Irish Mortgage Brokers Blog

While the issues and numbers are different, the idea of personal accounts for retirement are compelling, we have been a big fan of these for some time, check out the video and see what you think.

We were delighted to be part of TV3’s ‘The Morning Show, with Sybil & Martin‘. We are fans of the show and enjoy the relaxed nature of the conversational commentary style they are so adept at. In this clip we spoke about the costs of finance and the potential removal of fixed rates, while Marian Finnegan (of SherryFitzgerald) covers housing, her background is in urban economics and she lectured at both NUIG and UL before moving to SherryFitzgerald. We hope you enjoy the clip.

We were delighted to work with Irish Debate on doing a mortgage show, we have been big fans of theirs for a long time so it is especially nice to work with people you already admire. The clip is below, you can tune into Irish Debate at the URL above and follow them on Twitter for timely warning when a new show is coming up @IrishDebate

PTsb are going to take away investors tracker mortgages unless they go to capital and interest payments, that story was broken by Charlie Weston in the Independent today. That is a business decision by them, but for the business affected (landlords) it creates a new problem.

How can they do this? Isn’t it part of the new rules that banks can’t take your tracker from you? Yes and no, if you bought a property as an investment you are not covered by the Consumer Credit Act 1995 (you are not acting as a consumer) or the Code of Conduct for Mortgage Arrears. So any renegotiation can result in the loss of a tracker, staying on interest only (if you are with Ptsb - and others will follow suit) will require moving to a variable rate.

We’ll look at a standard example: Take Joe, he is married and earns €45,000 p.a. and his wife Kate makes €30,000 they bought an investment property with their SSIA’s (€30k deposit on a property for €300,000 in 2006). They have a child and a primary home with a mortgage of €250,000 on it. A generic family income statement is below

In this scenario - where the loan is on interest only, there is a a high ratio of costs to income at 62%, over 65% is where people tend to start defaulting. The savings tend to focus (in many families) in the area of General Expenses, cutting back on various day to day costs, so there is a little room for manoeuvre left in there.

Going to a repayment mortgage however, gives the following situation - and now these people are into ’struggling seriously’ territory. With only €310 per week to cover any expenses we have not accounted for and unforeseen events. Recent research by the British Building Societies Association has shown that about 1/3 of arrears occur due to ‘Financial Circumstances’ outside of job/income loss, ie: something comes up that uses your available income and you miss payments because of it.

If you both had to drive for work and your car broke down that might be what gets you, in any case, for these people (who would be considered middle of the road middle class) they would be at risk if they went to a repayment mortgage. It sucks to be a landlord (caveat: if you used finance to do it with)

Couple this with the economic fisting we are about to get and it means that this couple could be earning significantly less next year, if one of them loses their job or takes a significant wage cut then they will go under, 2011 will be a very testing year for a lot of people, and in particular it will be a year in which a second wave of mortgage shocks hits the banks, further deterioration in the regular residential loan book and the residential investor loan book will likely come to the fore.

We were delighted to appear on RTE’s Primetime with Miriam O’Callaghan, whe I converted the video the sync went weird so you can find the original here.

Primetime looked at the property market news of a 40% drop in prices from peak to date and after the package piece they had an ‘in studio’ piece. The debate centred around property and mortgages as well as some of the issues regarding negative equity.

We expected a 10% increase in mortgage arrears for the first half of this year, moving the total from 32,321 households to 35,531, however it increased 10.73% and the final figure was  36,438 [statistics for the last four quarters are below].

There is an ongoing inability for banks to deal effectively with people in arrears, both in terms of having the operational capacity or liquidity to offer debt relief in some form, and on the other side we have the Financial Regulator who is incrementally stripping away their power to enforce the mortgage via repossessions.

The arrears of the second half 2010 will go up again, there is no sign of either a slowing growth in arrears, or of a slow down in the rate of growth.

