Irish Mortgage Brokers Blog

Today I will give you a tip about the single best way to reduce and avoid debt, it is perhaps the most effective method known to man. Here it is…

“Don’t borrow any more money”

Simple enough to almost make you feel conned I bet? The fact is that debt begets debt and if you enter into a lifelong debt cycle it is something that is virtually impossible to free yourself from. The very first step towards financial freedom and a life out of debt is to realise this fact and to come up with a solution.

Some people think that if they consolidate loans that they will then have more money, but what do most of them do with this ‘extra money’? Save it? Or do they then get more debt and the extra money thus goes into the debt vortex as well?

All good ideas have an exit plan [one of the very reasons Iraq was such a terrible idea to begin with], and you can make yours. To do this you have to decide how you will go about ridding yourself of debt, will you consolidate debts into your mortgage? Take an extra job? Sell up and move to a smaller house?

Thrift can carry you quite a way, we have covered many ideas in previous posts, but we failed (unfortunately) to put the fundamental point of personal finance in black and white. If you want to be richer in the future you have to have a way to fix your debt, a plan is where you start, if you don’t then you might make 20% gains every year but still be in the red.

Living on the money you have is not always easy, but it is the only way to eventually wake up one day and say ‘I don’t owe anybody anything’.

We have written in the past about tracker mortgages becoming an endangered species. It seems that now we are witnessing the demise of them, the interbank rates and the ECB have become so disparate to each other that one is no longer an accurate gauge of the other. What does that mean?

The ECB is the rate set by the European Central Bank, and it is the ‘base rate’ (currently 4.25%), but banks can’t generally borrow at that price and instead they buy on the ‘interbank‘ market, this is the largest market in the world in which over 1.9 Trillion is traded every single day! It is how banks access the ‘Euribor‘ market (European interbank offered rate). This is basically run as an auction and because liquidity is an issue we have seen the prices of the Euribor rise and rise, demand is outstripping supply.

Why is the Euribor rising? Simply put, fractional banking means that banks must have a constant inflow of money in order to stay in business, when money is scarce that gives it a higher value or a so called ‘scarcity value‘, anything scarce for which there is a demand will go up in price and that is the basis of what we have seen on the interbank market.

So how does this affect tracker mortgages? Tracker mortgages were marketed in the residential market as (almost exclusively) a loan that would ‘track’ the ECB by a fixed margin, this was as low as 0.45% above ECB with some banks, this mean that if the base rate was 4% your loans interest rate was 4.45%. A brilliant loan for Mr. Consumer and excellent value, and the banks were happy as well because they were able to provide these loans (albeit at low margins) and still find some profit from them.

Then along came the credit crunch, it started to show up in Euribor rates in July of 2007, and since then the old cosy relationship with the ECB is but a distant memory. The Euribor was typically ECB + 0.1 to 0.2%, since the credit crunch it is more like ECB + 1%. So do the maths, lending out at ECB + 0.45% and buying in your ongoing money supply at ECB + 1%. That instantly tells you that the bank is actually supporting lenders by 0.55% on these loans! And this is the case on many loans, on average trackers were sold out at ECB + 1% so although they might not all be making an instant loss on margin they are creating operational loss because banks can’t run their companies for nothing, although at least it’s not as bad as negative margin.

The Sunday Business Post (article by David Clerkin) wrote this week about the ‘End of the Tracker’ and quite rightly it was pointed out that lending at negative margins is a reality for many lenders. PTsb and IIB have stopped offering tracker mortgages altogether while Ulsterbank and First Active have instead used the blunt hammer of rate to control this, their margin is ECB + 2.25% (huge margins on those loans!). It is therefore fair comment to accept that new tracker borrowers with Ulsterbank and First Active are funding the losses being created by the past customers who are on negative margin loans, I guess even in finance the ’sins of the fathers will be visited upon thy sons’. Unfair? Perhaps, but this isn’t about morals, it’s about margins.

Rates in general now with most institutions are hovering around the 6% mark, this is a full 1.75% above the current ECB, and almost 0.8% above the Euribor, so the margin is actually above where it used to be in 2006 yet this is no solace as every lender is still carrying negative margin loans that likely take the goodness out of higher rates over all. In the Irish mortgage market c. 50-70% of home loans are on the variable rate, so the variable rate hikes must have produced a windfall of additional income for lenders as this is all generally happening on the older developed book, however, liquidity is still an issue and that is what drives the interbank prices, you need interbank money for new loans so while they are gaining ground on one hand they are losing it with another.

