Irish Mortgage Brokers Blog

We expected a 10% increase in mortgage arrears for the first half of this year, moving the total from 32,321 households to 35,531, however it increased 10.73% and the final figure was  36,438 [statistics for the last four quarters are below].

There is an ongoing inability for banks to deal effectively with people in arrears, both in terms of having the operational capacity or liquidity to offer debt relief in some form, and on the other side we have the Financial Regulator who is incrementally stripping away their power to enforce the mortgage via repossessions.

The arrears of the second half 2010 will go up again, there is no sign of either a slowing growth in arrears, or of a slow down in the rate of growth.

The only growth area in our economy at present seems to be in the deterioration of debt quality . . . but for the second half of the year it will not only be an ‘unemployment’ lead increase, rather it will be with the additional impact of lenders creating the problem via mortgage rate increases that have been independent of any European Central Bank moves (with an general move of c. 1.2% upwards in standard variable rates over the last 12 months).

The quarterly increase in arrears has been near or above 10% for the last three quarters, if this continues we can expect a further 20% by 2011 which would bring the total households in arrears to the region of 43,000 by year end and a likely figure of 50,000 by this time next year.

The solution for more than half of these owners would be repossession, in a functional market economy that is the end result. It is the fair termination of a contract where the borrower is unable to pay and it allows them to put distance between themselves and a financial obligation they can’t afford.

In the last 12 months 387 houses were repossessed, which is about 1% of the distressed stock, but according to the Irish Bankers Federation the rate of repossession by mainstream lenders has gone down in the last quarter to 86 properties, this is the third straight quarter of decline. How is this happening while the general mortgage situation is getting worse? Surely repossessions would go up at a time like this?

Unfortunately, the situation has turned entirely political, and the message that ‘keeping people in homes’ they cannot afford is the preferred solution, this in turn subjects them to endless calls, letters, form filling and stress in dealing with the banks on the basis that it keeps them in the home, but the statistics are showing that it isn’t changing the trend, or giving people the opportunity to get off a one way train. We have no metric of the family deterioration that occurs with financial problems, suffice to say, MABS, FLAC and other representative bodies say it is significant.

The question therefore must ask if a solution that keeps a person holding an asset they can ill afford to pay for is the humane approach, or would it be to release them from debt bondage as early as possible rather than to force them down a path that may have the same end result but with additional arrears interest and stress along the way?

We cannot be seen to encourage people to walk away from their debts, but we would be willing to say that when banks feel a deal may be turning against them in business that they will not continue to fund a project. We know of no reason for households to behave differently.

The rapid growth in mortgage interest supplement and applications for same is turning into a back-door bailout, non-performing loans extended by banks are being serviced by the taxpayer, banks are reluctant to take properties, not simply as a public service – that has never been their remit – rather it is so that the value of those properties do not need to be realised on their balance sheet. Banks assets are based on the value of the loans, not the value of the underlying collateral.

One view is that if you had a business and it didn’t look like it was working out a bank would have no issue in revoking credit lines or offering further support because in their opinion the proposal has soured. For the same reason it is fair to wonder why an individual would be asked to do precisely the same thing when the tables are turned?

A mortgage is ultimately a commercial arrangement and if it doesn’t work out the issue and duties are between the lender and borrower, not the lender, borrower and tax payer, but we are being dragged into the foray through mortgage interest supplement (taxpayer funded), through increased bank charges, through higher taxes which come about as a result of concern about our banking system/sovereign (and the arrears profile with lack of response is part of the issue), and directly by having a property market that is not adjusting in the time that it should.

When property markets reach clearing prices you have better odds of economic recovery (Kevin O’Rourke/ Barry Eichengreen and Agustin Benetrix all recently wrote on this topic), but we are not allowing this to happen, and it means that people who do buy today are paying too much because all of the properties that should be up for sale are not up for sale, it’s a modern ‘beggar thy neighbour’ scenario.

There are answers, but the cheap solution is denial, it has impacted 7bn of loans and only 500m in un-paids, compared to the likes of NAMA  it isn’t expensive, but the resulting reputational risk as a nation is pricey.

