Irish Mortgage Brokers Blog

About five years ago I had a couple in with me who were buying a home, I was helping them to determine their insurance needs and I realised that they had literally no protection if either of them ever fell seriously ill - not via their job/employer schemes or individually. So I suggested that they consider some serious illness cover, it would have cost them about €20 a month but they were insistent that they only wanted what was ‘cheapest and nothing more’.

As an adviser, it isn’t my job to always accept what people say they want because often, with adequate probing and understanding they actually want something entirely different, a skewed but simple way of understanding what I mean is that when saving or investing the majority of people want ‘high growth and high security’ - when in fact, these two features are normally night and day, if there ever was an asset that could deliver high growth with deposit account style security then everybody would pile in and the market would adjust accordingly, therefore you need to find out what a person actually wants more, growth and the accompanying risk, or security and the accompanying lower performance.

Back on topic - I explained why they should have serious illness cover (also called critical illness) and they flat out refused to listen, I asked what would happen if one of them got seriously ill to which I was told ‘I’ll go to France’ (one of them was French), this is one of those answers that threw me entirely: I mean, after a decade I thought I had heard it all but the idea that you could have a heart attack and then just fly off to France as a meaningful solutions just baffled me, to the degree that internally we sometimes joke around in the office when somebody makes an error and in asking how they will rectify it they answer ‘I’ll got to France’, it has become an in house punchline (thankfully not required very often!).

Anyway, I got a call two months ago from the husband in this couple, asking me about their insurance policy, wanting to know if it had any benefits attached to it other than life-cover, I quickly responded ‘no’ but wanted to know more - then I heard a story that quite literally broke my heart, perhaps I am going soft in my age or since I became a parent but it goes something like this: The couple had a child six months ago, the mother had some sort of allergic reaction when the baby was 3 months old and her throat swelled rapidly, she actually wasn’t able to breath at one point, for long enough that when they finally got to a hospital that they thought she might die.

She lost air for long enough that she had severe brain damage, and now in her own husbands words she is ‘a vegetable’, this isn’t some old lady, some stranger, some random story, this is real life, people I had met and seen afterwards in full health. So the husband is left in a situation where he can’t go to work any more because he has a young baby and wife to look after, they don’t have any money and there has been no payout on the insurance policy because they opted not to cover the risk, ironically, things won’t improve if they go to France either, they have already looked into that.

They will be losing their home eventually as the arrears are building up rapidly and there isn’t a damn thing I can do about it to help, I’m angry about it…. While I couldn’t have saved this lady, I could have ensured that they had a lump sum with which to either pay off the mortgage, or to live off, or if they wanted to go to France then they would have been able to sell the unencumbered property or use the money to move there and live off while renting out the home, it doesn’t really matter, it would have given them options.

I didn’t make sure they bought what I knew they needed, instead I let them determine their needs and didn’t hound them to do what I knew was the right thing to do. I didn’t do anything wrong in that, the only power I have is to make a suggestion and weigh up the pro’s and cons’, the line I like to use when talking about insurance is ‘you must identify and quantify the risk, then take appropriate steps to mitigate that risk at a reasonable price’. If I had been more forceful they might have taken out the cover, but that kind of behaviour will actually get you in trouble with the Ombudsman - strong arm selling is wrong and shunned for a reason, but when you allow a client to supersede your knowledge, knowledge gained from a decade of experience, study and daily practice - then you are essentially powerless to do your job right.

I thought about calling a radio show or something to talk about this but after my first enquiry quickly realised that it isn’t the type of story people want to hear, if I had instead ripped off a granny it would be everywhere, but in failing to protect a person there was nothing worth broadcasting.

This is a real life story and it has taught me a valuable lesson: people need to know that bad things happen to regular people, Jade Goody is an example, Lance Armstrong is another, illness doesn’t discriminate between the rich and poor, or the unknown and the celebrity - Some cynics will say ‘you just wanted the extra money!’, and that is a fair accusation but the €120 difference it would have made to a firm of our size is meaningless, we won’t be made or broken on that. So if you ever happen to find yourself seeking my advice, please know in advance, my suggestions are based on something greater than statistics, it is based on several clients I have had the pleasure of knowing who are in some cases dead, or in others in seriously bad shape. This is the real world and clients have taken their own life, died in accidents, had serious illnesses and experienced all of the tragedies you read about daily, ‘protection plans’ don’t really protect you, they are in fact quite selfless, they only serve to financially protect the ones you leave behind for the most part.

