Irish Mortgage Brokers Blog

Primetime took a look at the mortgage market situation in Ireland on the 2nd of February, they spoke to various industry experts as well as people on the street about their feelings on the situation. The clips below are well worth watching.

In this clip Primetime spoke to people on the street, and the general opinion was one of empathy for borrowers in trouble but the overall tone was that people didn’t necessarily want to step in and have their tax money going to bail them out. Then David Murphy interviews an anonymous borrower who is in debt trouble, as well as getting the opinion of Irish Mortgage Brokers Operations Manager Karl Deeter and Paul Joyce of the Free Legal Aid Centre (FLAC).

In the second video Pat Farrell of the IBF (Irish Bankers Federation), Stephen Kinsella (Lecturer of economics at University Limerick, and author of ‘Ireland in 2050), Pauline Blackwell of FLAC (free legal advice centre) and Ciaran Cuffe of the Green Party talk to Miriam O’Callaghan about the issues of debt and the solutions for solving impaired mortgages.

The third clip looks at the effects of interest rates as well as the PTsb decision to increase their interest rates, featuring David Guinane of PTsb talking to an Oireachtas Committee. Charlie Weston of the Irish Independent newspaper (personal finance editor) also features.

When making a mortgage application this is a question that many first time buyers want to know, how much money do I must I have for a deposit? Well, that kind of depends on which bank provides the mortgage finance!

Lending criteria is different for every bank/building society/lender, this goes for rates, the general underwriting criteria as well as the ‘loan to value‘, the deposit you need is 100% minus the Maximum LTV and that will give you the deposit amount you require.
For instance, ICS have a maximum LTV of 92% so the deposit you need - if you are obtaining finance through them - is 100% - 92% = 8%.

What is interesting in that example is that when you go ’sale agreed’ on a property the estate agent will ask for a security deposit and the balance of 10% at the signing of contracts, this is an example of industry lingo being so embedded that it becomes separate to reality. The fact is that if you obtain 92% finance that you don’t need to give a security deposit plus the balance of 10% at the signing of contracts, it would be the balance of 8% - your solicitor will talk to the other side and organise this.

The mortgage criteria on deposits required by each bank is listed below. We have put them in the order of the banks that are actually lending.

Banks Lending Normally:
AIB, ICS, BOI all require at least an 8% deposit.

Banks Drip Feeding Lending:
EBS 8%
Haven & KBC 20%

Banks That are essentially Not Lending:
INBS 10%
NIB 20%
BOS 20%
PTsb 10%
First Active (Not doing any new mortgages)
Ulsterbank 10%

The banks that are currently lending in a regular fashion all provide 92% finance, it will be no surprise that they are headed for the maximum market share on lending in 2009, obviously the €1,000,000,000 that we gave each of them earmarked for first time buyers helps a lot too! In any case, there are plenty of banks and lenders to choose from, the issue is currently more about ‘who’ is lending as opposed to what prices or options are available, if you can’t get approved with one of the current primary lenders then you may have to wait up to 3 weeks for an initial response or find yourself with the option of a variable rate which is 400 basis points above ECB.

I was asked by a colleague in the UK to provide an overview of the Irish mortgage market, he has often advised the Bank of England in the past on the UK buy to let market, however this time it is in relation to a talk he was due to give to an international financial services group on the Irish economy. Below are the contents of my correspondence which is a no holds barred view of the mortgage market in 2009.

Remortgage: This area is finally starting to see some life again, the rate drops are filtering through and many of the people on fixed rates taken out in 2005/2006/2007  are shopping around, as always new business attracts better rates than existing customers so there is once again an argument for switching.

However, the many people who took out trackers are basically out of the market in the long term as every single lender has removed tracker mortgages from the market, in fact, if you know of a lender willing to do tracker mortgages in Ireland they could hit the market and win on that basis alone, trackers are consigned to financial history on the emerald isle - at least for now.

The one area that seems to be getting some transaction speed is that of top-ups for improvements, people are not gearing up to buy a new house, instead they will improve that which they have already. The one downside is that many Irish lenders will not do a totally separate second mortgage top up - keeping the original at its rate/term etc.- and the reason is because there are so many negative margin loans out there, almost every residential tracker is currently negative margin when you consider cost of funds [although that's doing better for now], cost of distribution, and then margin. The crunch hit the banks bad on these loans, some were as low as ECB+0.5% so you can only imagine what Euribor cost of funds being at over 1% above ECB during the bad days was doing to the book and liquidity of same!

