Irish Mortgage Brokers Blog

The EBS distribute through brokers via their subsidiary ‘Haven Mortgages’, the EBS have thoroughly debunked the idea that mutuality means anything by charging their existing clients different rates than new clients. They have also failed to be in the driving seat for a ‘third force’, going it alone has not happened, remaining an independent entity has failed, and the likelihood of private equity getting involved will most likely hinge upon state support being part of the package, thus it seems that institutional buyers will be the only serious suitors.

It is in an environment such as this that costs should be most seriously addressed, they have done this with Haven, slashing commissions and workforce, getting the organisation lean, but thus far EBS have failed to pursue efficiency with the same zeal within their own camp, and this zombie-like bank/mutual/whatever, is now reducing LTV’s for the only efficient part of the operation, Haven will now only offer a maximum of 80% LTV to potential clients, leaving 90% loans with the least effective arm of the organisation, the agent network.

It is important to remember that EBS obtain much of their distribution via their ‘agency network’ which is effectively a network of tied brokers, there are actually very few EBS branches that are owned and operated solely by the parent company, rather it is like branded tied brokers. As non-tied independent brokers we are saddened by the EBS move to force Haven to lower their maximum LTV, the move certainly wasn’t sought by Haven, and it is funnelling resources instead toward the inefficient mother-ship when the sensible thing to do would be to cut costs there and get cheap distribution via intermediaries, but it seems they are opting instead for intermediary distribution but only via tied agents who have different sets of underwriting rules etc. This is typical of Irish banking, punish those who do right and reward those who don’t.

When making a mortgage application this is a question that many first time buyers want to know, how much money do I must I have for a deposit? Well, that kind of depends on which bank provides the mortgage finance!

Lending criteria is different for every bank/building society/lender, this goes for rates, the general underwriting criteria as well as the ‘loan to value‘, the deposit you need is 100% minus the Maximum LTV and that will give you the deposit amount you require.
For instance, ICS have a maximum LTV of 92% so the deposit you need - if you are obtaining finance through them - is 100% - 92% = 8%.

What is interesting in that example is that when you go ’sale agreed’ on a property the estate agent will ask for a security deposit and the balance of 10% at the signing of contracts, this is an example of industry lingo being so embedded that it becomes separate to reality. The fact is that if you obtain 92% finance that you don’t need to give a security deposit plus the balance of 10% at the signing of contracts, it would be the balance of 8% - your solicitor will talk to the other side and organise this.

The mortgage criteria on deposits required by each bank is listed below. We have put them in the order of the banks that are actually lending.

Banks Lending Normally:
AIB, ICS, BOI all require at least an 8% deposit.

Banks Drip Feeding Lending:
EBS 8%
Haven & KBC 20%

Banks That are essentially Not Lending:
INBS 10%
NIB 20%
BOS 20%
PTsb 10%
First Active (Not doing any new mortgages)
Ulsterbank 10%

The banks that are currently lending in a regular fashion all provide 92% finance, it will be no surprise that they are headed for the maximum market share on lending in 2009, obviously the €1,000,000,000 that we gave each of them earmarked for first time buyers helps a lot too! In any case, there are plenty of banks and lenders to choose from, the issue is currently more about ‘who’ is lending as opposed to what prices or options are available, if you can’t get approved with one of the current primary lenders then you may have to wait up to 3 weeks for an initial response or find yourself with the option of a variable rate which is 400 basis points above ECB.

The changes mentioned in the recent budget will be kicking in soon and it will mean that people are likely to be affected in their mortgage interest relief for the month of May. TRS (tax relief at source) is going to be temporarily suspended for most of qualifying borrowers so that revenue can work through the claimants and determine who should be obtaining the benefit and at what level.

The rules regarding TRS can be found on the Revenue Commissioners website, some of the national commentary on it appeared in the Times (here).

According to banking sources we spoke to the borrowers who will be affected are any who changed their mortgage in the first seven years, so if you switched to get a better deal, topped up or made any changes you will probably be affected in the short term. As well as that, any first time buyers who moved during this time will be affected, if you bought a house (for instance) in 2004 then moved in 2006 then you are still (for TRS purposes) considered a first time buyer until 2011, the relief is connected to your status from the time you first take out a mortgage, not to the property in question.

The time it will take to resolve will be at some point in June according to the Revenue Commissioner.

Below are answers to some of the questions you might have about the change in TRS. The come compliments of Barry Delaney of Haven Mortgages who were the first bank to contact industry about this issue, we are both thankful and impressed, I think we speak for customers and intermediaries alike when we say this customer driven approach of Haven pointing out a problem before it arises is particularly welcome in banking.