And that’s the thing, if insurance and finance bores the hell out of you then you need to know a guy like me, because I love it, I love what I do and the fact that almost no other industry would allow me the ability to sit with people and figure out ways to help protect their family if something bad happens while changing their financial future for the better, and I believe totally that I can make any person better off financially - if you aren’t happy with your finances, it doesn’t have to stay the way it is now, if you want more of it then you can make a plan, and the truth is that even with markets in turmoil or all the bad luck in the world, many of our clients still come out on top because they also change the way they think about money, and about what they hope it can do for them, more importantly - what it can’t.

Rant over.

This is a fascinating clip about a concept I am a fan of - that of the emotions of investing, and how we make decisions - only did a post on it yesterday! The full video is available here if you want to check it out (c. 1hr long).

I should state from the outset that I am against a banking enquiry if it is the ‘9/11 style public enquiry‘ it was originally billed by Patrick Honohan as (pic related). I also believe the primary failure in Ireland was one firstly of regulation and governance over and above what went on within the banking system, it is after all, the responsibility of regulators to exert their control over the systemic aspects of banking rather than vice versa, however, it seems to be the popular choice to have an enquiry and thus I have outlined how a relatively cheap investigation might be set up.

The people of Ireland are calling for blood and it is no surprise that various powers now want to deliver on it, they join other leaders from antiquity such as Titus, Nero and Caesar in wanting to please the masses with blood-letting, sadly, we have a history of making any investigation extremely expensive (it would actually be cheaper to have a real life gladiator tournament than a tribunal) often with little result - the tribunals are largely testament to this, in particular when they involve white-collar issues and not criminal ones. The fact is that in Ireland after an investigation find you guilty, that if you are rich enough you tend not to go to jail, and the only hardship might be having to cover your own legal bills.

So in advance we have several aims.

1. clearly define what it is that we are trying to ‘investigate’, much of the activity in banking is well documented and there is a large and clearly defined audit trail, for this a knowledgeable auditor can do
the job if there are specific issues known in advance that need to be considered. So if the issue is that ‘bad loans were intentionally placed’ or that ‘underwriting requirements were avoided’ or ‘legal requirements circumvented’ then it is all right there in the audit trail, oddly though, the feeling I get is that people want a general ‘explanation’ with a motive attached, I don’t know that we will ever get one, even if we stopped the entire nation to focus only on this enquiry.

2. define the parameters of relevance, is this about breach of regulation, irregular practice or outright illegal activity, depending on what you opt for (or indeed if we opt for all of them) it may be a case that we don’t need to do much research at all. This ties in with point 1, because banking is such a paper-trail intensive industry there is very little that cannot be uncovered with relative ease, if however it has more to do with conversations in board-rooms and the like then we get into a softer brand of evidence.

3. set a time frame and make the results public, something the Government fails to do, and when they do they don’t stick to it, not even when its a fairly set infrastructure project (think LUAS, Port Tunnel etc.).

Process: The first thing to do would be to remove the onus of discovery from the regulators alone, they don’t have the resources and it would take far too long, instead we should have a two phase initial inquiry which encourages people to rat out the wrongdoers.

I know (only anecdotally) that there is a huge amount of rage within the rank and file banking staff, they would all be only too happy to make sure that any people at the top that they can expose are given what they see as their comeuppance. There is a precedent there too, most of the public don’t know that former BOI chief Michael Soden was vigorously paring down BOI’s IT department just prior to the precarious information being found on his PC, odd that… You go to chop the IT department then suddenly the IT department brings you down?

There might be a ‘cosy cartel’ or ‘golden circle’, we see that kind of language used to describe many things if you look at some of the books out this year, or the tv/paper headlines, but in these ‘circles’ their strength lies only between themselves, every other rank and file member of financial institutions are likely more than happy to see these people brought down, and they want vindication for the regular Joe’s, this is one course where they might achieve it.