Buy to let: This end of the market is basically dead, the issue is acute on the supply side but mainly on the demand side, there are estimates of between 45,000 and 100,000 empty units (some unofficial sources cite even more than that). The industry economists all figure from 60-100k of empties, that means the supply side is swamped for a population the size of Ireland. Prices will fall and residential sales are going to be a slaughterhouse for some time to come.

On the demand side the issue is that paradoxically prices and rents are falling in tandem, a damnable situation, prices fall due to oversupply and confidence/credit crunch etc. the rental prices are falling because of oversupply of stock, competition for tenants, a need to meet payments even if it is loss reduction rather than meaningful yield, as well as that many of the Eastern European renters are returning home. Completions are still flowing  through, on the issue of attracting a tenant the competition for tenants is high, i had to drop rent by c. 45% on my Irish investment property to get it occupied.

The sensible proposition at present is that the state could buy some really cheap social housing, or if a buyer had enough cash/finance they could likely  bulk buy units at huge discounts, having said that, accurate market valuations are hard to come by, it is in the realm of educated guesses because with many distressed sales due to developer/owner going broke a suppressed price implies the ‘market’ price which is not the case in truth but the market only accepts that as it is the point at which a transaction occurred.

For me, i don’t really care about prices, instead i am watching yields and when they get over 7% investors will go back in feet first. I think the concept of cash flow will be the fundamental in property in the short to medium term, it is going to be viewed the same as bonds currently are - yields yields yields. Really it was continued market strength (when yields stopped making sense) seeking capital appreciation that caused the pendulum to swing so far beyond acceptable values.

Switching: moving lenders is really bunched in with re-mortgaging, the idea of using your house like an ATM is no longer popular [rightly so] thus the movement in the switching market is the same as the re-mortgage market. There are deals being done but a trend we have noticed is that it is primarily people who are on bad value variable deals already, again, the folks with trackers will likely sit tight unless we get the inflation wave [which I personally expect] at the end of this which may entice them onto fixed rates in the future.

New home buyers: an area with at least some life in it! Many buyers realise that prices are much lower as are interest rates, if rates go up 1% you would need to have bought a house for a few grand less on price to make up the difference, its an interesting mathematical approach which people need to be aware of. A house for €300k over 30 yrs. at 4% is actually €6,000 cheaper than a €270k house at 5% and with the long term rate outlook being a rise eventually it is perhaps better to lock in now rather than later, personally that is my intention.

The state is getting on board with a thing called homechoiceloan which is literally like a mortgage bank, they already do shared ownership and affordable housing too, currently even with 20% discounts many banks won’t lend on these, partly due to councils not being in line with the actual market - their valuers price totally differently than independent valuers - and then the profile of the lender who qualifies for this kind of loan. In many cases developers are selling for comparable prices with ‘affordable housing’ diminishing the attraction of the programme.

Developers are slashing prices, one in Kerry is actually doing a 2 for the price of 1, who would have thought you’d ever see that in property!

Niches Markets: The only one I would consider at the moment is distressed debt/portfolios. The confidence is so utterly low that people would literally sell at cost to get out of deals/debts. Commercial property is now taking a spectacular dive, if you had a good tenant arranger and the right finance this may be an option, stamp on this is likely to get changed in the near future, but for now its a total barrier to entry. Unless you were to get into buying properties with motivated buyers and turning them into duplex’s etc. in desirable locations then I wouldn’t have any novel ideas currently but that depends on your timeframe to a degree. The place with the most movement is the first time buyer market and after that the remortgage market.

Product guide:

Homeloans: We are now in a market with fixed rates, variable rates, and LTV variables, where you get a variable [no fixed margin] depending on the LTV, rates are c. 3-6% many banks don’t have the money to lend so they are using the blunt instrument of tranche management and high rates to control the book.

Changes in strategy of lenders: Hardened criteria and industry underwriting are prevalent, for instance, if you work in finance it seems you are persona non grata, in the past 100% mortgages were everywhere, now LTV’s are averaging much less, several lenders - Haven, KBC [formerly IIB] are only doing 80% loans, others are offering 90% but getting the money and approval requires the patience of Job and the earnings potential of Warren Buffet. suffice to say the market is not frozen but a single sentence sums it up

“Banks will lend to very strong candidates, on good collateral at high margins” - almost sounds like an old central bank mission statement!