The only growth area in our economy at present seems to be in the deterioration of debt quality . . . but for the second half of the year it will not only be an ‘unemployment’ lead increase, rather it will be with the additional impact of lenders creating the problem via mortgage rate increases that have been independent of any European Central Bank moves (with an general move of c. 1.2% upwards in standard variable rates over the last 12 months).

The quarterly increase in arrears has been near or above 10% for the last three quarters, if this continues we can expect a further 20% by 2011 which would bring the total households in arrears to the region of 43,000 by year end and a likely figure of 50,000 by this time next year.

The solution for more than half of these owners would be repossession, in a functional market economy that is the end result. It is the fair termination of a contract where the borrower is unable to pay and it allows them to put distance between themselves and a financial obligation they can’t afford.

In the last 12 months 387 houses were repossessed, which is about 1% of the distressed stock, but according to the Irish Bankers Federation the rate of repossession by mainstream lenders has gone down in the last quarter to 86 properties, this is the third straight quarter of decline. How is this happening while the general mortgage situation is getting worse? Surely repossessions would go up at a time like this?

Unfortunately, the situation has turned entirely political, and the message that ‘keeping people in homes’ they cannot afford is the preferred solution, this in turn subjects them to endless calls, letters, form filling and stress in dealing with the banks on the basis that it keeps them in the home, but the statistics are showing that it isn’t changing the trend, or giving people the opportunity to get off a one way train. We have no metric of the family deterioration that occurs with financial problems, suffice to say, MABS, FLAC and other representative bodies say it is significant.

The question therefore must ask if a solution that keeps a person holding an asset they can ill afford to pay for is the humane approach, or would it be to release them from debt bondage as early as possible rather than to force them down a path that may have the same end result but with additional arrears interest and stress along the way?

We cannot be seen to encourage people to walk away from their debts, but we would be willing to say that when banks feel a deal may be turning against them in business that they will not continue to fund a project. We know of no reason for households to behave differently.

The rapid growth in mortgage interest supplement and applications for same is turning into a back-door bailout, non-performing loans extended by banks are being serviced by the taxpayer, banks are reluctant to take properties, not simply as a public service – that has never been their remit – rather it is so that the value of those properties do not need to be realised on their balance sheet. Banks assets are based on the value of the loans, not the value of the underlying collateral.

One view is that if you had a business and it didn’t look like it was working out a bank would have no issue in revoking credit lines or offering further support because in their opinion the proposal has soured. For the same reason it is fair to wonder why an individual would be asked to do precisely the same thing when the tables are turned?

A mortgage is ultimately a commercial arrangement and if it doesn’t work out the issue and duties are between the lender and borrower, not the lender, borrower and tax payer, but we are being dragged into the foray through mortgage interest supplement (taxpayer funded), through increased bank charges, through higher taxes which come about as a result of concern about our banking system/sovereign (and the arrears profile with lack of response is part of the issue), and directly by having a property market that is not adjusting in the time that it should.

When property markets reach clearing prices you have better odds of economic recovery (Kevin O’Rourke/ Barry Eichengreen and Agustin Benetrix all recently wrote on this topic), but we are not allowing this to happen, and it means that people who do buy today are paying too much because all of the properties that should be up for sale are not up for sale, it’s a modern ‘beggar thy neighbour’ scenario.

There are answers, but the cheap solution is denial, it has impacted 7bn of loans and only 500m in un-paids, compared to the likes of NAMA  it isn’t expensive, but the resulting reputational risk as a nation is pricey.

The ‘Rent or Buy?’ report was featured on RTE1 ‘Drive Time with Mary Wilson‘ yesterday, it was prepared by Dr. Peter Stafford (Independent economist recently taken on by the Society of Chartered Surveyors), Karl Deeter (of Irish Mortgage Brokers) and Frank Quinn (of Senior College Dun Laoghaire). In the report we ran six different future scenarios with a view to determining whether it made better sense to rent or buy a property.

The findings are in the report, you can download it by clicking on the image to the left.

