Irish Mortgage Brokers Blog

I don’t understand why a person would want to pay for something they could get for near free or where the charge for said thing is difficult to enforce. You see this every day when people park illegally or don’t put money in the meter, there are clamper’s out there but they don’t catch the vast majority of offenders.

That is why I see two articles in the Irish time that seem to contradict the likelihood of the each other.

Article 1: Council flat purchase scheme to start in 2012
Article 2: Tenants owe city council €21m in rent arrears

In the first one we are told that Dublin City Council (in particular) are close to bringing out a ‘tenant purchase scheme’ via the 2009 Housing Act for people who live in flats. The scheme has a few things that may hamper it…

For a start 65% of the tenants need to agree to having the flats put up for sale and 30% must then follow through and purchase, if this doesn’t happen within 3 years the scheme lapses for that complex and everybody remains as local authorities.

The only incentive might be to almost give the properties away. In one respect (for long term tenants) this is justified because they were locked out of being able to buy their properties in the past, in another respect it’s just a large wealth transfer for which nothing was received.

Local authority loans are on average 33% in arrears - and that figure has likely gotten worse. Does it make sense to bring more people into a market that is already a slaughterhouse? Athlone town council for instance has an arrears rate of 65%.

Dublin City Council social housing tenants (as opposed to Shared Ownership & Affordable Housing) have arrears in 25% of their tenancies and are owed more than €21,000,000 in unpaid rent. The average time in arrears is almost one year (50 weeks). With 40% of those in long term arrears unwilling to co-operate with new repayment agreements, there is a near zero rate of outright evictions.

So why on earth would anybody want to buy their own flat? The people I know that live in flats by and large don’t want to live there forever, and in one respect many council owned flats occupy some of the best real estate in the city - so prices may well be unaffordable unless there is a give away.

If people can afford to buy a house then why are they not moving on from social housing to make room for the 100,000 people who are on the waiting list? This is also unfair because it bestows a benefit on those who are occupants based upon the year they were born in rather than upon current need.

This at the same time as we see property taxes coming in, where waivers are already in place for local authority tenants, purchasing means you’ll end up paying more even if only by virtue of not getting your property tax waiver any more.

Personally, I think it would be great to see higher levels of ownership in social housing, flats in particular. Having spent the last decade in the inner city I believe that one ongoing aspect of policy that dis-empowers city dwellers in flats is that they don’t have a sense of ownership on their homes because they can’t buy them even if they want to.

However, in the current vista there is no reason to believe that this scheme aimed at the 12,000 flats in DCC ownership will see a sizeable uptake unless there is a large financial incentive to do so and that means giving up a large portion of state wealth in many prime real estate areas.

We have made a few more bold predictions in our ‘Mortgage Market Trend Outlook 2012′ and reviewed how wrong many of our 2011 forecasts were as well.

Some of the main points thus far are:

1. That mortgage lending bottomed out in 2011.
2. That IBRC may take on some tracker loan portfolios to de-risk state owned banks (as the state already owns these loans entirely anyway).
3. That rates for existing AIB borrowers will have to go up but that for new borrowers rates may come down with changes to how prices are charged depending on risk of the proposed loan.
4. That deposit rates will start to drop.
5. That up to 25,000 mortgages will be deemed ‘unsustainable’ and that the ‘won’t pay’ contingent of arrears cases may be as high as 1 in 5.

We hope you enjoy this report, we in turn hope that we get some of the calls right!

Many thanks,

Irish Mortgage Brokers

Inside Job, Narrated by Matt Damon (Full Length HD) from jwrock on Vimeo.

We took part in TV3’s Property Watch again this month, when we covered the topics of price drops and the reaction to the ESRI study which looked at the forecast for property in 2012.

We were talking about personal finance coming up to Christmas on The Morning Show with Sybil & Martin last week. Research has shown that between €550 and €900 euro is the average spend, making it a very expensive time of year. We gave the viewers some very simple ideas that should make it a little easier to avoid the new year blues by spending wisely in December!