Who is the best: The Irish banks will be partly recapitalised, as regards balance the best is likely AIB, regarding product they are also top table much of the time, Ptsb is likely to reduce or even remove some offerings, First Active/Ulster [RBS owned] are not very competitive, they are doing some 90% loans but ensuring they get the margin for doing so. Haven/EBS are lending but the press have been releasing many rumours about their financial health, unlike many banks they still have men on the ground though which is a good sign. Bank of Ireland have harsh criteria but decent rates, top end of the mid-table. NIB who don’t deal with brokers are offering a lot of really good deals but at their multipliers - even with low property prices - few would qualify, they are the best for low LTV’s, as regards an ‘approach’ i guess i would say caution is king.

Borrower integrity: The reduction in lender integrity is there but both pre and post lending but thus far it is down to job loss/redundancy and the things that are killing every economy in the developed world. Certainly the underwriters have developed a new brand of risk aversion where they factor in eventualities that don’t even exist, for instance - successful currency trader refused [we didn't even ask them to consider bonus etc.] because the institution he worked for got downgraded by S&P.

Equity release for retired couples: if you are talking about residential reversions or reverse mortgages then these are gone from the market, the companies offering this have all closed down, they had the double hit of factoring in too much on the potential growth of Irish property, one of them did securitise the loans out one house at a time which I thought was novel but the business model broke irrespective of this.

Regarding a brokers ability to trade: Falling prices, yes, this took confidence and transactions out of the market, we are in the transaction business so if prices dropped it doesn’t ruin brokers, it’s when transactions freeze up that we get hit. Probably the harshest development is the confidence killer that is combination of credit crunch/falling prices/credit criteria - albeit some of these are required to reach market clearing levels. Naturally prices will drop beyond true value on the way down the way they exceeded true value on the way up, the issue is when and more importantly what is the true market value.

Negative equity: The press seem to love to write about this one, I have often argued that negative equity is interpreted rather badly, it only becomes negative if realised, actually being in negative equity doesn’t change anything unless you are also forced to sell and crystallize the loss, however, for those who do find themselves in that position it is catastrophic. And the harsh reality of having paid more for a property than it is worth is a confidence and financial killer. It has turned people off of buying and it gets mentioned virtually every day in the papers.

Reduced lending capacity: This is the other part of the squeeze on prices, we spoke about supply and demand already, the reduced supply of credit is a third factor which is pushing the prices of property down from outside of the property specific supply demand spectrum. There is nothing one can do about this and yet you can only wonder what would happen if credit became easily obtainable again, I don’t know that we would see reflation unless there was a zero rate policy and a huge money supply creation which is a circular proposition as at the root of this crisis are low interest rates, increased liquidity and money supply.

Lenders cutting out brokers: This is key, originate and hold seems to be the route for many banks as they move away from the originate to sell/securitise model, we are seeing dual pricing and it is there to specifically remove the broker, banks say it is so that they can get the cherry on top [life assurance etc.]. The intermediary market makes less sense in a downturn, why pay a broker when you already have to cover branch costs? And in a market as simple - in terms of lenders and options- as the irish one the argument for ‘going direct’ is strong, particularly in advertisements. We are still only at a 50% penetration for broker use for mortgages which is substantially less than the UK.

Reduced commissions are the other side of the coin, and this is the one that may be the rock many brokers perish on, costs have not reduced at the speed that commissions have. Commissions have dropped on average by 30% but the main banks lending dropped by c. 50% so the actual hit to a working brokerage is c. 40%, this when combined with a massive restriction of credit in a falling property market has created what we can only describe as ‘the perfect storm’.

However, we are not being discriminated against, the overall picture in banking is bleak at the moment, I’m an ‘optimistic bear’ for now. The banks are getting hit on both sides as well, impairment charges are high which hurts liquidity, their book, and their ratings. The rush for depositors means they have to offer exceptionally high deposit rates (compared to historic norms v.s. base rates/euribor), and when rates drop they are being pressurised into passing on the rate cuts to the mortgage market. This is actually bad for them though because they can’t do the same to the depositors or they will move their deposits so the compression sets in of reduced mortgage margin and paying out higher deposit margin, it is actually the opposite of the traditional banking model and somebody will go bang due to it, already banks have required capital injections. [since writing Anglo were taken over by the State]

This should be enough to give you the general idea of how it looks in Ireland coming into 2009.