Our findings were fairly consistent, showing that in almost every future scenario that renting makes better sense from a cost perspective than buying does. The times that buying is better is in an upward only market and a flat market.

That may help to put numbers on behaviour, because during the boom people thought prices would go upwards only and it is therefore reasonable to see why so many jumped into the market. It doesn’t get into the deeper causation but it helps to demonstrate this albeit ex ante evidence.

I want to give a very big thanks to the other authors, Peter and Frank, without them this report never would have happened, Peter keeps a great blog/site and his monthly macro reports are well worth signing up to check out his site. Frank teaches valuations in Senior College Dun Laoghaire and although he doesn’t keep a site himself, we have been chatting about him contributing on this blog from time to time, the prospects of which we are very excited about!

‘Research on Real Life’ is (in my opinion) the best kind there is, we hope that this report helps readers to make a decision that they may otherwise find difficult to answer, of course, not everybody buys a house based on minimum cost to themselves, if that were the case we’d all cram into bad neighbourhoods and rent there [albeit that paradoxically that would drive up rent prices in those areas!], having said that, this report should help to debunk some of the property spin you may hear from time to time.

If you want to get a calculation done you can contact us and we’ll send you the report all you have to do for any scenario is the following

1. Send the price of the property you are considering
2. The rental price of a similar property, or the one you are renting now
3. The rental price scenario you envisage over the next ten years in terms of % change per year.
4. The purchase price scenario for the same period, giving the % change per year +/-

From there we can let you know the cost of buying now, waiting five years, or renting only for the next ten years. There are some flaws in our calculations as there are in any calculation that makes assumptions but we can tell you about them so you are aware of them.

Happy reading!

We were thinking of changing the way that brokers operate, by saying to our clients ‘our service comes at a price, we’ll advise you on any lender in the market and be totally independent, if we place your loan with one that pays commission you can set that against your fee, and if not then pay the fee’, doing so in the belief that totally transparent and independent advice is a good thing, and something that everybody wants, the broker, the consumer and the Regulator.

Sadly this is not the case, instead the Regulator (soon due another name change to ‘Central Bank Financial Services Authority of Ireland’) is relying on the letter of the law in the Consumer Credit Act of 1995 to ensure that brokers can’t give best advice. This is an example of total regulatory failure.

The actual portion of the code is S. 116.1.b which states ‘A person shall not engage in the business of being a mortgage intermediary unless— ( a ) he is the holder of an authorisation (”a mortgage intermediaries authorisation”) granted for that purpose by the Director, and ( b ) he holds an appointment in writing from each undertaking for which he is an intermediary.

The guidance given by the Regulator is that this is to be interpreted as meaning ‘you cannot advise a client on any mortgage unless you hold an agency with the bank/lender which you are advising about’. In other words, you can only offer advice based upon the agencies you hold, it seems many of have been breaking the rules by being honest with our clients and letting them know about mortgages that we cannot broker, and in the current climate that honesty is wrong and deemed to be outside of the remit of an independent broker.

So why bother forcing the industry participants to have certain qualifications, minimum standards, and undergo continuous professional development (CPD) if they are not going to be able to give the advice they are trained to give? This makes a donkey of common sense, and the CBFSAI (Central Bank Financial Services Authority Ireland)  would do well to remedy the situation sooner rather than later.

How do you explain such an anomaly? What is wrong with advising a person to go where ever the best deal is available? This is yet another example of regulatory failure, and sadly, the state are forcing advisers to be tied into the banking system by not allowing them to advise a client on any mortgage product outside of those for whom they hold an agency.

You can’t become a mortgage adviser unless you hold a letter of appointment with a bank, surely this is a mistake? How are we ever going to move financial advice away from commissions if you have to be in the commissions system to offer any advice? To do so without the full authorisation is illegal.

We can only live in hope that many of the irregularities in how regulation works in practice can be ironed out because the primary loser at this point in time is the Irish consumer, the very people for whom the Regulator was established to protect.

