Irish Mortgage Brokers Blog

We have made a few more bold predictions in our ‘Mortgage Market Trend Outlook 2012′ and reviewed how wrong many of our 2011 forecasts were as well.

Some of the main points thus far are:

1. That mortgage lending bottomed out in 2011.
2. That IBRC may take on some tracker loan portfolios to de-risk state owned banks (as the state already owns these loans entirely anyway).
3. That rates for existing AIB borrowers will have to go up but that for new borrowers rates may come down with changes to how prices are charged depending on risk of the proposed loan.
4. That deposit rates will start to drop.
5. That up to 25,000 mortgages will be deemed ‘unsustainable’ and that the ‘won’t pay’ contingent of arrears cases may be as high as 1 in 5.

We hope you enjoy this report, we in turn hope that we get some of the calls right!

Many thanks,

Irish Mortgage Brokers

RTE interviewed Karl Deeter in this clip about the recent CSO report, it was on the 20th of December 2011.

There are two sets of statistics floating around; on one hand you have the banks who claim that they are lending and also that the demand for credit simply isn’t there - a belief further expounded by John Trethowan. Then on the other hand you have the likes of PIBA who counter claim that 80% of applications are being refused.

So it is important to break down the vital components. First of all, the debate often centres around Small Medium Enterprise (SME) lending; even if demand for that type of credit isn’t there it doesn’t automatically translate into a reduced demand for mortgages. The point being that we can’t compare SME loans/business loan demand to that for mortgage credit.

Secondly is ‘what constitutes a refusal’, and this is where common sense diverges. Even the bank accept that if you seek €200,000 and are only offered €100,000 that it is a loan not fit for purpose, this even goes for SME loans - imagine trying to borrow 80% of a machine purchase at 200k and then trying to come up with €60,000 you can’t raise? Mortgages are no different, if people don’t have the ability to bridge the difference between the purchase price less their deposit and the loan sanctioned then it is an effective refusal.

If one wanted to be cynical, they would advise the banks to say ‘yes’ to absolutely everybody and only offer them €100 maximum. This ruse would be quickly seen for what it was, and yet when you add in a few zero’s and

Having given the banks support to the point of no return it now seems acceptable for even the Credit Review Office to use the ‘reduced demand’ argument to tacitly approve the strong chance that BOI & AIB will miss their combined lending target of €6,000,000,000 to Irish companies over two years.

If you have no demand in one area then why not funnel those funds which ‘must be lent’ to wherever the willing borrowers are? That our vested interest comes into this is evident - but it is frustrating to see a market down 95% and the issue of loan supply being a strong driver in the lack of transactions.

The vast majority of people who want to purchase a property simply cannot get past the underwriting hounds who have gone from being puppies in the last decade to being dogs at the gates of hell over the last two years. And the blurring of lines between different types of credit and the gathering of statistics give two totally different stories, but much like any cake, you have to look at the ingredients going into it, and in our opinion at least, the way ‘approvals’ are counted and accounted for is wrong, meaning credit is nowhere near as available as we are told it is.

The preference for letting property for 1 year is often suitable for both tenant and landlord alike, however, if we do start to see people showing a propensity for longer term renting then creating a lease that facilitates this is vital.

The fact is that the ‘12 month term’ is partly irrelevant, what it does do is set out the terms and agreements; but during that 12 months the renter obtains the right to stay for a longer period under ‘Part 4′ of the Residential tenancies act 2004 (a 4yr cycle).

This is often a point of contention in eviction cases, so it is vital that people wishing to avail of Part 4 write to the landlord stating this between 3 and 1 months before the end of the tenancy date, although it can exist even without notification being given.

But today we’ll assume that both parties to the lease want to engage in a longer term choice. There are a few primary issues that each of them will want to cover.

1. Who pays for certain aspects of the upkeep? It is a good idea to sit down and negotiate this point and have it written into the lease, so mowing lawns (for instance) may be assumed to be the landlords responsibility -it is – but if you agree to have the tenant do it then it should stand.
2. Rent reviews is a big one, a longer lease comes with the risk that the person can fix their cost going forward, for this reason we would suggest doing two things. Firstly have a review date, and secondly have a ‘collar’. The review date needs agreement, so every two or three years would be a good idea. The ‘collar’ sets out the change – so if you had a 15% collar it would mean that the rent at that review date cannot go up or down by more than 15% and otherwise you set it at ‘market rent’.
3. The ‘market rent’ should be the average of two estate agent opinions, one from each party; not ideal, perhaps not even totally accurate but it is a way to ensure that 3rd party opinion is front and centre rather than personal battle on the topic.