Phase 1: (60 days) anybody who worked in finance within the last decade can send an affidavit into the regulator, they can turn whistle-blower on any activity they know about within any field they have worked within, giving names, rough dates etc. equally, anybody can write in a confession in advance, stating their version of events upon any activity that may have been done with bent rules or contrary to regulation/law. This will provide a large body of evidence for the regulator to read through, they can then tie together the various affidavits to the organisations they relate to and that will be the foundation of further investigation. The obvious flaw is that perhaps nobody will whistle-blow, but this could easily be worked around by ensuring that professional bodies will get involved if any wrongdoing is uncovered

Phase 2: (30 days) The Regulator reads through the statements and filters them into criminal, very serious, serious, breach without serious implication and non-serious strata’s, then they set to work on the biggest ones first.

phase 3: (40 days) there would need to be some precedent set so that people implicated in the affidavits from phase one are placed with a burden of proof in phase 3, all the people implicated from phase 1 will have to defend their position from any implication placed against them in phase 1, rightly or wrongly, the people who come clean in the first instance should be given a precedence of ‘truth’ so that there is no reverse investigation based solely upon their affidavit, so they can’t ’self incriminate’, however, they can eventually be investigated if they failed out outline their own role, if they do confess and help then you do the standard treatment of greater leniency for them.

Finance isn’t like the Mafia, people won’t protect each other, perhaps if there is guaranteed anonymity for the people who make statements in phase 1 (not anonymous submission, but within the investigative process if their identification is protected) then it will encourage a full disclosure from within industry. The fact is that getting people to dob each other in from within is far more effective than trying to get in and pry answers from without. It works in breaking drug rings, criminal gangs, it is cornerstone of the RICO act and history tells us that people have an innate desire to not live in prison, so even the biggest criminals rat others out, they might be competitors or former bosses, it doesn’t matter, its effective.

phase 4: 6 months: All of the information is studied and investigated, the most pertinent being dealt with first and the less important either going into later investigations or thrown out altogether depending on the gravity of same - but with a formal warning issued as a precaution.

The regulator must then have a set level of fines which is relative to the size of the firm and or individual in breach, and professional bodies must also be involved - to the degree that any criminal breach or high level regulation breach results in the removal of professional recognition (eg: Institute of Bankers/ LIA would strip people of QFA, ACCA, ACA, CFA etc.) would all endeavour to do the same, and the regulator would create a ‘black list’ of people from the investigation so that it is known publicly, a further move would be that these individuals cannot be directors of financial firms, or become regulated personally, effectively we need to ‘clean out’ the system, in one fell swoop, not via the slow grinding attrition that we have seen thus far where the culpable are creating their own terms of termination.

The end result is that criminals would graduate to jail, and serious offenders are dealt with in a variety of different punitive manners, but if it must be done, then it must be done quick, with a set agenda. We shouldn’t put the uncovering of some ‘higher truth’ that we won’t ever really obtain above that of running a cost effective investigation in a timely manner.

This is (to my warped mind), one of the most beautiful things to witness, world class leaders in their respective fields talking to the young leaders of tomorrow on matters of life, ethics, success and what it takes. There is simply no alternative for being around great people, it should be part of any university syllabus to have a mentor, I have spoken about this several times in the past and believe it now as I did then. If there are any of you in education I hope that you find ways to expose your students to inspirational characters.

Full transcript available here.

‘I have a tracker mortgage so I don’t care’ a man recently said to me when I was talking about the near definite increase in margins that we will start to see in mortgages as lenders seek margin and reprice risk.

It was almost said in a smug manner, a kind of ‘yeah, times are hard but I have my tracker mortgage’, and then it struck me, most banks have a get out clause, they don’t have to use it, but they might. So I thought it might be interesting to point out exactly how this could come about, and essentially the relationship it has with falling property values, so if your lender ever calls you out of the blue asking you to let a valuer into your gaff be sure to say ‘no’.

The way that trackers could be wholesale removed from borrowers is via an up to date valuation where the tracker rate is connected to the loan to value (LTV) of the property, many tracker mortgages only exist because of a covenant where the loan was at a certain level or band of LTV at the time it was taken out (such as <60% LTV), and the danger is that the best of them were based upon low LTV’s which are more exposed to price drops.

Huh?

O.k. say you got a loan that was just a ‘general tracker’ at ECB+1.25% (no LTV restriction or an inverse LTV - eg: this was a rate for loans of 80% and above), then the value of your home isn’t really an issue, but some were ultra low margin loans along the lines of ECB+0.5% if your mortgage versus property was less than 50%. So put that in figures. Bought a place for €300,000 in 2003, property market goes wild, refinance in 2006 because the top end of the market is now at €600,000 and the ECB+0.5% loan commences.

But then prices fall 30% (take any figure you want the idea behind the example remains the same) and now the place is worth €420,000 and the loan is at €270,000. You are now in breach of your LTV covenant, the lender knows it, and you know it too, but nobody has reacted yet…. key word ‘yet’.

