Irish Mortgage Brokers Blog

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.

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.

Sherry FitzGerald said yesterday that property prices fell 4.5% in the second quarter of the year having fallen 1.9% in the first quarter. The results to the 12 months to June showed that prices fell 10.2%. So house prices are moving, albeit down.

The factors that are affecting property are mixed and many, primarily the prices are/were too high, and any time assets receive valuations above and beyond what they merit you will see market corrections. We are also seeing a unique time in banking history, and in many respects the property price correction is not dissimilar to the 1929 crash because both of them focus around leverage, I’ll continue on that point in a later blog about ’similarities in economic history’.

Cheap money from central banks is also on the wane, in fact almost every economy has increased rates in an effort to bring inflation under control, mixed in with the lending liquidity issues we see a two fold effect. First is that there is not as much money to lend, even if borrowers want it, that is a confounding issue when it comes to mortgages because in general money is ‘created‘ when it comes to lending. However, in true economic style there is a high premium on having cash now, so you will see that almost every bank is finally offering decent deposit rates, the reason for this is that they need cash desperately.

However, it is also true that interbank lending is carrying a premium, and that is driving up the cost of funds, the 3 month euribor is at 4.95% today, however, this is being ignored as money is basically ‘auctioned’ off, and for that reason we are seeing banks paying up to c. 6% in order to obtain funds. Financial institutions can’t catch a break in the current climate, and we saw the stock market reflection on this recently with the values of Bank of Ireland, Irish Life & PTsb, and RBS (who own UlsterBank and First Active). RBS have lost 60% off their share price since last year and some commentators are wondering whether or not they will rebound ever.

Recently Ulsterbank and First Active raised their rates to what can almost be considered sub-prime lending prices, this was because when they raised funds (the most recent purchase was said to be €1 billion) they had to pay a very high premium for that money and the only way to lend it successfully is to raise margin to whatever point they have to go in order to create profit.

The hammering banks have taken is naturally having a big effect on the intermediary market, brokers clients are still looking for money but the present issue is that lenders are reigning in criteria at a rapid pace which means that lending is becoming more and more restrictive, in fact, many perfectly sound clients are finding credit lines difficult to obtain simply because of the changing criteria landscape.

If we look at property booms and busts in other countries the pattern (if there is any semblance of a pattern!) seems to be that you can expect a 36 month period of adjustment, that can be a fall out in two months followed by 34 months of little or no movement in prices or it can be 20 months of falling prices with 16 months of stagnation, in any case the cycle tends to take about three years to move out of, in terms of the percentage changes the normal pattern is a drop of about 33% from peak values.

Ireland has seen prices on the way down since late 2006 so it’s acceptable to believe that we are at least 18 months into this cycle already, it doesn’t feel like halfway because the start of it was gentle, however, in recent weeks not many people could say that they are in any doubt about the condition of the economy, the ESRI has stated that we are officially primed for a recession.

A recession is a normal economic cycle, you could look at it almost as an ‘economic rest period’, if you kept running until you literally dropped the fall out would be worse than if you run for a while, take a break and then run again. The problem this time around though is that we were running for a long time, running on easily available cheap credit.

This will be a bitter pill for many who may find themselves in negative equity, however, there is no way to protect buyers, even the hardest hit and most vulnerable from the movements in the wider economy, perhaps we will find a way to avoid this in the future.