Important Update on Tax Relief at Source (TRS) - FAQ

What is happening?
From 1st May the Revenue are making changes to the Tax Relief at Source (TRS) system.  As a result of changes announced in the Government’s April 2009 Emergency Budget, borrowers who qualify for TRS will now be entitled to receive relief for the first seven years of their mortgage only, .

First-time buyers, who have not moved house/remortgaged/re-financed, will continue to receive tax relief at source in the usual way.

All borrowers currently receiving TRS are having their relief suspended immediately, pending a review of their entitlements by the Revenue under the amended TRS scheme. Mortgage lenders are acting on the instructions of the Revenue in this regard.

Why is this happening?
The Revenue want to ensure that customers get relief only for the period they are entitled to receive it.
For example, a borrower (including first-time buyers) who switch/change their mortgage lender three years into their mortgage will not be classified initially as a qualifying borrower.  However, under the amended TRS scheme they will be entitled to a further 4 years relief under the seven year rule.

These changes will ensure that customers, as in the example above, are accurately assessed for the remaining relief owed and are not awarded an additional seven years tax relief when switching.

Will customers who still qualify for TRS get reinstated?

Yes.  The Revenue have committed to a full review of these accounts across all institutions and will reinstate TRS for customers who continue to qualify under the new rules.

How long will this review take?
An exact timeline has not been provided at this stage, however the Revenue aspire to have the review completed during the month of May 09 and to begin reinstatement of payment/credit for TRS from June 09 onwards.

This timeframe is purely indicative at this stage and given the number of accounts involved across all institutions this review may take longer to complete.

Will qualifying customers get back the TRS they miss while the review is ongoing?
Yes.  The Revenue have agreed to reimburse customers for any relief entitlements not paid/credited during the review.

It is important to note that under the new TRS rules included in the recent budget, borrowers may now attract a lower level of relief than previously enjoyed and may not get back as much as they anticipate or as much as previously received.

Are the Revenue telling customers what is going on?
No plans are currently in place for communication by the Revenue to the general public.

As you will appreciate this will cause a great deal of confusion for borrowers who will be unsure as to why their relief has been suspended.

We expect a large volume of calls to both brokers and Haven on this issue and it will be important to reassure borrowers that this is a temporary measure.

HOWEVER, AFFECTED BORROWERS CAN EXPECT HIGHER DIRECT DEBITS TO THEIR ACCOUNTS FOR THEIR MONTHLY MORTGAGE PAYMENT, DUE TO THE ABSENCE OF TAX RELIEF BEING CREDITED TO THEIR MORTGAGE ACCOUNTS.

Customers who are currently experiencing financial difficulties as a result of the economic downturn could be negatively affected by this change and it will be important to handle such queries in a manner sensitive to their circumstances.

if you have specific questions in relation to tax relief at source you can call the Revenue TRS helpline on 1890 463626.

Steve Leuthold talks on Bloomberg about the reasons he feels we are going to see a cyclical bull market (as opposed to the secular bear that many feel we are in). Small cap stocks (likely some pinksheets) and many others are headed upwards according to Leuthold who feels that this we are seeing the best valuations he has come across in his 45 years of studying the markets.  He says that a split of 65% in stocks is now advisable, that is a huge weighting given the market moves we have seen lately where equity holders have been continuously wiped out. Big tech stocks and gold both feature in his talk.

I was asked by a colleague in the UK to provide an overview of the Irish mortgage market, he has often advised the Bank of England in the past on the UK buy to let market, however this time it is in relation to a talk he was due to give to an international financial services group on the Irish economy. Below are the contents of my correspondence which is a no holds barred view of the mortgage market in 2009.

Remortgage: This area is finally starting to see some life again, the rate drops are filtering through and many of the people on fixed rates taken out in 2005/2006/2007  are shopping around, as always new business attracts better rates than existing customers so there is once again an argument for switching.

However, the many people who took out trackers are basically out of the market in the long term as every single lender has removed tracker mortgages from the market, in fact, if you know of a lender willing to do tracker mortgages in Ireland they could hit the market and win on that basis alone, trackers are consigned to financial history on the emerald isle - at least for now.

The one area that seems to be getting some transaction speed is that of top-ups for improvements, people are not gearing up to buy a new house, instead they will improve that which they have already. The one downside is that many Irish lenders will not do a totally separate second mortgage top up - keeping the original at its rate/term etc.- and the reason is because there are so many negative margin loans out there, almost every residential tracker is currently negative margin when you consider cost of funds [although that's doing better for now], cost of distribution, and then margin. The crunch hit the banks bad on these loans, some were as low as ECB+0.5% so you can only imagine what Euribor cost of funds being at over 1% above ECB during the bad days was doing to the book and liquidity of same!