If a lender gets an up to date valuation and you are not within your agreed LTV brackets then they could potentially take the loan away from you and replace it with the appropriate LTV product, now that trackers don’t exist any more that replacement case would invariably be a variable rate.

That would represent a huge win for banks, essentially removing low margin low profit loans which likely still have a great LTV and replacing them with higher margin variables during a time where refinancing is extremely difficult, if a bank does this their customers won’t be able to do a thing about it, jump up and down perhaps, but otherwise helpless.

Who would do such a thing? The first will be (if it happens) a bank that isn’t covered by the State Guarantee or NAMA, they have nothing to lose and no political pressure to bow to, I hope I’m wrong, but when there is money on the table somebody tends to take it eventually and in this instance there are piles of cash for the taking and the thing that puzzles me is why this move hasn’t already been made.

Financial innovation has meant you can make money from many things which may or may not be considered morally correct, there are ’short sellers’ who make money when the price of a stock drops, some people consider that a bad thing, others feel that it is proof of an efficient market working correctly. Then you have the likes of ‘vice funds’ which invest only in things considered immoral such as weapons manufacturers, liquor distilleries, beer brewers and gambling. Then there are those that literally make money from death and today we will consider that group of investors, the SLS traders [naturally there are other non-market groups such as those dealing in blood diamonds but they are not tradable and fall outside of the remit of our description].

There is a thing called a ’secondary life settlement’ (SLS), and it is a financial trade where an investor buys a persons life insurance policy from them and continues to pay the premiums on it, then when the seller dies the buyer gets the money from it. Naturally this sounds pretty grim, especially when you see some of the buy side criteria - such as looking for ‘medically impaired’ policies, translation: the seller has cancer and is unlikely to survive for long.

SLS’s are therefore portrayed as a fairly macabre way of making money, even more so than the companies that sell insurance for death, and that is an odd thing, because a SLS investor is really only seeing out the duration of an assurance policy to its natural end of contract (and payout) that may have occurred anyway and in the meantime the seller makes some money from it.

Secondary settlements are actually a good idea for several reasons, first of all is that it infers certain property rights onto the owner of a policy, currently an insurance policy isn’t considered property that you can sell and that undermines the value of even paying for it in the first place, it is after all a type of asset albeit one that most of us never want to cash in!

It would be a good thing if people who were old were able to realise a cash settlement in life from a utility point of view, so rather than look at the example of paying off a granny with 6 kids who is dying of cancer, consider it another way - what if getting a cash payment for selling her life insurance gets that granny the best palliative care available that the kids (who may not have the money to pay for it) can’t afford, and this means that despite the inevitable conclusion, that this person passes away in the best and most comfortable surroundings possible.

Some might say - well… this isn’t really any different to ‘reversionary loans’ [which I jokingly call 'revulsionary loan' because people are so put off by them] where a person sells a stake in their home that they never pay back and then when they die the reversionary lender sells the property (offering it to next of kin first) and gets their money plus interest back.

The key difference is the asset, and in particular the validity of the asset, you see, a house can be used long after a person is dead, it can be rented out if they are in long term care and passed on as an asset that may eventually appreciate etc. A life insurance policy on the other hand stands several serious risks that may prevent it from realising a meaningful end, mainly that of premium cessation, where the person gets ill or in old age can’t afford the indexing premiums (many SLS are on policies where they get more expensive as you get older) and if they stop paying it becomes void and invalid.

In that example the policy now becomes worthless, you could argue that an old sick person might miss mortgage payments and get repo’d but experience tells us that the majority of people don’t have a mortgage after age 65 so while one asset becomes increasingly expensive to service (life policy) the other becomes less, and then negligible (house).

Take this example a bit further, imagine the person who is old and sick wants to give children a gift of money while alive but they only survive on a pension, a secondary settlement can do that, it can also help to cover the gap left by financial storms such as our 2008/09 crash which have left many who held dividend paying equities or other investments with catastrophic capital and cash flow losses.

When you consider every facet of a secondary settlement you can start to see that far from being a mercenary thing, it is in fact the market finding a way of offering people what they want. A person may have many perfectly good and rational reasons for wanting to take the money now rather than leaving it as a benefit to others after they die, most simplistic of all: what if they have no beneficiaries?

