Irish Mortgage Brokers Blog

There are two sets of statistics floating around; on one hand you have the banks who claim that they are lending and also that the demand for credit simply isn’t there - a belief further expounded by John Trethowan. Then on the other hand you have the likes of PIBA who counter claim that 80% of applications are being refused.

So it is important to break down the vital components. First of all, the debate often centres around Small Medium Enterprise (SME) lending; even if demand for that type of credit isn’t there it doesn’t automatically translate into a reduced demand for mortgages. The point being that we can’t compare SME loans/business loan demand to that for mortgage credit.

Secondly is ‘what constitutes a refusal’, and this is where common sense diverges. Even the bank accept that if you seek €200,000 and are only offered €100,000 that it is a loan not fit for purpose, this even goes for SME loans - imagine trying to borrow 80% of a machine purchase at 200k and then trying to come up with €60,000 you can’t raise? Mortgages are no different, if people don’t have the ability to bridge the difference between the purchase price less their deposit and the loan sanctioned then it is an effective refusal.

If one wanted to be cynical, they would advise the banks to say ‘yes’ to absolutely everybody and only offer them €100 maximum. This ruse would be quickly seen for what it was, and yet when you add in a few zero’s and

Having given the banks support to the point of no return it now seems acceptable for even the Credit Review Office to use the ‘reduced demand’ argument to tacitly approve the strong chance that BOI & AIB will miss their combined lending target of €6,000,000,000 to Irish companies over two years.

If you have no demand in one area then why not funnel those funds which ‘must be lent’ to wherever the willing borrowers are? That our vested interest comes into this is evident - but it is frustrating to see a market down 95% and the issue of loan supply being a strong driver in the lack of transactions.

The vast majority of people who want to purchase a property simply cannot get past the underwriting hounds who have gone from being puppies in the last decade to being dogs at the gates of hell over the last two years. And the blurring of lines between different types of credit and the gathering of statistics give two totally different stories, but much like any cake, you have to look at the ingredients going into it, and in our opinion at least, the way ‘approvals’ are counted and accounted for is wrong, meaning credit is nowhere near as available as we are told it is.

The Tobin tax was a transaction tax first mooted in the 70’s, it was meant to be a tax that would reduce blatant speculation in currency markets.

The revived idea of a ‘financial transaction tax‘ is as flawed now as it was then, because it will likely hurt investment, reduce liquidity and institutions will pass on the cost to private individuals as was seen in the example of Sweden who implemented one for several years in the 80’s. .

However, there are issues in the current market which are distortionary and where a tax might aid the market and reduce volatility, I’m talking about algorithmic trading and high frequency trading. Much of the volume (on US exchanges estimated at c.60%) is not due to people making calls on the market, rather it is on computers that execute trades in short amounts of time, taking a minute profit each time - in many cases they do it just to earn the exchange commission (a fee the actual stock exchanges pays to active traders).

The financial arms race is at the point where people are putting machines in the actual stock exchanges just so that they can get an extra nano-second upper hand on people outside of the exchange, is this the ideal of price discovery or is it a rent seeking activity? I would go with the latter.

So the tax would instead be a Pigovian tax rather than a Tobin tax. A Pigovian tax is there to reduce undesirable outcomes (negative externalities in economist speak), if you decided that algorithmic trades are part of the issue then you could tax based on the time a share was held even if it sells at a loss. This would reduce liquidity provided by the algorithmic trades but is liquidity a universal good and would it exist without algorithmic trades?

This approach would be better than outright bans on short-selling, which do not aid in market transparency. It would also be a more easily understood (by the public as opposed to practitioners only) solution than the up-tick rule which is really only there to punish a short to some extent.

A tax based on the time an investment is held could go to zero after 24 hours, the point is that it would eradicate much of the black box activity which is dominated by investment banks at present. You could argue that this is a fair hedge, but was the idea of electronic trading to use the speed of light as the ‘investors edge’?

Ockhams razor applies on this one in my opinion, and leads to a ‘no’. It only exists and an investors edge because it can be utilized and lead to certain outcomes, not because it serves a market function of itself. Which is why a sliding scale based on the time a security is held may be a good idea (or maybe not?!).

A regular household investor would likely never face this tax, it would specifically be something that allows speculation but taxes the brand of it that is operating in an area of the market where only machines trade, there are not humans capable of doing what the algorithmic traders do, they can programme the function but a human can’t do it as fast.

This may reduce the efficiency of an organization, one could argue that having a machine do a trade faster is efficient and therefore reduces the bottom line, while I empathize with that opinion, I cannot sympathize with it because the frequency and the machine actioned trades are the problem, not the platform.

Algorithms are not the devil, nor can we blame them, but they are not there to create an efficient market, they are there to give a certain group of investment banks who spent a lot of money on them a rent collecting ability. Thus the need to tax that activity, if it must exist and they cannot prove the advantage to society general (because the disadvantages are clear) then pay up.

The preference for letting property for 1 year is often suitable for both tenant and landlord alike, however, if we do start to see people showing a propensity for longer term renting then creating a lease that facilitates this is vital.

The fact is that the ‘12 month term’ is partly irrelevant, what it does do is set out the terms and agreements; but during that 12 months the renter obtains the right to stay for a longer period under ‘Part 4′ of the Residential tenancies act 2004 (a 4yr cycle).

This is often a point of contention in eviction cases, so it is vital that people wishing to avail of Part 4 write to the landlord stating this between 3 and 1 months before the end of the tenancy date, although it can exist even without notification being given.

But today we’ll assume that both parties to the lease want to engage in a longer term choice. There are a few primary issues that each of them will want to cover.

1. Who pays for certain aspects of the upkeep? It is a good idea to sit down and negotiate this point and have it written into the lease, so mowing lawns (for instance) may be assumed to be the landlords responsibility -it is – but if you agree to have the tenant do it then it should stand.
2. Rent reviews is a big one, a longer lease comes with the risk that the person can fix their cost going forward, for this reason we would suggest doing two things. Firstly have a review date, and secondly have a ‘collar’. The review date needs agreement, so every two or three years would be a good idea. The ‘collar’ sets out the change – so if you had a 15% collar it would mean that the rent at that review date cannot go up or down by more than 15% and otherwise you set it at ‘market rent’.
3. The ‘market rent’ should be the average of two estate agent opinions, one from each party; not ideal, perhaps not even totally accurate but it is a way to ensure that 3rd party opinion is front and centre rather than personal battle on the topic.

These are the two main considerations, there may be others for wear & tear and maintenance of other things that you may want to negotiate on. Negotiating at the outset doesn’t guarantee results, naturally, at any point either party can renege on their agreement and revert to the PRTB or courts or otherwise, but it does take care of the majority of issues you might encounter.

Agreeing these things in advance also sets out pricing which is one of the main concerns of a renter (along with quality levels/location etc.).

Conference on “Bringing Retrofit to Market“, supported by SEAI, Sponsored by AIB, ESB Electric Ireland and Saint Gobain. Croke Park Conference Centre 23 September 2011

- Key theme is how to stimulate loan offerings to consumers who wish to invest in deep energy retrofit of their home or business

- Will provide overview of government’s new energy programme Better Energy, which plans transition away from grant supports to more market-based supports

- On the day, the findings of the IIEA/SEAI report to Government” “Thinking Deeper: Options for Financing Home Retrofit” will be launched.

Fascinating video (that takes some time but is well worth it). This video looks at the various issues surrounding growth.

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!

Our regular piece on The Morning Show with Sybil & Martin was about debt forgiveness this week, great conversation in an easy to interpret manner.

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?