Buy to let: This end of the market is basically dead, the issue is acute on the supply side but mainly on the demand side, there are estimates of between 45,000 and 100,000 empty units (some unofficial sources cite even more than that). The industry economists all figure from 60-100k of empties, that means the supply side is swamped for a population the size of Ireland. Prices will fall and residential sales are going to be a slaughterhouse for some time to come.

On the demand side the issue is that paradoxically prices and rents are falling in tandem, a damnable situation, prices fall due to oversupply and confidence/credit crunch etc. the rental prices are falling because of oversupply of stock, competition for tenants, a need to meet payments even if it is loss reduction rather than meaningful yield, as well as that many of the Eastern European renters are returning home. Completions are still flowing  through, on the issue of attracting a tenant the competition for tenants is high, i had to drop rent by c. 45% on my Irish investment property to get it occupied.

The sensible proposition at present is that the state could buy some really cheap social housing, or if a buyer had enough cash/finance they could likely  bulk buy units at huge discounts, having said that, accurate market valuations are hard to come by, it is in the realm of educated guesses because with many distressed sales due to developer/owner going broke a suppressed price implies the ‘market’ price which is not the case in truth but the market only accepts that as it is the point at which a transaction occurred.

For me, i don’t really care about prices, instead i am watching yields and when they get over 7% investors will go back in feet first. I think the concept of cash flow will be the fundamental in property in the short to medium term, it is going to be viewed the same as bonds currently are - yields yields yields. Really it was continued market strength (when yields stopped making sense) seeking capital appreciation that caused the pendulum to swing so far beyond acceptable values.

Switching: moving lenders is really bunched in with re-mortgaging, the idea of using your house like an ATM is no longer popular [rightly so] thus the movement in the switching market is the same as the re-mortgage market. There are deals being done but a trend we have noticed is that it is primarily people who are on bad value variable deals already, again, the folks with trackers will likely sit tight unless we get the inflation wave [which I personally expect] at the end of this which may entice them onto fixed rates in the future.

New home buyers: an area with at least some life in it! Many buyers realise that prices are much lower as are interest rates, if rates go up 1% you would need to have bought a house for a few grand less on price to make up the difference, its an interesting mathematical approach which people need to be aware of. A house for €300k over 30 yrs. at 4% is actually €6,000 cheaper than a €270k house at 5% and with the long term rate outlook being a rise eventually it is perhaps better to lock in now rather than later, personally that is my intention.

The state is getting on board with a thing called homechoiceloan which is literally like a mortgage bank, they already do shared ownership and affordable housing too, currently even with 20% discounts many banks won’t lend on these, partly due to councils not being in line with the actual market - their valuers price totally differently than independent valuers - and then the profile of the lender who qualifies for this kind of loan. In many cases developers are selling for comparable prices with ‘affordable housing’ diminishing the attraction of the programme.

Developers are slashing prices, one in Kerry is actually doing a 2 for the price of 1, who would have thought you’d ever see that in property!

Niches Markets: The only one I would consider at the moment is distressed debt/portfolios. The confidence is so utterly low that people would literally sell at cost to get out of deals/debts. Commercial property is now taking a spectacular dive, if you had a good tenant arranger and the right finance this may be an option, stamp on this is likely to get changed in the near future, but for now its a total barrier to entry. Unless you were to get into buying properties with motivated buyers and turning them into duplex’s etc. in desirable locations then I wouldn’t have any novel ideas currently but that depends on your timeframe to a degree. The place with the most movement is the first time buyer market and after that the remortgage market.

Product guide:

Homeloans: We are now in a market with fixed rates, variable rates, and LTV variables, where you get a variable [no fixed margin] depending on the LTV, rates are c. 3-6% many banks don’t have the money to lend so they are using the blunt instrument of tranche management and high rates to control the book.

Changes in strategy of lenders: Hardened criteria and industry underwriting are prevalent, for instance, if you work in finance it seems you are persona non grata, in the past 100% mortgages were everywhere, now LTV’s are averaging much less, several lenders - Haven, KBC [formerly IIB] are only doing 80% loans, others are offering 90% but getting the money and approval requires the patience of Job and the earnings potential of Warren Buffet. suffice to say the market is not frozen but a single sentence sums it up

“Banks will lend to very strong candidates, on good collateral at high margins” - almost sounds like an old central bank mission statement!