The secondary settlement market may be a partial solution to our pending pensions crisis, if the funding for this is not available in the public purse perhaps there is a market solution to providing income for the aged and this could be a part of that. Obviously, not everybody will ever continue to pay premiums or hold a policy large enough to provide a meaningful payout in the future and there are some restrictions that will weed out some participants, but SLS’s are not ‘bad’ by nature, they merely reflect a transaction between a willing seller and buyer, each have their motivations and each take from the transaction what they can but it is not inherently ‘wrong’ or ‘right’, if it is wrong then explain that to the buyer and see if they change their mind?

There are some important controls in place such as an auction system which ensures that people are not underpaid for their policies, and the buyers are regulated heavily as well. The one thing that could cause big problems in what is a totally uncorrelated investment market (to markets, there is obviously correlation to actuarial longevity tables) would be something like a cure to cancer, but frankly, I think even the losers in that example would be pleased with that because it would serve them in the future better perhaps than their profits would.

Today’s post is by a guest writer who we cannot name, but we can tell you that this person works in the collections department of a major Irish lender, this person (or somebody like this person) is the one who will call you if you are in arrears on your mortgage. In this post we will reveal some of the inner workings of a collections official and the various things that they do as well as letting you know some of the unpublished things that you should do to protect yourself. Our guest writer has many years of experience in collections, during both the boom times and the downturn.

So now, over to our guest writer…..

There are a lot of buzzwords in the press at the moment and a few of them are regarding what to ask your lender for if you are in arrears. At this stage we have all been told that if you fall into arrears you should ask for payment breaks and interest only periods etc. However, simply asking does not guarantee that you will be granted these concessions. It can (but not always) depend on your payment history profile, personal details (age etc) down to loan/value ratio amongst other criteria. In this blog I’m going to look at a few of these buzzwords and explain how you can turn these suggested options into a reality.

Ask for a mortgage break or ‘Moratorium’.

At this point in time every lender in the country is inundated with requests for moratoriums. Some of these are genuine and some are opportunistic. While many people will only request a moratorium when they are advised to do so or are in genuine need of one, there is currently an element of borrowers who are demanding moratoriums based on their ideas that the banks ‘owe’ them; having been bailed out by the tax-payer.

The unfortunate aspect of this is that genuine cases can be swallowed up in a multitude of undeserving requests. For example, if you and your partner are both working but one of you has ‘taken a hit’ with the pension levy, this does not merit a moratorium, and yet I am asked for this daily.

However if you for example have lost your job and are genuinely in need of a moratorium you need to present your case in a way that will show this to the lender. Having worked with many mortgage brokers I can testify that a good mortgage broker will not lie about the facts of his case, however, they will present the case in the best possible light to the lender. Requesting a moratorium is no different. Here is how you should go about this.

Before agreeing to grant a moratorium your lender may ask for details of your current income and your outgoings. They may have a specific form for this or they may ask you to include these details in a letter. Be aware that if in a plea for sympathy you state that you are paying credit unions, credit cards, and personal loans this may sound good to you but will cause alarm bells to ring for your mortgage provider. You may well be struggling financially but they will instantly question why are you paying €200 per month to a Visa Card, €200 per month to the credit union and €400 per month to a car-loan when you have not paid a penny to your €800 mortgage in the last 3months.

If this is actually the case forget the moratorium and reassess your priorities. The credit card company can do no more than cancel a piece of glorified plastic. Your mortgage is secured on your family home. Your lender will point this out to you and suggest that perhaps you are asking the wrong lender for a payment break. That being said, do let your lender know that you have other creditors. Include statements and or demand letters from the other institutions.

Be honest with all incomes. If you mention you are spending x amount on food and groceries because you have 3 young kids, then your lender will know that you are in receipt of child benefit for each of your children. Do not be afraid to be honest. Your lender will have more sympathy for a request from a customer who is not seen to be trying to pull the wool over their eyes, and I mean that from a collections point of view, if somebody is jerking me around I’ll return the favour.

There are two types of moratoriums. Full moratoriums and interest-only moratoriums. Full moratoriums provide you with a complete break in payments for a period and interest only moratoriums allow you to only pay the interest for a period of time. In your request you should always ask for a full moratorium. Your lender may only grant you an interest-only moratorium but if you only ask for this from the outset, then this is all you will get.

If you are refused a moratorium do not be afraid to ask again. Ask them on what basis was it refused. You may be able to clear up some details and subsequently have it approved, ask again and if needed, ask again and again. However, do not be aggressive – it will not endear you to the person on the other end of the phone and it will make them less sympathetic to your case.

