) on Rent Supplement live in major urban centres, namely Dublin, Cork, Galway, Limerick and Waterford, something I verified with a senior civil servant in the Housing Finance Agency. Looking at those areas you see the following:

It shows that far from being some big ‘give away’ that in the actual areas that the supplement is most needed and used that often it is BELOW the market asking price, meaning that in many cases the person actually has to make up the difference.

In particular the 2 bed apartments interest me because they are the key accommodation in ’standard letting property’ (we’ll continue to just breeze past the uncomfortable non-inclusion of actual houses in the example) and in every major urban centre the figures are negative or only up less than 1%.

In the three bed category it is an even bigger divide with a greater than -10% in 4 out of 5 urban centres.

And this is where it gets unpleasant. There is a risk premium to letting a property to people on rent supplement, the PRTB backlog is not just made up of tenants who had their deposits kept, and in those cases there are a percentage who will still lose based on the evidence provided at the hearing.

Rent supplement is not ‘guaranteed’ because in many cases the tenant controls whether it gets paid or not, and letting agents will tell you that in general a property let out to a family on rent supplement will have greater wear and tear - hence the ‘no rent supplement’ ads you see, implying that there is a genuine increased cost that comes to renting a property to a person in receipt of it.

So, when you look under the hood of the figures you find that in the major urban centres where rent supplement is used most that far from being a give away that in fact it doesn’t cover the price, so landlords either discount for the tenant or the tenant has to make it up themselves it is nothing like the image portrayed when you first examine the issue.

The propertypin has proved nothing, I don’t often visit the site because I was banned for having a ‘commercial name’ [three years after taking the name up!]); and you can consider this ’sour grapes’ if you want, or a rational examination of faulty analysis, whatever floats your boat!

There is a fine line between credible and incredible, and I don’t know how to spot it.

Once a month we head over to TV3’s ‘The Morning Show’ to talk with Sybil and Martin about the property and finance markets in an easy to understand manner, this month the topic was NAMA mortgages and household charges.

If you were listening to the Scott Williams Show on Q102 and heard Karl Deeter talking about personal finance then you may have wanted some of the documents he mentioned on the show so we put them all here for you!

First of all we have the quick introduction to the Mortgage Arrears Resolution Process or MARP (click on the image below)

The other document is the actual full code of the CCMA which you can get by clicking the image below.

And lastly we have the FLAC guide to the CCMA which is well put together and easy to read (click the image)

For any other questions on your personal finances you can give a call to 016790990 or email us via the enquiry section on our homepage (the purple box area)

And the special surprise! For all of the Q102 listeners…. Just click on Scott’s head and you’ll get one of the ‘insider’ tools of the trade!