Who is the best: The Irish banks will be partly recapitalised, as regards balance the best is likely AIB, regarding product they are also top table much of the time, Ptsb is likely to reduce or even remove some offerings, First Active/Ulster [RBS owned] are not very competitive, they are doing some 90% loans but ensuring they get the margin for doing so. Haven/EBS are lending but the press have been releasing many rumours about their financial health, unlike many banks they still have men on the ground though which is a good sign. Bank of Ireland have harsh criteria but decent rates, top end of the mid-table. NIB who don’t deal with brokers are offering a lot of really good deals but at their multipliers - even with low property prices - few would qualify, they are the best for low LTV’s, as regards an ‘approach’ i guess i would say caution is king.

Borrower integrity: The reduction in lender integrity is there but both pre and post lending but thus far it is down to job loss/redundancy and the things that are killing every economy in the developed world. Certainly the underwriters have developed a new brand of risk aversion where they factor in eventualities that don’t even exist, for instance - successful currency trader refused [we didn't even ask them to consider bonus etc.] because the institution he worked for got downgraded by S&P.

Equity release for retired couples: if you are talking about residential reversions or reverse mortgages then these are gone from the market, the companies offering this have all closed down, they had the double hit of factoring in too much on the potential growth of Irish property, one of them did securitise the loans out one house at a time which I thought was novel but the business model broke irrespective of this.

Regarding a brokers ability to trade: Falling prices, yes, this took confidence and transactions out of the market, we are in the transaction business so if prices dropped it doesn’t ruin brokers, it’s when transactions freeze up that we get hit. Probably the harshest development is the confidence killer that is combination of credit crunch/falling prices/credit criteria - albeit some of these are required to reach market clearing levels. Naturally prices will drop beyond true value on the way down the way they exceeded true value on the way up, the issue is when and more importantly what is the true market value.

Negative equity: The press seem to love to write about this one, I have often argued that negative equity is interpreted rather badly, it only becomes negative if realised, actually being in negative equity doesn’t change anything unless you are also forced to sell and crystallize the loss, however, for those who do find themselves in that position it is catastrophic. And the harsh reality of having paid more for a property than it is worth is a confidence and financial killer. It has turned people off of buying and it gets mentioned virtually every day in the papers.

Reduced lending capacity: This is the other part of the squeeze on prices, we spoke about supply and demand already, the reduced supply of credit is a third factor which is pushing the prices of property down from outside of the property specific supply demand spectrum. There is nothing one can do about this and yet you can only wonder what would happen if credit became easily obtainable again, I don’t know that we would see reflation unless there was a zero rate policy and a huge money supply creation which is a circular proposition as at the root of this crisis are low interest rates, increased liquidity and money supply.

Lenders cutting out brokers: This is key, originate and hold seems to be the route for many banks as they move away from the originate to sell/securitise model, we are seeing dual pricing and it is there to specifically remove the broker, banks say it is so that they can get the cherry on top [life assurance etc.]. The intermediary market makes less sense in a downturn, why pay a broker when you already have to cover branch costs? And in a market as simple - in terms of lenders and options- as the irish one the argument for ‘going direct’ is strong, particularly in advertisements. We are still only at a 50% penetration for broker use for mortgages which is substantially less than the UK.

Reduced commissions are the other side of the coin, and this is the one that may be the rock many brokers perish on, costs have not reduced at the speed that commissions have. Commissions have dropped on average by 30% but the main banks lending dropped by c. 50% so the actual hit to a working brokerage is c. 40%, this when combined with a massive restriction of credit in a falling property market has created what we can only describe as ‘the perfect storm’.

However, we are not being discriminated against, the overall picture in banking is bleak at the moment, I’m an ‘optimistic bear’ for now. The banks are getting hit on both sides as well, impairment charges are high which hurts liquidity, their book, and their ratings. The rush for depositors means they have to offer exceptionally high deposit rates (compared to historic norms v.s. base rates/euribor), and when rates drop they are being pressurised into passing on the rate cuts to the mortgage market. This is actually bad for them though because they can’t do the same to the depositors or they will move their deposits so the compression sets in of reduced mortgage margin and paying out higher deposit margin, it is actually the opposite of the traditional banking model and somebody will go bang due to it, already banks have required capital injections. [since writing Anglo were taken over by the State]

This should be enough to give you the general idea of how it looks in Ireland coming into 2009.

Our firm [and I am sure many brokerage firms] are witnessing a conundrum in the market which is causing both clients and the broker a huge amount of heartache. It is that of the ‘AIP’ or ‘Approval In Principle’ not being honoured by banks over short periods of time. One lender in particular [we can't name names] is doing that on so many cases that we no longer consider their approvals as holding any relevance.