If you are still being denied the option of a payment break, you can try bargaining with them. Offer an agreement that if they give you interest-only for 3 months then you will pay above the interest at an agreed amount so that while on interest only, you will still be bringing down the arrears. Likewise you can offer that if they give you a full moratorium you will pay an agreed amount during the moratorium to bring down the arrears. The lender may be persuaded by this, as not only will you be given a much needed breathing space, but the existing arrears will be lowered during the break even if only slightly.

Finally do Not repeatedly ask for a MONO-torium. It won’t in any way affect your eligibility for being granted a moratorium, but it will make the arrears officer want to bite his or her tongue which may affect their ability to properly annunciate the further options available to you!……Ok that last point may not be relevant to most cases but this arrears controller could not bring himself to omit that comment from this blog!

Extend your term

If you are struggling to meet your monthly instalment a good option is to ask your lender for is a term extension. This will increase the time you have to pay off the balance of the loan and as a result will decrease your monthly repayments. Lenders will comply with this proposal provided you meet certain criteria. However they may be reluctant if you have not been paying at all recently..

If you haven’t been paying at all in the last few months there are ways in which you can assure your lender that you will maintain future payments if the extension is granted. Offer to pay the proposed new repayment for a couple of months as a show of good faith. They will then have proof that you are serious about maintaining this new monthly repayment and they should then be happy to extend your term. If you have proven you can pay the new amount by making 2 or 3 of these repayments then they would have no reason not to extend it. If they refuse, make the point that you will be complaining to the regulator that they are not playing ball as you have proven you can meet the new repayments and then they are not allowing you to do so. Bear in mind however, that there are some constraints on what can be done.

Do not demand that your mortgage provider extends your term beyond the limits of human longevity. The lender will not increase the term of a mortgage by 20 years where the borrower is already 65 at the end of the current term. There is a very good reason for this. Life companies get a little scared when asked to cover large sums of money against the (un?)likely death of someone who was likely begotten during biblical times. Unless waived due to certain circumstances, a Life Policy must be in place on a home-loan and so the lender will require you to increase your life policy before they extend your term. Check with your life company that they would be willing to extend the policy at a reasonable price. If you have a reasonable quote from your life company before you approach your lender to consent to an extension, this can only make your proposal stronger.

If you have failed to secure an affordable life policy covering the proposed new term, ask your lender will they waive life cover for the last 5 or 10 years depending on how long you were extending it for. One again, do not be afraid to ask. Not all options are advertised but that does not mean they are not available in certain cases.

Ask for a rate review.

Find out what interest rate you are on. Are you on the standard rate? Banks will not voluntarily drop your rate if you are on a higher than average rate. Once again, if you don’t ask you wont get. It may be that you are already on a standard rate and therefore wont be offered any better than what you already have but sometimes rates can simply be wrong. Perhaps there is an unreasonable loading on your account. Again, asking will do no harm.

Are you on a fixed rate which is making your repayments unmanageable? Find out what the charge would be to break from this fixed rate. Ask  them to work out for you what your new repayment would be if they were to take this fee and add it onto the balance of the loan. If the breaking fee added to the balance of the mortgage does not amount to much of an increase in monthly repayments and on the other hand, the difference in the rate would bring about a significant drop in monthly repayments then this is certainly something you should consider doing.

Sure, the breaking fee being added to your balance may mean increasing the loan to the tune of perhaps a couple of thousand or more but the interest saved with your lower interest rate may actually save you money overall and simultaneously make your repayments more manageable, and don’t forget - in the long term you obviously want to recover, this is a ‘here and now’ solution.

Ask to have your arrears capitalised

So you’ve been in arrears for almost a year now. You have looked into all the options from monomoratoriums and rate reviews. You have extended your term. You can now just about make your monthly repayments but you just cant seem to bring the level of those arrears down. How do you stop worrying when you can meet your repayments but those 5 months you missed are just sitting there like worry-goblins on your shoulders.

Perhaps you are slowly clearing the arrears with the odd payment here and there but seeing as the balance is only reducing by 100 each month you feel like its taking forever and you are eager to have this off your back. You should realise that the bank does not want to have its customers in arrears. They are being monitored very closely and want the arrears book to be shrinking rather than growing or remaining unchanged.

Make an offer to the bank that if you maintain the monthly repayments for a few more months, that they might agree to capitalise the remaining arrears? If you had arrears of €7000, and you were only paying €100 per month off the arrears, this would take just under 6 years to bring your account back up to date. If they agree to capitalise your arrears after you make 6 full instalments then you are clear of arrears in 6 months. Six months or six years. This is clearly a no brainer for both lender and borrower.