These are the two main considerations, there may be others for wear & tear and maintenance of other things that you may want to negotiate on. Negotiating at the outset doesn’t guarantee results, naturally, at any point either party can renege on their agreement and revert to the PRTB or courts or otherwise, but it does take care of the majority of issues you might encounter.

Agreeing these things in advance also sets out pricing which is one of the main concerns of a renter (along with quality levels/location etc.).

I put on my thinking caps last week and drafted a paper called ‘Designing a Debt Relief programme with minimal moral hazard to address the Irish household debt overhang‘.

We were every happy with the write up it got in the Sunday Independent via Carol Hunt.

There is far too much talk of ‘moral hazard’ in the public debate to date, instead we should be also considering ’separating equilibrium’ (which is kind of the opposite of moral hazard - it’s the ‘pain’ that comes with moral hazard ‘gain’).

To do this you have to create a programme which works within some of the parameters of the existing laws (new legislation must still take account of what exists before it), look at the operational aspects of the scheme (how it functions in real life), design a general algorithm of the process and most importantly have an ‘incentive alignment’ which means that neither party voluntarily makes an action to the intentional detriment of the other.

So I failed if you take every metric together, but what does come out of this is that you could have a somewhat prescriptive debt solution that works rapidly, uses established methods and that is fair to both bank and borrower.

The statement that we ‘can’t afford the cost’ is a legitimized fallacy, one that if you repeat it often enough becomes true. Contrary to that is the fact that loans that cannot be repaid will not be repaid - if you accept that then there is a cost, the question is whose lap does it land in? The banks via writedown/writeoff or the taxpayer via additional welfare costs?

An easier way to think about this is as follows: A cost is a cost, and the question is really about who bears it rather than whether it exists or not. This is just another example of the banking system hoping to offset their costs on other parties, it is the ultimate rent-seeking behaviour.

I am hopeful that a few people will read this and critique the heck out of it (please critique here or post a link to where we can find the critique), because this is HOW the subject advances, to date it has all been on subjective stances as to what is ‘right’ or ‘wrong’. On the cost front we used a simple comparative cost rather than a macro-economic one.

If nothing else, this paper will cure insomnia!

I had a wonderful debate today on Newstalk where we discussed the rental market, Threshold sent in their Chairperson Aideen Hayden. The debate was very informed, in particular Aideen was very sharp in the area of tenancy laws, I learned a lot during this interview.

Naturally there are always a few corrections - she corrected me twice; once on sub-letting and again on a statistic that I took from the PRTB annual report (going so far as to mention that she is on the board of the PRTB and that therefore I was wrong).

Alas, I have to offer a correction in return to a PRTB board member & chairperson of Threshold who is currently undergoing her PhD in Housing and who has a degree in Economics (all of these things were mentioned to me in backing up her argument [on and off air]); see the graph below - taken from page 33 of the PRTB 2009 annual report.

This is not advanced mathematics, just add up the Green and Blue parts of the chart and you get the 65% that I mentioned that I mentioned where part or all of the deposit was kept by the landlord. At the same time her take on the matter was that I was wrong/inaccurate and that in fact in over 70% of cases the deposit is refunded in full or in part.

This is merely taking your figures starting at different ends of the number line.

I did mention this after the show and she still insisted I was giving misleading information and that due to holding a degree in Economics that she didn’t need to converse on the topic any further. My impression of her is that I was both highly impressed with her encyclopaedic knowledge in her field of expertise but dismayed at the lack of engagement when challenged on simple numbers by a practitioner - because the point made was both fair and accurate depending on which side of the fence you read it from - I actually tried to raise this as we were leaving studio (about the blue part of the chart being a crossover in both stat’s) but it was not taken up.

The other correction was when I said that you can’t just sub-let a property, I write this condition is written into leases based upon my interpretation of the 2004 Act. Aideen said that this was not true that you could sublet if you wish. Which brings us to (2004 Act S16 sub section k)  Tenant may not assign or sub-let the tenancy without the written consent of the landlord (which consent the landlord may, in his or her discretion, withhold).

My interpretation was that this had to be written into the lease as a clause for them to be able to do it automatically [or they would need permission] - in this case (quoting law) it shows that you cannot just go ahead and do this without consent.