With our bonds auctions making news (in the past bond auctions were dreadfully boring affairs) and the recent S&P downgrade on the nation I thought it might be useful to take a look at some charts. What I believe is happening is that nobody truly believes we will default, Greece wasn’t allowed to do it, the ECB is backing auctions where necessary and yield hunters are happy to lend at an appropriate price (thus the over subscription of the issuance).

This is a chart of Credit Default Swap prices, the purple line is Ireland, Spain is white, Italy green and Portugal Orange. Often CDS’s are referred to as being an indicator beyond reproach, but it is important to remember that this financial derivative which is barely over a decade old is actually a barometer in the sense of insurance premiums, and the market is not infinite, so at any given time there may not be a matching number of sellers v.s. buyers and the prices go up, Irish debt likely has some of that playing into it - we already know that perceived risk drives prices up - just making the point that it isn’t the only thing.

Spain has been in terrible shape for some time, and unemployment at almost 20% yet we are trading higher, at the same time, Spain doesn’t have some magical recovery plan, and their banks are suffering (as are the Caja’s) but their debt market is far more liquid and has many more heavy players in it (such as Santander).

So it isn’t to say that default swaps are telling us the wrong thing, but rather that it is a reflection of many factors outside of risk of the underlying reference entity alone. We have also been trending in a loosely correlated pattern for most of the year with the PI(g)S. The end is not yet nigh.

The thing that does concern me however is the fact that the yield is rising on our debt. The thing I am looking at is the price of the bond. The yield (in blue) is the coupon (interest rate of the bond) relative to the price the bond is trading at. With a trading price of c. 93 (ie: it costs €93 to buy €100 of Irish debt) it is a problem because what people are actually doing is getting out of the trade and giving up future capital repayment. Remember: bond buyers are concerned about getting their coupon but above that is the concern that they will get their capital back.

When the price falls the yield rises (although the coupon is staying somewhat static), but again, the price fall is saying that at least some portion of the market are happy to walk away from the yield and even suffer some capital loss in order to get away from the trade.

Why then were recent auctions over subscribed? For a start there was ECB intervention, but that doesn’t explain all of it, it goes a little further. When an auction is held the buyers place bids, and in doing so they have certain prices in them, the bond seller will then sell to the lowest bidders to the extent that a the whole issuance clears.

In plain English: If you are selling €1,000,000 in debt you might get different bidders, one says ‘I’ll buy €200,000 at 3.5%, another says ‘I’ll buy €500,000 at 4%’ and a final one says ‘I’ll buy €400,000 at 3.7%’. What actually happens is that they will sell to the lowest rate bidder first (200k) then the full 400k of the one at 3.7% and then 400k of the one at 4% (the most expensive). And when the bond is cleared they take an average an announce that they cleared the bond at 3.78%.

The over subscription is at least in part due to yield hunters who think that there is money on the table, the bids that do come in are already elevated given the perceived risk, in return this gives the jitters to people already holding debt and they feel at least party obliged to hedge and thus CDS prices trend upwards, or sell their position and move to higher grade paper: hence the capital value drops. It doesn’t always stand that the market can have fear of our debt, yields that imply risk and yet massive over subscription, somebody somewhere is getting the message wrong, the question is who?

The ‘Rent or Buy?’ report was featured on RTE1 ‘Drive Time with Mary Wilson‘ yesterday, it was prepared by Dr. Peter Stafford (Independent economist recently taken on by the Society of Chartered Surveyors), Karl Deeter (of Irish Mortgage Brokers) and Frank Quinn (of Senior College Dun Laoghaire). In the report we ran six different future scenarios with a view to determining whether it made better sense to rent or buy a property.

The findings are in the report, you can download it by clicking on the image to the left.

Our findings were fairly consistent, showing that in almost every future scenario that renting makes better sense from a cost perspective than buying does. The times that buying is better is in an upward only market and a flat market.