The bank may not make it public knowledge that they will do this but you may find on asking that they are only too happy to do so. They know that you will have the incentive to ensure future payments are made on time and they get the bonus of decreasing the arrears figures on their books. It’s important to note that they may very likely only agree to this on a once off basis so remember your motto, you have only one life; use it wisely. Don’t presume you can make a habit of missing a few months over each xmas period and then proceed to have them capitalised by summer. The lender is genuinely helping you here, don’t try and take advantage of it, or it wont be entertained and you are only ruining it for other people, if management find out that this isn’t being handled well then future borrowers in trouble won’t be offered it.

And Finally………. If worst comes to the worst

Banks keep a file of all documents received and sent on your account. Ensure that you do the same. If things come to the worst in an arrears situation and your case comes before a judge, it would greatly benefit you if you have a complete documented record of having asked for moratoriums or interest only periods. It will benefit you that you have a record of having offered certain proposals. If none of the above options have been entertained and the lender can be proven to having not helped you in anyway reasonable then the court will be swayed more in your favour. Keep a record of all correspondence and don’t forget that when it comes to getting lenders to grant concessions, ‘No’ does not always mean ‘No’. Be firm but be polite, if you are reasonable and honest they will normally do what they can to help. Just remember, if you are granted a concession you should do your best to stick to your part of the agreement. Cooperation works both ways.

Good look with managing your arrears and remember; don’t be afraid to ask for concessions. After all, the bankers have not been afraid to go cap in hand and you are only seeking a solution that will benefit everyone.

This is a six part interview so rather than fill our blog with lots of clips you can follow the rest of the it here, it is also worth bookmarking minyanville as it is a great site with lots of good information and contributors from around the world.

At present any practising solicitor is required to have professional indemnity insurance up to a value of €2.5 million (per claim) this is a cover that allows the solicitor to pay out if they have a claimable fault in their business - such as a mistake in reading title or other such issues. This insurance is not optional, they have to have it in order to practice and the minimums are set out by the Law Society of Ireland.

Recently professional indemnity insurance has gone through a serious repricing, it has to do with the COR (combined operating revenues) of firms offering insurance. COR is part of the way that insurance companies make money, say the actual cost of providing a person with insurance (the type doesn’t matter) is €100, the insurer takes that money and generally invests it, if they make 8% on the markets with that €100 then they make €8 and in turn they can offer you insurance for less (eg: €95) the next year and still make good money as long as they keep their claims book in order (which is more to do with underwriting).

However, when markets tank (as they have in 08/09) the investment side of the business loses out, typically claims increase in a down market (that might be in [for instance] household claims as crime rises with unemployment) but the premium loading affects the entire book and thus we enter a ‘hard market’ to use the general insurer terminology for ‘jacking up prices because we are not making money’.

This has happened to solicitors on the PI front, it is also partly due to the sheer size of the risk (you might think Michael Lynn and his €80m+ issues but that actually isn’t where the claims are coming from because dishonesty may not be covered) which have been seen in the commercial markets primarily, for instance errors in commercial conveyancing where a remedy may cost into the tens of millions.

A knock on effect is that of a reprice whereby solicitors who paid €10,000 last year will now be expected to pay as much as €30,000 this year! Strip out any like or dislike and put this case in a different light: imagine you had car insurance, no crashes or claims and suddenly you are told it’s 2008/09 prices times three! Of course, that is if you are lucky enough to be granted the right to insure, most of the insurance companies have clauses that allow them to stop offering insurance over and above any re-pricing.

This couldn’t come at a worse time for solicitors who have already seen a total slump in fee income (other than that of litigation!) along with an increased difficulty in realising the income where and when it does arise because of widespread economic difficulties across the range of clients they represent.

Conveyancing has collapsed and while divorce rates are up the vouched expenses (expenses a solicitor goes to on your behalf) are high and cause cash-flow issues and often the payment in a marital break up came about in a lump sum when a family home was sold, which feeds negatively into their practice given the issues in the property market.

There is now a very strong likelihood of many practices having to close down which will leave only the larger firms with a presence in the market, that will reduce competition, inflate prices (cost push in terms of the price of delivering service when insurance doubles/trebles, and supply side as there will be fewer competing for business) and apart from putting many people out of work it will mean paying more at a time when all we are hearing about is ‘deflation’.