I have to admit, I don’t often walk away from such debates disappointed, in fact they are often a great education (even if it comes at the expense of being wrong a lot of the time!), but Aideen’s statements that my points are wrong/invalid simply do not hold when challenged, and as both a board member of the PRTB and Chairperson of Threshold I would have expected more.

There was an interesting post on ThePropertyPin that I came across on twitter and in reading the analysis I was struck by the statistics mentioned regarding the rent supplement.

For a non-landlord, hearing that ‘rent supplement’ is above actual rents must seem like lunacy, heck, even for a landlord it sounds ridiculous. In particular when the average is 7% above the general asking prices according to the piece. But taking this post on the face of things merely circumvents the truth within the figures.

In fact, in many instance there are several factors at play, such as a local authorities inability to accept ‘asking prices’ as the real price, where these figures are negative it demonstrates that they know the asking price is not the ‘clearing price’ and therefore they can offer the client (rent supplement recipient) far less than that which is dictated by the market.

For instance, in every case given, Leitrim is not giving people enough to rent a property and its the same in Longford. In Longford the average of -22% of the asking rent is not there to make people homeless, rather it is the clearing price for the properties and it is working in terms of getting tenants into good quality buildings.

Am I sure? Yes, because a call to the housing department in Longford County Council verified that (just needed to double check!).

Now that we have debunked the fallacy behind some of Ireland’s worst counties when it comes to property stock why don’t we look at the shocking examples of overpayment which would justifiable whip people into a rage.

A 17% premium in Kerry on a one bed apartment becomes only a 2% premium if you go to 2 or 3 bed apartments. And let us not forget - every example given is for apartments, not houses. How many 1 bed apartments are there in Kerry versus the people who want to live in them who are on rent supplement? If a couple in Kerry lose their jobs do they move to a major urban area to look for work or stay put?

How many owners of 1 bed apartments are in the tourist letting business in small towns rather than the local welfare receipt business? These things don’t translate across, if they did you wouldn’t see such a drop in the premium on 2 and 3 bed apartments.

Wicklow demonstrates the same thing, Wicklow 1 beds command a 25% premium according to what is on the PropertyPin, but think about this: if you are getting money that you don’t have to work for then why would you opt for anything other than the maximum quality you could obtain for the allowance given? Add to that the cheaper properties are not in good locations and welfare recipients don’t all own cars so they need to be close to public transport and that means getting a really good 1 bed, not something halfway up a mountain, if they have children there are also minimum standards that must be met.

In fact, under the housing act changes of last year the local authorities actually carry out inspections now for properties that are to let and if it isn’t up to scratch you can’t rent it to a person receiving rent supplement, so it implies that standards must be kept high and therefore the cheap properties might be eradicated instantly.

Even this flood prone property in Bray is more expensive than the price given as ‘proper market price’ in the comparison so there is perhaps some ‘figure massaging’ in there too.

The majority of 97,000 recipients (people or households) on Rent Supplement live in major urban centres, namely Dublin, Cork, Galway, Limerick and Waterford, something I verified with a senior civil servant in the Housing Finance Agency. Looking at those areas you see the following:

It shows that far from being some big ‘give away’ that in the actual areas that the supplement is most needed and used that often it is BELOW the market asking price, meaning that in many cases the person actually has to make up the difference.

In particular the 2 bed apartments interest me because they are the key accommodation in ’standard letting property’ (we’ll continue to just breeze past the uncomfortable non-inclusion of actual houses in the example) and in every major urban centre the figures are negative or only up less than 1%.

In the three bed category it is an even bigger divide with a greater than -10% in 4 out of 5 urban centres.

And this is where it gets unpleasant. There is a risk premium to letting a property to people on rent supplement, the PRTB backlog is not just made up of tenants who had their deposits kept, and in those cases there are a percentage who will still lose based on the evidence provided at the hearing.

Rent supplement is not ‘guaranteed’ because in many cases the tenant controls whether it gets paid or not, and letting agents will tell you that in general a property let out to a family on rent supplement will have greater wear and tear - hence the ‘no rent supplement’ ads you see, implying that there is a genuine increased cost that comes to renting a property to a person in receipt of it.

So, when you look under the hood of the figures you find that in the major urban centres where rent supplement is used most that far from being a give away that in fact it doesn’t cover the price, so landlords either discount for the tenant or the tenant has to make it up themselves it is nothing like the image portrayed when you first examine the issue.