That may help to put numbers on behaviour, because during the boom people thought prices would go upwards only and it is therefore reasonable to see why so many jumped into the market. It doesn’t get into the deeper causation but it helps to demonstrate this albeit ex ante evidence.

I want to give a very big thanks to the other authors, Peter and Frank, without them this report never would have happened, Peter keeps a great blog/site and his monthly macro reports are well worth signing up to check out his site. Frank teaches valuations in Senior College Dun Laoghaire and although he doesn’t keep a site himself, we have been chatting about him contributing on this blog from time to time, the prospects of which we are very excited about!

‘Research on Real Life’ is (in my opinion) the best kind there is, we hope that this report helps readers to make a decision that they may otherwise find difficult to answer, of course, not everybody buys a house based on minimum cost to themselves, if that were the case we’d all cram into bad neighbourhoods and rent there [albeit that paradoxically that would drive up rent prices in those areas!], having said that, this report should help to debunk some of the property spin you may hear from time to time.

If you want to get a calculation done you can contact us and we’ll send you the report all you have to do for any scenario is the following

1. Send the price of the property you are considering
2. The rental price of a similar property, or the one you are renting now
3. The rental price scenario you envisage over the next ten years in terms of % change per year.
4. The purchase price scenario for the same period, giving the % change per year +/-

From there we can let you know the cost of buying now, waiting five years, or renting only for the next ten years. There are some flaws in our calculations as there are in any calculation that makes assumptions but we can tell you about them so you are aware of them.

Happy reading!

I waited a long time for a conversation with Tony Boeckh, his newsletters are a must read for anybody looking to keep a finger on the pulse of the markets both in the USA and internationally, you can sign up for free at the homepage.

Tony’s career has spanned over 40 years and during the entire time he has focused on banking and credit, starting in the Canadian central bank, then taking over the helm at the industry stalwart publication Bank Credit Analyst. His recent book ‘The Great Reflation‘ is a culmination of thoughts on the future of finance and what trends we can expect, and perhaps more importantly, the trends that investors can profit from.

My questions are in bold.

You look at the world in a very macro sense, what indicators, given the span of your career, have you found to be the best guides? Interest rates? flow of funds?

“That’s a never ending question, I am every eclectic, and look at a number of things, liquidity and the rate of change of liquidity in particular is important and that is what drives markets, but how do you measure it? There are different ways to do that, but it is a slippery concept and the measurements are subject to difficult constraints, data can be wrong, or the financial system evolves in ways that your old harvesting methods don’t pick up”.

So what do you watch for in liquidity?

“For what are banks doing with their assets and liabilities, watching the banks gives you a much better handle on what is happening in the system because, at least years ago, banks were the main part of the financial system 70% or more but that is reducing so we have had to constantly change our approach. Corporate liquidity matters as well so we look at liquid assets to total assets, for market measures a good one is the US Treasury yield curve”.

“When it is very steep it tends to be a good indicator, flat or inverting means there is trouble coming”. He focuses on the Treasury Yield curve, or the commercial paper/corporate sector yield curve, believing that generally they tend to give a similar answer, but that any one measure on its own can be very deceptive, he used to look at the debit/loan ratio [cheques cashed against bank deposits], but that is no longer possible.

“in 1930 the debit loan ratio showed the economy was getting worse. Then the Fed stopped publishing that series which was a real pity because it took a key metric out of the market. A lot of people look at money supply and from time to time that has been a good thing to watch, but which measure do you look at? M0 (monetary base), or M2 then M3/M4? Money supply can be misleading, and often random”. For the most part he is a big fan of looking at the asset side of the bank balance sheet and looking at what they do with their money.

“Bank holdings of securities as a percentage of total bank assets is important, if they are adding to liquid assets its an indication the system is becoming liquid and is good for financial markets, on the lending side, if institutions are selling securities to expand loans it means money is getting tighter, if the Fed is lagging behind on rate movements they may not be raising rates but the system is getting tighter, and that shows up in liquidity long before it is evident anywhere else”.

Banks in Ireland are more likely to sit on bonds and make better returns than they are to extend lending at lower margins, what do you think of that?