If you are like me you have no particular love for solicitors or their trade (the same can be said of brokers I suppose!), but you must recognise the vital service that small practitioners offer in particular in rural communities, namely that of providing legal advise in a personal capacity with delivery of the service in a manner that larger firms often will not consider (outside of 9-5 hours, unbilled phone calls etc.)

The nail in the coffin is that of the requirement to hold insurance after closing down for a period which is greater than the Statute of Limitations (6 years after ceasing trading).

It would appear that Solicitors have fallen foul of this economic downturn and particularly the errors of our financial regulation and ineffective Government. However, the real losers will be Joe Public, in that Law like other commodities will increasingly only be available to the rich.

While it may be too late to save some small firms, there are others out there who will weather the storm, the only question is ‘who’, one thing is for sure, it can no longer be a given that you will have a fully bonded solicitor in your own town, and if you do require their services you will (perhaps not in the short term but in the long run) have to pay more for it as the cost of operating a law practice shoots through the roof.

The current debate is raging over NAMA and the pricing of loans, much of it centres on the value of the properties in question and about the way in which a ‘loan’ is valued (as opposed to the underlying asset). This makes for good headlines, but it doesn’t help the average person who is not shaping policy and who’s sole role in this mess will be to carry the can and pay their part in the tax pool which will ultimately fund the bailout.

However, you may be affected in other ways, and these are things which you have the choice of opting out of, namely that of the margin you are paying if you currently have any debt/credit outstanding.

Once NAMA comes in it will be extremely likely that banks increase their margins, it is important to consider the ‘why’ as much as the ‘when’ though so we’ll take a look at those.

Why?

PTsb lead the way on this, because they are not getting NAMA protection they have no need to worry about the politics of the situation they raised their variable rates by 50 basis points this summer and despite all of the fuss created it went ahead successfully. They have realised that there is cash on the table in the respect that lending is scarce and therefore prices for it should be accepted at greater premiums.

It seems likely that PTsb will now be spun off (doing wonders for the Irish Life share-price in the process which will likely trade higher than €6 before the end of 09′) into a ‘third pillar’ in the banking system, the other companies that will be mashed into this new entity are likely to be the EBS and INBS, both of whom have considerable issues of mutuality to overcome for this to happen. Having said that, where there’s a will there’s a way and if NAMA goes ahead the impetus will be there for such a move after the two entrants with a difficulty have been effectively saved from extinction.

For a while we felt that this wasn’t likely, that INBS would be pushed into an arranged marriage with BOI and EBS would be forced into AIB (all lead there kicking and screaming), but this has -according to the recent headlines- been a misguided belief, we get it wrong here too!

AIB and BOI have not been able to do this for political reasons, all of the foreign based banks have already gone ahead and done this, and that means we are seeing a pattern evolve, non-NAMA protected banks have already raised their interest rates on variable rate mortgages, so what is stopping the others? Surely it doesn’t make sense to be extra competitive in a market with scarcity value?

And so we find ourselves asking the second part of the question.

When?

When… Q1 of  2010 seems to be the most logical time in our opinion. After the NAMA legislation has passed and things have started to change, the justification will be (from EBS/INBS side) that ‘new structures/prices etc.’ have forced a ‘reconsideration of risk pricing or margins’, nobody will be able to argue that one. PTsb will likely be at the table and having done this already, will not have any issue in being part of the move.

AIB and BOI will have faced down total nationalisation (BOI is a near certainty to avoid it at this point) and with the risky assets either off the book or guarantees of it, they will use the opportunity to shore up the coming residential slaughterhouse that the imposed policy of forbearance on repossession (as part of the re-capitalisation scheme) brought about. We’ll be sold the idea as ‘that of borrowers having to pay so as not to rely upon the taxpayer’ and apart from being right, we’ll all suck it up.

Ireland has the lowest lending margins in all of Europe (other than Finland) and this is set to end soon, the window of low margin lending is rapidly closing and along with it, access to credit will become reduced as it is directed towards businesses (rather than residential borrowers) and equivalent stress tests based on existing rates cause qualifying for a loan to get harder.

Included in this will be less of a reliance on depositors and thus the utopian deposit environment will turn on its head and depositors will be paid much less while borrowers will pay much more.

So it seems any prospective buyer has a Rubicon to face if they are not a cash buyer… Do you buy now and pay over the odds for the property? Or wait and pay over the odds for the finance required to fund the purchase?