We touched on this topic over on MyHome.ie last Friday in our weekly blog contribution to their site.

It is important to look at this from a few perspectives

1. Regulation and the role of the Regulator
2. Past decisions by the Regulator
3. Politics and policy

1. Regulation and the role of the Regulator: The idea of regulation is not for price control, rather it is about prudential control. As galling as it seems to everybody, the Financial Regulator is not (nor should they be) empowered to tell banks what prices they can charge. This is sickening given that we have spent €10,000,000,000 this year alone via the NPRF in supporting our banks (€8.8bn to AIB and €1.2bn to Bank of Ireland).

Readers, if you know of other jurisdictions where regulators set prices please let us know! The idea of a Regulator is that you pay for them in return you get the avoidance of systemic risk, that is the fundamental reason for their existence and for bearing the cost of having them. The same way that we pay for police in order to have a safer society where there is consequence of actions.

That our regulator has failed and was unfit for purpose is a given, however, placing new powers in them that can force banks to charge certain prices is utilitarian - where the end justifies the means - rather than fair and prudent. If we are to sell our banks they must be profitable, higher rates are one route to that (the others are dropping deposit rates and firing staff).

No investor will want to buy an Irish bank if they cannot control their own pricing, even if pricing is controlled and certain promises given or undertaken not to meddle in the future, the first time you do so it destroys your credibility. And that is where Government erred. They thought that the warning of a stern telling off would make banks change their ways.

It failed, leaving the Taoiseach with egg on his face and the banks with a reputation as bad as ever, while the ball is now in the Regulators hands as they were asked to ‘let the Government know if they need extra powers’.

[Irish Times] “Mr Elderfield has previously stated that his powers of intervention are limited when it comes to forcing the banks to pass on mortgage rate cuts. The Government’s legal advice is that the roles of the regulator and of the Central Bank are independent and the Government cannot direct him to take action.

A source said it has instead “invited” him to consider the outcome of the meeting and, if necessary, make a request to Government for additional powers.

Mr Gilmore denied the Government was powerless in the matter. “No, this has some way to run yet . . . we will take further action if necessary,” he said.”

2. Past decisions by the Regulator: It is interesting to note that the argument about rate setting has already been raised with the Regulator, only it didn’t make headlines the last time. The complaint was via the Professional Insurance Brokers Association and the basics were that ‘dual pricing’ (where prices vary according to distribution channel) was wrong and should be prevented.

The regulator said and did nothing about this, their return comment was that ‘The Regulator has no input into pricing by banks’. So if that precedent is anything to go by then they will not intervene this time either. And that is the key issue- Kenny has passed the ball to the Regulator and now they will be the ones to be made to look bad by appearing impotent. Or worse yet they will seek powers that will make the financial services vista even worse in Ireland.

If the Regulator does get involved in pricing issues it will open a larger can of worms than presently expected, next of all people will dispute their TVR’s based on LTV’s, brokers can bemoan dual pricing etc. etc. It is a downward vortex when you make a Regulator responsible for pricing.

3. Politics and Policy: It is not disputed that people are unhappy, upset and morally outraged at banks getting a cut in cost and not passing it on. However, this is primarily perceived rather than real, because banks are paying more for money than they have existing loans out at (for the most part, and largely due to the 400,000 tracker loans out there).

The question we are asking though is ‘what part of politics requires price intervention?’. The natural byline is ‘well we had bank intervention?’, that that is true (we made a mistake in how we did it, a big one), but mistake ‘A’ is not a justification or foundation for Mistake B if you operate on a rational case by case basis. Furthermore, the likes of AIB who are ‘the bad guys’ are still more than 2% cheaper than PTsb who did pass the rate cut on! So should politicians risk any political collateral they have on diving into this?