“Sitting on paper after a recession is typical, so they [banks] buy bonds instead of extending loans, they increase the least risky assets, that is actually a bullish indication, the system is becoming more liquid, after a time lag they start lending. Liquidity is a leading indicator, some forecast by taking a view on the economy, but don’t forget: the market forecasts the economy not the other way around, that is the biggest issue that people face in trying to understand the economy”.

So is there a danger in trusting economists too much?

“Absolutely, a lot of people are pure economic forecasters, and some are very good but the good ones look at different things: talk to David Rosenberg sometime- he is brilliant (and also Canadian!) he has moved back to Canada and he’s a very good economist, but he stayed bearish during the entire recovery over the last 18 months. I think he did this because economic indicators are only one side of the market, he may yet be right, but he missed a huge rally that was staring liquidity watchers in the face”.

“The stock market, ultimately is determined by profits, which is driven by the economy but catching the cyclical swings makes you late if you watch the economy only. Don’t worry about where the stock market is, worry about where profits are, watch that and you are watching the real indicator”.

O.K. but where do you look for that?

“Bank balance sheets, household balance sheet, corporate sector balance sheets. A series of indicators relate to liquidity, sometimes the reading is good, other times it is confusing”, then he looks at other sets, valuation as an adjunct to other things, but he readily admits that it doesn’t always tell you about turning points.

“Negative changes in liquidity with market decreasing means you’ll want to pull the plug a lot faster. The fourth key thing is psychological factors, which tell you a lot about risk. At the bottom of the market in 09′ the valuation was good, the psychology was as bearish as possible and liquidity was going straight up while the technicals looked washed out… That was a screaming ‘buy’!”

Is the reflation going to be monetary? If so how is gold in a bubble at the same time?

“Nobody knows how this will play out, the great reflation is an experiment. Private debt became public debt and now we are in act 2, Greece is the canary in the coal mine, it told the world what happens when you have too much debt, there is a huge shift toward austerity and that is happening to different degrees in different countries. If we get the fiscal restraint required it will put huge downward pressure on the economy, and that impacts on monetary policy, with a ZIRP you can’t go lower so government’s can buy debt to drive down interest rates which will ultimately lead to much higher inflation. Gold bugs who have been forecasting this see it as the buy signal”, but he thinks that the risk is much further down the road, the big threat is deflation and will remain so for some time. “Gold might come through eventually, but for now its a crowded trade”.

Do you believe in locomotion? where large economies recovering will pull smaller economies with them.

“It is happening, in particular in developing countries, the balance of power is shifting and doing so rapidly, that is going to continue, there is no way around that, western countries will be at 1-1.5% growth a year. most of Asia will be at 7-8%, the Chinese are trying to diversify into real assets with their dollars, they are buying companies, mining, energy, so if the US goes the inflation route then the Chinese will ride that wave up indirectly”.

“There is an unspoken dance between to the two nations (US and China), the US might devalue but China will hold companies and assets that benefit from that, ultimately it is political, if it wasn’t they’d (the USA) let unemployment go to 20% go back to fiscally orthodox solution, but politically they can’t do that.

Was the crisis was driven by the ex ante expectations of bailouts for ‘too big to fail’ institutions?

(This is a very economics based question which was put forward by Trinity College maestro Constantin Gurdgiev, so in plain-speak it is as follows: was the crisis partly created by a belief beforehand that investors were sure that even if things went wrong, that the government would intervene with a rescue or bailout package for financial institutions and therefore it gave them the confidence to take bigger levered risks)

“The moral hazard factor… ‘Yes’ and it has been building for 30 or 40 years, there has been a progressive pattern of governments bailing out the economy, after the Great Depression the government was perceived to have responsibility for full employment, there was even a full employment act in 1946. Since then during every recession they run in, pump money and run deficits. The deficits started in the 60’s, Penn Central, then Franklin National Bank were saved, in the seventies it was car maker Chrysler, so it was evident that the government would bail everything out, then in 87′ Greenspan pumped the markets. This trend has been building, meaning people took on more and more risk, the recessions became shallow and that made people think the system was stable so it was o.k. to take more risk, it all falls down and what do they do?… The biggest bailout in history”.