The propertypin has proved nothing, I don’t often visit the site because I was banned for having a ‘commercial name’ [three years after taking the name up!]); and you can consider this ’sour grapes’ if you want, or a rational examination of faulty analysis, whatever floats your boat!

We were pleased to appear on TV3 news in connection with the most recent CSO figures

When a bank creates a loan that becomes an asset, the property it is secured upon is the collateral (sorry my teaming millions, I know I repeat this eternally). So if NAMA decide to become a brand of lender this October as we saw from an article in today’s Independent; then how does it work? Where does the money come from?

Take a property that they are putting up for sale (1st picture: pic not related). We’ll say for the sake of this example that it is worth €200,000.

The NAMA position may be that they paid more or less for this particular property but it doesn’t really matter; what does matter is that for the sake of them selling it the property may as well be unencumbered, there is no lien above that held by the NAMA.

This means they can give a title deed to the buyer when they sell it - but don’t forget, when a person takes out a mortgage there are two sales/purchases, the individual buys from the vendor (1st sale/purchase) then they sell it to the bank in exchange for the money [we call the 'mortgage] to complete the transaction (2nd sale/purchase) and the bank then take the ‘1st lien’ or ‘right’ on the property.

Prior to this they put in their deposit (10% or €20,000) which becomes their own, this is their ‘equity’, which is why ‘negative equity’ is described not as value versus the market (that’s called ‘price’), rather value versus the mortgage secured on the property.

What NAMA have indicated is that they will provide a kind of ‘bridging finance’ for buyers, so a certain portion will be made up of Bank borrowing, just a regular mortgage (we’ll speculate that it will be 60%).

This has a key advantage for the bank who will have 1st lien (because NAMA have said that there is some loss sharing mechanism which would indicate that at best they hope for 2nd lien). First of all they have a low loan to value (LTV) mortgage - considered lower risk because before the property gets into negative equity from the banks perspective (60% of 200k is €120,000) the price would have to fall a further €80,000. Secondly it means that they can lend a little more freely because their risk in this instance is reduced, it doesn’t mean ‘lax standards’ but it shouldn’t be as stringent as the lunacy that prevails now where it is so difficult to obtain credit.

So working through the example: The buyer puts in €20,000 (10%), the bank forward €120,000 (60%) leaving €60,000 (30%) to cover.

Thus we have the NAMA input; but where does this money come from?

Quite simply it comes from nowhere.

How? Because the property is unencumbered so what NAMA do is draw up a loan agreement (that then becomes an asset) and they give you the keys, along with an agreement that (speculating) might say that if prices fall then after 5 years there is some kind of loss sharing mechanism.

This means that they go from a situation of having an empty apartment generating nothing into the following:

Buyers input: €20,000
Mortgage: €120,000
Loan written: €60,000

The first two give a cash input of €140,000 which can then be invested (we’ll assume they get 5% p.a.) and they also have a loan of €60,000 which is a future claim on earnings of the buyer (again, we’ll assume 5% interest rate).

If there is ‘loss sharing’ don’t forget, the buyers equity gets wiped out first so it is not a case that if values fall that NAMA are onto a loser, rather it is if they fall greater than 10% over the next 5 years, and that may well be likely but don’t forget, they have money in hand today which will generate profit elsewhere.

That 140k over 5yrs at 5% will give them €178,679 (compound interest being [M=P(1+i)n]), the 60k loan will bring in €16,567 in cash meaning that they have €60,000 at risk but €55,246 in cash-flow, and let us not forget that if prices did fall and fall that the €120,000 bank loan has no loss sharing and would put NAMA in a better position than if they held out and sold at a later date - but I see that as an Armageddon scenario.

If prices fell a further 20% (which could happen and was hinted at in the Central Bank paper ‘Scenarios for Irish House Prices‘) then NAMA only have €20,000 to worry about and depending on the loss sharing scheme put forward all they do is write down the value of their loan on that basis giving the following:

€120,000 underlying bank loan
€20,000 deposit (now wiped out as buyers equity goes first)
€200,000 - 20% = €160,000 so the €60k loan they advanced becomes a €40k loan from that day forward.

Not a bad deal (for them) all said.

We were pleased to feature in studio with Sharon Ni Bheolain of Six One news on the topic of the CSO Property Price index.