We were delighted at the invitation to join the Marian Finucane show on RTE 1 last Saturday for the second time this year, we were asked to go on alongside Angela Keegan of MyHome.ie to talk about property prices, mortgage lending criteria and property tax.

The RealPlayer version is here

You can check out an MP3 of it here

Or go to RTE and go through the list of shows to find it here

If you were listening to the show and have any questions relating to it please feel free to call us or email your query. We hope you enjoyed the show and if not then listen back to it!

We hope to be on this show again soon and help to raise the debate of Property Tax again.

The Financial Regulator recently brought out a new code of conduct for mortgage arrears, the full length eight page document is here.

The code applies to: all of the regulated mortgage lenders in the state (this includes the sub-prime lenders), as well as all mortgage lenders operating here via other EU states (eg: Leeds Building Soc.)

It applies to consumers only, and only in respect of their principle private residence in the state. The code should be treated as an extension of the Consumer Protection Code.

Scope: The code covers finance for primary homes, lenders must adopt flexible procedures that aim to assist the borrower as far as possible. It sets out what the lenders must do in an arrears case but allows repossession where the code is not appropriate (fraud, breach of contract, abandonment). It doesn’t relieve the borrower from their duties to repay

Legal Background: S117 of the Central Bank Act 1989

Avoiding an arrears problem: Once arrears arise the lender must promptly communicate with the borrower to establish grounds for same.

Handling an arrears problem: The lender must make every effort in correspondence by telephone, mail, or meeting to find a resolution. A plan for clearing the arrears should be made which is in the interest of both parties, all viable options must be considered. If a third payment is missed the lender has the right to issue a formal demand. At this stage the borrower must have been advised in writing of

1. The total amount of arrears
2. Any excess interest (as a rate or amount) that may continue to be charged and the basis of how it is charged, any charges payable and the basis of them.
3. Advice regarding the consequences of failing to respond - namely the risk of legal proceedings with an estimate of costs to the borrower of same.

If arrears persis the lenders has the right to enforce the agreement (repossess the property) however, they must wait 12 months from the time arrears first arose before applying to the courts (civil bill). The lender must notify the borrower when it commences legal action for repossession.

Addressing an arrears problem: Lenders can distinguish between those ‘unable’ to pay, and those who are ‘unwilling’ to pay. they must examine each case on its individual merits. Overall indebtedness must be considered. They should look into one or more of the following solutions -

1. An arrangement where the monthly payment is changed in order to address the arrears
2. Deferring payment of all or part of the instalment for a period if appropriate
3. Extending the term of the mortgage
4. Changing the type of mortgage if it results in reduced payments.
5. Capitalising the arrears and interest if it results in repayment capacity and if sufficient equity exists.

The borrower must be advised to take appropriate independent advice. Lenders must give borrowers clear explanations in writing along with costs/charges that may arise, they must continue to monitor the situation, the borrower must have a relevant contact in the lenders firm.

Where appropriate the lender should refer the borrower to MABS, at the borrowers request and with their consent the lender can liase with a nominated third party. the borrower should be made aware of all alternatives, trading down, voluntary sale, or refinancing elsewhere.

Repossession proceedings: A lender must exhaust every alternative before seeking reposseession, an abscence of engagement is considered grounds for this. It may also come about via voluntary possession, by the borrower notifying the lender, or via court order.

Even in a repossession case the lender must maintain contact with the borrower or their nominated representative. If agreement can be made the lender must enter talks and put a hold on proceedings if an agreed regular payment is maintained.

The lender let the borrower know that no matter how the property is repossessed and disposed of, the borrower will remain liable for the outstanding debt, including any accrued interest, charges, legal, selling and other related costs, if this is the case.

Retention and Production of Documents: A lender must keep and maintain adequate records of all the steps taken, and all of the considerations and assessments required by this Code, and must produce all such records to the Financial Regulator upon request.