How will balance be restored in the world? My belief is that the USA will eventually rip off china via a devaluation which will drive up exports and reduce deficits, it cures all ills and has hegemony to back it - what do you think?

“Ultimately the rubber meets the pavement on China and the USA, at the moment there is a ‘balance of financial terror’, the US are saying ‘don’t like our currency? don’t hold it! The Chinese don’t want devalued Dollar but then Euro collapses, so now they think ’should we hold yen or sterling? At the same time Russia is buying Canadian dollars for reserves, China can’t do that (they missed the boat so to speak) so they are stuck with the USA and they have all these dollars and they can’t dump them, if the dollar tanks then China tanks.

“Currently Dollar is the best looking horse in the glue factory. This is the fascinating issue; ‘how does this play out?’. The international monetary system and how governments approach them are THE story, the developed countries economies are going to be gravitating toward 1-1.5% GDP growth. With low growth and real interest rates of 2-2.5% the debt/gdp ratios are hard to control”.

“When you try inflating away the debt the average term to maturity gets shorter and shorter, at present its around 4 years, in a fiscal orthodoxy they should be issuing long term bonds, that is the sensible idea, it also gives them protection against inflation, the shorter the term and the more the perception of inflation the quicker it inflates interest rates and that is where you get the death spiral. The US government won’t go there willingly, central banks don’t inflate because they want to, they do it when it is the least bad alternative. If the US goes for orthodox policies while unemployment is going up then you have a big problem, debt monetization etc. In 2009 they started that but they will have to go back and do it again”.

How closely linked or correlated do you believe the housing cycle and business cycle to be?

“In the past they were closely correlated, but that seems to have broken down, the US one is not very different from that in Spain and Ireland, some are more extreme, it will take years to bring that out of the system, then you have demographics working against the housing market, so many people bought homes based on rising prices and now they are under water, pension funds are down, and there is nowhere to bounce from, people will start selling their home earlier in this scenario to raise money because their pensions are not worth what they expected them to be, supply will swamp demand for a long long time, we  simply overbuilt”.

If you could give three golden rules to people who wanted to delve into the kind of inisight you have what would they be?

“That’s a tricky one, I suppose in terms of early training- work at a central bank, that is the best way to learn how the financial system works”. His training at Bank of Canada was invaluable. “Be eclectic and flexible, the business of analysing and forecasting is more of an art than a science”, he has always been sceptical of people building models, he wasn’t into the quantification/quantitative systems but people tend to accept them or believe them because modelling is hart to refute, but equally it just doesn’t work in real life, hence his profound belief that its an art, not a science. “The different schools of economic thought matter, Keynesian’s, Austrians, Monetarists, but you must apply the best of each one depending on what is happening at the time, and never under estimate the stupidity of central bankers and government officials, the paradox is that these people are bright, high IQ’s, PHDs, and they can make the biggest blunders you can think of. the Federal Reserve is a great example”, he catalogues their mistakes in his book, “the only periods when it worked well was by luck”.

“Politicians also have huge capacity to do stupid things, and work out of self interest. It’s like they (the USA) have a permanent minority government, nothing ever gets done until there is a crisis”, Churchill once said ‘You can count on the yanks to do the right thing, but only after they have exhausted the other possibilities’. “Go on what they do not what they say, ignore the verbal noise, for investors you have to be the CEO of your own portfolio, don’t run with the herd”.

Do you find any economic school of thought represents the lunatic fringe?

“The core of the Austrian view is solid but the supporters can sometimes be a little out there, the problem with Keynsians or Monetarists is that they never look at the balances sheet. Supply side guys can also be crazy”. He also thinks that (especially in the US) the system is flexible, that below the surface there are hard working americans looking to correct things, get efficient, looking for new opportunities, the micro can be far better than you think, don’t ever dismiss the micro or anecdotal. “The best thing the government can do is not screw it up”.