What is an approval in principle (A.I.P. is the broker-speak we use to describe them)? It generally means that you have given a bank enough information to make a strong [and yet preliminary] decision on a case, sometimes it is subject to further documentation, or they want to get a valuation report before making a full offer, in any case an AIP is NOT a loan offer but it is as strong an indication as one can get without dealing with solicitors, in the past an AIP was honoured almost exclusively and they were seen as fundamental to operating within your budget.

When did banks start to change their minds on AIP’s? Well, like many things 2008 was the year! Although recently they have changed their direction a little in how they are doing it, last year they would say ‘criteria changed’ or give some other equally useless excuse, now they are just telling us ‘we are not doing that deal’. If you want a cure for low blood pressure then try explaining that to a client who was told that an AIP was something that a bank would honour as long as the conditions on it were met.

So we now find ourselves in a situation where an AIP is merely part of the formality of getting a loan offer, and worse again is that we are trying to get loan offers as quick as possible before the banks change their mind and revoke it which puts stress into an already stressed financial system. When an approval no longer means an approval then the only other choice is to get an ‘offer letter’ but doing so will cost in terms of valuations fees, engineer reports etc. and it merely distorts a functional system into a broken one. We strongly urge banks to desist from such calamitous practice, it is one thing to be frenzied in a crisis but another to act disgracefully in the face of it.

Today we received an email from Haven Mortgages about their updated interest rates, we were pleasantly surprised because for the first time in a long time there were some very attractive long fixed rates. Recently banks have had no choice other than to lash on margin in order to pay for the funds they were securing. The new 10 year fixed rate from Haven is 5.66% it is also the cheapest rate they offer.

What does this mean for a borrower? Well, on one hand we have Trichet saying that he doesn’t see inflation coming under control until 2010 and as the ECB’s only job is to control inflation it would therefore stand to reason that we won’t see a rate cut any time soon. Economists and commentators (myself included) have made some bad forecasts and for that reason I would be prone to feel that the rate outlook is uncertain, at best the current climate is guesswork. This means that a borrower would do well to buy some stability, a way of doing this is by going for a longer termed fixed rate.

Rates (when healthy) tend to be over 5%, the rates we witnessed in the past were historically low, we are still getting used to the new levels in interest rates (many falsely believe they are astronomical) which are only sitting in the region that healthy rates traditionally sat. If you looked at rates over time around 5% is healthy, lower rates normally correlate to a time when economic stimulation was needed and higher tend to be when there were currency runs/issues and huge inflation. Taking all of this into account a 10 year fixed rate of 5.66% looks very attractive.

The title of this article was ‘Will Irish lending turn American’, what was meant by that is the fact that in the USA prime lending tends to be done on fixed rates for up to 30 years, meaning that when you take out your mortgage the price you will pay is set for as long as you have it. The advantage in that respect is that you can budget over the long term as well, because people tend to earn more as their career progresses [even if only due to inflation] the percentage of income your loan represents decreases over time.

ARM (adjustable rate mortgages) are the US equivalent of our variable rates, ARM loans are actually one of the central reasons that sub-prime loans were not paid which lead to the credit crunch in the first place (the actual foundations lie elsewhere but ARM’s are considered a vector to it all starting). In Ireland the stats say that 50-70% of the mortgages out there are on variable rates, this means that we are likely paying way over the odds. The downside of this is that when rates go through an upward trend you get hit harder and harder at the same time as you are getting hit with inflation etc. and it actually compounds the issue. While at the same time it means that paying is easier during a time when making payments is easier (when rates are low money is normally awash in the economy).

For this reason we would feel there is a strong argument for the introduction in Ireland of fixed rate mortgages over longer terms, for instance 10-30 years. They can be funded on the back of long bonds and charged for accordingly, it can also be a win win situation. Banks will win because they will achieve their goals which are profit and to have loans stay on the book. Profit will come from the margin charged and the loan will stay on the book because surprisingly few people break fixed rates. Consumers will benefit because they can get a guaranteed price for their loan which makes it easier for them to budget and as mentioned, it is likely that over time their mortgage payment will be less and less of their salary, as long as rates don’t drop right down they can also prevent being on the wrong end of rate spikes and of course if they drop they could consider re-mortgaging to lock into a lower rate over the long term.

Some fundamental rethinking as to how we do loans in this country is required and I for one am delighted to see Haven leading the way with a rate suite that has such an attractive long term fixed rate.