Why instead are they not fighting the most expensive providers and asking them to come in line with more competitive banks, this ‘pass the rate cut’ is all about the appearance of power, and the flexing of muscle rather than about genuine leadership and policy, sadly it would seem that our leaders are willing to spend considerable equity in optics when the results are unlikely to be forthcoming.

Perhaps the most pertinent question is ‘what are they hoping to achieve?’.

In this piece by Stephen Murphy of TV3 we spoke about the issue of Regulators enforcing pricing and the fact that it is not a common practice.

This piece by Claire Brock of TV3 was about Mario Draghi’s unexpected rate cut of 0.25% last Thursday.

The debate about whether or not it will be passed on still rages. We spoke about that particular issue the following day on both LMFM and Newstalk.

I hope you enjoyed the first round of economic history from 2008 to 2011, I think it is time for round 2.

Alan Greenspan was on CNBC last week and his interview is a very interesting take on Europe - which happens to be the first thing he looks at every day (European Bond Markets). Meanwhile Lloyds are reporting that the risk of a 2nd recession in the UK are higher at c. 25-30%.

Greece is the crisis that just keeps giving, The Telegraph has the usual Eurosceptic line but it isn’t about being smug any more. The Greek referendum call of recent days came out of left field and while it may never actually occur the political optics show that the Aegean issues are far from solved, along with the replacement of military officials (the interpretation being the fear of a coup).

And German joblessness is higher for the first time in 2 years, standing now at 7%. The rate of inflation in Germany is currently 2.6% (HICP at 2.86%), having remained over 2% since January 2011. The issue with that (and unemployment that wasn’t growing) is that it lead to a ‘Goldilocks delusion’ where not cutting rates and fiscally conservative policy was considered best. It seems now that Germany has not decoupled from the rest of Europe.

Growing resentment about profligate EU members along with some fear inducing inflation as well as rising unemployment make for a very grumpy Germany, it does not bide well for negotiations. Perhaps hindsight will equally not bide well for the Germany that handled the Great Recession so well (from an employment perspective) either?

Of course at home here in Ireland we are about to pay €700,000,000.00 to speculative/junk rated bond holders who in any normal circumstances would be jumping for joy at a 50% haircut. Politicians are walking out of the Dail due to the lack of discussion, and bingo halls being raided by cops [irrelevant but a sign of the times!].

The Central Bank of Italy (Banca d’Italia) €-Coin ‘one figure for all European GDP’ statistic is also showing a sharp down-trend at present, negative for the first time since September 2009. Italy, with the worlds 3rd largest debtor at €1.9 trillion Euro, and winner of ’scary chart of the day’ almost every day regarding their bond spreads v.s Germany.

I don’t know of any model that can capture and create metrics out of the information flying around at present. There are interesting twitter based investment tools that use crowd sourced information to imply the trajectory of the markets, but I’m not privy to being under the hood on those.

What I am trying to say is that all of this news doesn’t paint a pretty vista, and in this analysts opinion the October/November 2011 period will be another big turning point or cusp. I last made a call like this in January of 2008 (and while it seemed grim at the time it was understated in retrospect), and during that time I went entirely to cash and advised all of our private clients to do the same until late 08′ early 09′.

Today I am repeating that call - to stay out of the markets for a while and see what comes of this all. You might miss out on the Spring 09′ moment, but you won’t face the burn on the road that gets you there. The news flow is simply too negative at present for confidence to go any other way than down, capital preservation remains key.

Until Central Banks step up to the plate (and it our long held belief that they must and will -they are already our lifeline) with the multi-trillion multi-lateral approach there is no reason to do anything other than earn interest.

An excellent analysis of the issue with banks being bailed out, banks get into trouble and they are rescued (bailed out) or they default and creditors take a hit. However, often times the sovereign gets into trouble as well. Does the Sovereign then privatize assets or default themselves? Assets such as the banks fall into the hands of foreigners at that point - as we have already seen with Bank of Ireland.