ENDS

I didn’t get to type everything Tony said, the conversation lasted about 45 minutes and was a really interesting one to be part of, getting a world view from such a well known analyst, and in particular some insight into how he thinks is a huge benefit for a practitioner and I hope that to some degree that I have shared that with our readers. His book ‘The Great Reflation’ will be reviewed here in the near future.

A recent report by Moody’s pointed out that increased negative equity will cause a rise in arrears. The commentary surrounding this (in Ireland) takes the view that correlation is not necessarily causation. That people in negative equity won’t automatically go into arrears unless they cannot pay, that negative equity of itself is only an issue if you lose your job or have to sell. This is a valid opinion but it ignores the operational aspect of a household in respect of the way that they react when financial difficulty occurs.

There are several hundred thousand households in negative equity, and about 35,000 in serious arrears, how many of those people would not be in arrears if they were not in negative equity? The answer is: how ever many would have sold their house as a solution.

The first thing many people do if they know they are going to be headed for a situation where they stand no chance of paying their mortgage is to put their home up for sale, in the past this simple act disqualified you from receiving mortgage interest supplement (MIS), and that has thankfully changed, but you can’t put your house up for sale when you are in negative equity because the sale will not clear the mortgage and in many cases the bank will prevent this from happening. They will instead push for full repayment of the debt, an application for mortgage interest supplement and while this happens the individual goes further and further into arrears.

In the past the majority of people had some equity in their home, and that meant that arrears might eat into the equity, and if they decided to sell then they would be out from under the debt and the arrears. However, this is no longer happening, which is why 21,000 households are more than 6 months behind in payments and a further 7,000 have not made a payment in a year. They are stuck where they stand and little can be done about it.

And that is the way in which negative equity and arrears are perhaps more closely tied to one another than we often hear about, where one actually can cause the other.

Sometimes talking about present values, par and yield to maturity will catch even a well versed practitioner off guard, but to see a pricing model in action helps and that is precisely what this video does - in this clip an assumed future rate is discounted into present values and we arrive at the bond price. Well worth watching (twice!).

We were thinking of changing the way that brokers operate, by saying to our clients ‘our service comes at a price, we’ll advise you on any lender in the market and be totally independent, if we place your loan with one that pays commission you can set that against your fee, and if not then pay the fee’, doing so in the belief that totally transparent and independent advice is a good thing, and something that everybody wants, the broker, the consumer and the Regulator.

Sadly this is not the case, instead the Regulator (soon due another name change to ‘Central Bank Financial Services Authority of Ireland’) is relying on the letter of the law in the Consumer Credit Act of 1995 to ensure that brokers can’t give best advice. This is an example of total regulatory failure.

The actual portion of the code is S. 116.1.b which states ‘A person shall not engage in the business of being a mortgage intermediary unless— ( a ) he is the holder of an authorisation (”a mortgage intermediaries authorisation”) granted for that purpose by the Director, and ( b ) he holds an appointment in writing from each undertaking for which he is an intermediary.

The guidance given by the Regulator is that this is to be interpreted as meaning ‘you cannot advise a client on any mortgage unless you hold an agency with the bank/lender which you are advising about’. In other words, you can only offer advice based upon the agencies you hold, it seems many of have been breaking the rules by being honest with our clients and letting them know about mortgages that we cannot broker, and in the current climate that honesty is wrong and deemed to be outside of the remit of an independent broker.

So why bother forcing the industry participants to have certain qualifications, minimum standards, and undergo continuous professional development (CPD) if they are not going to be able to give the advice they are trained to give? This makes a donkey of common sense, and the CBFSAI (Central Bank Financial Services Authority Ireland)  would do well to remedy the situation sooner rather than later.

How do you explain such an anomaly? What is wrong with advising a person to go where ever the best deal is available? This is yet another example of regulatory failure, and sadly, the state are forcing advisers to be tied into the banking system by not allowing them to advise a client on any mortgage product outside of those for whom they hold an agency.

You can’t become a mortgage adviser unless you hold a letter of appointment with a bank, surely this is a mistake? How are we ever going to move financial advice away from commissions if you have to be in the commissions system to offer any advice? To do so without the full authorisation is illegal.