One thing nobody is looking at is how this all relates to securitized books, you see, when banks start to raise their margins the effect on borrowers is that they can get less, borrowers who get less have to pay less or not buy at all, this means that property prices have to fall to meet the amount they can/will spend, and this in turn means that the equity of properties in general is lower. What does this mean for a bank? Margin call is what it means, as the asset upon which the mortgage is secured reduces in value it means that the bank (back to that fractional reserve concept) must actually become more liquid in order to maintain the loan, when they securitized their debt (i.e. sold their book of mortgages) there are margin requirements the same as there is in a stock holders position when leveraged.

So are we seeing the end of the tracker? Perhaps the real question here is are we seeing the ‘end of the low margin tracker’ and on that point I think it is fair to say ‘yes, we are’.

Yesterday I made a fairly bold statement stating that I believed we are on the cusp of a recession. Today I am going to point out some of the things that may shape global policies beyond economy.

Simply put its Mother Nature, Naturomics, maybe somebody coined that phrase before me - who knows, what I’m trying to say though is that nature will increasingly have an impact on world economies. The weather systems and ecosystems of the world were in state of stasis for a long time and now we have disrupted the whole thing, derailed a system that worked prefectly well for millenia. The price?

(recent storms in california)

Well, take California (my original home state), during the autumn they had the worst fires on record in a long long time, was the sun particularly hot because we’ve melted away all the ozone? was there no rain because of global warming? were the winds that drove it somehow higher due to shifts in weather patterns being caused by humans? I’m no scientist, so I can only ponder. Then for the last two days California is hit by the worst storm it has seen in fifty years and four hundred thousand are left without power etc. So, maybe there is a market in disaster-recovery goods? Electricity generators, bilge pumps for flooding, interlocking sand bags? Who knows.

Indonesia has eruptions of mud caused by gas drillers, 10,000 families are displaced and scientists reckon the mud might continue for decades!

(picture of houses covered in mud in Indonesia)

My sister in Florida had to leave home six times in 2006 because of hurricanes, and then there was Katrina which really brought the whole operation to a halt and displaced millions.

So be it sun, snow, rain, wind, melting ice, or mud I think that the big ‘leftfield’ or ‘caught off guard’ factor for 2008 is something to do with natural disaster, say that the recession I spoke of (that we’ll realise we are in by the end of Q1ish) doesn’t actually come about but there is a massive earthquake in the USA or more floods in Europe, that can - if its big enough - shake world economies and I believe that any government that doesn’t have a contingency plan for the natural disasters that may befall their nation are living with their heads in the sand.

So try to reduce your carbon footprint, personally I cycle to and from work everyday, and becuase of that I use less petrol, I wear a jumper instead of putting on the heating for an extra hour (although if my wife is home she over-rules this decision most of the time) and we use our green bin and have a composter.

The move to make all lightbulbs into energy saving bulbs is a good one, 17% of world energy currently is used in making light (note to God: when you made ‘day’ was it with the people of the 21st century in mind?).

Katrina’s fall out costs everybody, even here in Ireland, and why? Because insurance companies have a ‘re-insurance’ firm normally, these companies provide insurance to the insurance companies and they are massive in terms of their scope and financial clout, they are also international so insurance companies here may have the same re-insurer as an insurance company in Louisianna, for that reason it costs us because when the re-insurers have to pay out they raise their rates and that happens worldwide, not just for the folks living in Louisianna.

Anyways, before I meander too far off the point this is my 2008 wildcard: mother nature, she doesn’t mess about so watch out world, the Fed and ECB can do what they want to try and save the economy but who tells mother nature what to do? We nailed the last person with that ability to a cross.

The Irish Broker Association (IBA) made an approach to the Professional Insurance Brokers Association (PIBA) whereby their 300 strong membership might amalgamate with PIBAS nearly 800. They all went into a room and entered negotiations. This wasn’t a case where one had a gun to another’s head, it was something that would be of mutual benefit to all brokers in Ireland, because brokers, unlike almost any other industry, don’t have a single representative body.

So it makes total sense right? Of course it does! Standing as a united front and being able to ensure that members reach certain standards of operation, giving a voice to a multi-million euro industry, there is such great scope that I figured ‘even if we have to get over 75% in favour we’ll still be able to do it’. And we were.

Actually, PIBA were, the votes came in and in a voice of unity we voted with an 80% majority to go ahead and make one proper representative body.

The IBA on the other hand, who actually made the approach for all of this to happen showed the condition of their house, they - after making the negotiations and being the ones who suggested it - lost with a 70% against and only 30% for!

I’m not accepting any invites to their house for a sleep over…

Wouldn’t it be nice if we had one governing body in brokerage instead of three? (because there is also the mortgage specific one called IMAf) Yes it would. Can’t we all just get along? Well, PIBA showed their true colours by saying ‘Yes, we can do it, If Gerry Adams and Ian Paisley can sit at the same table so can we’.
Its just a pity that we don’t all have that attitude.