We can only live in hope that many of the irregularities in how regulation works in practice can be ironed out because the primary loser at this point in time is the Irish consumer, the very people for whom the Regulator was established to protect.

Today we were delighted to do the first of what will hopefully be a regular slot on the Business section of the Breakfast Show on Newstalk 106 with Conor Brophy. The topic today was that of Site Value Taxation (we had an article in the Sunday Times about it this week), property prices and then a mention of our Investment Property Profile which was done in association with PropertyWeek.ie and ODKM Architects in Terenure.

We looked at some properties in the Dublin market that might obtain a 7% yield, they require some work (sweat equity!) and although they all didn’t come out at 7% some were above 6%. This is helping to reinforce the believe that the market in general has not rationalised but that in particular you can find good value if you look for it.

Aidan McLoughlin of of the Independent Trustee Company was also there with some fascinating insight into non-bank lending that is occurring whereby pension funds are lending to businesses who cannot obtain credit via the banks, this is some compelling evidence that credit is not forthcoming to SME’s in the way that we are being told that it is.

[To see the Investment Property Profiler report click on the image]

We were very pleased to see that we were mentioned in the Sunday Times ‘Money’ section this week in an article by Niall Brady in which he examined the implications of reduced competition and increased regulation in the financial services market in Ireland.

For our part we were asked about mortgage credit and had this to say: ‘Karl Deeter of Irish Mortgage Brokers said: “Lenders are using every blunt instrument in the box to frustrate loan applications. One of my clients was turned down on the pretext her employment wasn’t secure. She works in reinsurance and, because of last year’s record floods, her employer recorded a loss. It is part of a global reinsurance giant, though, that makes €3 billion in profits a year. That’s the type of stupidity that borrowers are dealing with.”

First-time buyers must have at least a 10% deposit and a record of saving to back it up. “Banks aren’t interested in parental gifts or guarantees,” said Deeter. “They are interested in your ability to meet the repayments — not somebody else’s. Make sure you pay your rent by standing order, not cash or cheque, so that lenders can see the money leaving your account’.

We are of the belief that lenders are going to continue to contract credit in 2010 but that a new trend will arise in which they start to extend credit more freely but at much higher margins, this will help to offset the losses being made by trackers but they will need to wait until they have dealt further with their bond issues and also that of the arrears on the book, to see how deep they run.

I was interested in the front page of today’s Independent in which Charlie Weston broke a really big story about Irish banks being in advanced stages of designing ‘Negative Equity Mortgages’ (this is vastly different than the Negative Equity Loan/Short Sale Loan we have discussed previously). Essentially the bank will allow an individual to carry negative equity out of one property and move that onto another one within certain parameters.

This practice has already existed in the UK and is offered by Nationwide, Coventry and RBS, the schemes have not proved to be very popular, in part because of the stringent underwriting required. It is one thing for a client to fall into negative equity but another to actually facilitate them in compounding that fact and taking a further bet on their ability to repay. What do I mean by that?

First Loan: €200,000
Value: €150,000
Neg/Eq: €50,000

Then the €50,000 shortfall is passed into a second loan of (for example) €200,000 (which by nature will essentially be a 100% mortgage) and now they owe €250,000 with €50,000 negative equity in place the day they close.

In this case the borrower now owes more but they have a different property which they are more happy with and underwriting will ensure that they can still service the loan, but how many people will be willing to take up such a product? And who will the bank be willing to lend to on this basis? Credit is already tight, to trust a person with yet more money and negative equity in advance is a gamble, this beast is the evil love child of 100% mortgages - the very brand of lending that was a factor in the property bubble.

The sole saving grace is that people won’t opt for it, in the UK the uptake has been incredibly low, it is a niche product with little in the way of demand, it will help the people who are happy to use it and will be of little use to the average borrower, having said that, the Regulator recently said that banks have failed to learn their lessons from the crisis and that they don’t lend enough to business and rely to heavily on property, if this is the latest in financial innovation can we truly say they are learning anything at all?