Our firm [and I am sure many brokerage firms] are witnessing a conundrum in the market which is causing both clients and the broker a huge amount of heartache. It is that of the ‘AIP’ or ‘Approval In Principle’ not being honoured by banks over short periods of time. One lender in particular [we can't name names] is doing that on so many cases that we no longer consider their approvals as holding any relevance.

What is an approval in principle (A.I.P. is the broker-speak we use to describe them)? It generally means that you have given a bank enough information to make a strong [and yet preliminary] decision on a case, sometimes it is subject to further documentation, or they want to get a valuation report before making a full offer, in any case an AIP is NOT a loan offer but it is as strong an indication as one can get without dealing with solicitors, in the past an AIP was honoured almost exclusively and they were seen as fundamental to operating within your budget.

When did banks start to change their minds on AIP’s? Well, like many things 2008 was the year! Although recently they have changed their direction a little in how they are doing it, last year they would say ‘criteria changed’ or give some other equally useless excuse, now they are just telling us ‘we are not doing that deal’. If you want a cure for low blood pressure then try explaining that to a client who was told that an AIP was something that a bank would honour as long as the conditions on it were met.

So we now find ourselves in a situation where an AIP is merely part of the formality of getting a loan offer, and worse again is that we are trying to get loan offers as quick as possible before the banks change their mind and revoke it which puts stress into an already stressed financial system. When an approval no longer means an approval then the only other choice is to get an ‘offer letter’ but doing so will cost in terms of valuations fees, engineer reports etc. and it merely distorts a functional system into a broken one. We strongly urge banks to desist from such calamitous practice, it is one thing to be frenzied in a crisis but another to act disgracefully in the face of it.

This post is a brief account of the residential mortgage providers in the Irish mortgage market, a brief look at who they are and what kind of lending they are involved in. Many people have no idea who is who, or who owns who so this should help to clarify some of that. Of course, as a broker we can help guide you through the myriad of lenders and options, but even our expertise is not an adequate replacement

The list of lenders in residential mortgages are (in no particular order)

1. IIB Homeloans
2. Haven
3. PTsb
4. First Active
5. EBS
6. Irish Nationwide
7. ACC Bank
8. Bank of Ireland
9. Springboard
10. Start Mortgages
11. Nua Homeloans
12. GE Money
13. Leeds Building Society
14. Bank of Scotland
15. ICS
16. NIB
17. Ulsterbank
18. AIB

Who they are and what kind of lending do they do?

1. IIB Homeloans: This is ‘Irish Intercontinental Bank’ and they were once owned by Irish Life, they then got bought out by KBC. So who owns IIB now? KBC do, they are a good firm and KBC have had virtually no exposure to sub-prime loans, IIB did have a firm called ‘Stepstone‘ who were a subprime lender but they were closed shortly after starting. IIB are 95% broker channel with a small direct sales side. This means that almost all of their business is placed via brokers. The important thing to realise here is that they have about 12.5% of the residential mortgage market, if you didn’t use a broker you likely didn’t use them because they mostly deal only with broker loans. It re-enforces our belief that you have to talk to a broker to get independent advice.

2. Haven Mortgages: Haven is a broker only channel that is a subsidiary of the EBS, it was launched in 2007 and it is quickly gaining market share, their proposition is not identical to the EBS and access to their loans is exclusively through brokers. Haven is based away from the EBS (it’s located on Amien’s St.) and it operates as a seperate entity. They are quickly proving to be an innovative leader and the additional competition within the market is welcome. Currently however they have been raising their rates because (as is the case with most lenders) of the interbank markets, in addition, they source their money via the EBS so one concern for a broker only channel is whether or not they will be able to remain competitive with the EBS.

3. PTsb/Permanent TSB: This banks was formed when the building society Irish Permanent amalgamated with TSB (Trustee Savings Bank) later this new institution merged with Irish Life to become IL&P (Irish Life & Permanent), so PTsb is the banking wing of the Irish Life group. They are a massive lender who command almost a quarter of the residential mortgage market. They have been aided in their growth by strong support from the intermediary channel upon which they rely heavily. The share price of the Irish Life & Permanent group has been highlighted recently for poor performance but the actual company itself remains a market leader.

4. First Active: This was initially a building society that later got listed as a public company in 1998 and was later bought by RBS (Royal Bank of Scotland) in 2004. First Active had a strong history of home loans and although they have banking and savings facilities their penetration in that market is minimal. Their current host of rates are considered to be amongst the most expensive in the market and they have been the first to re-introduce certain types of mortgage fees.

5. EBS (Educational Building Society): This is Ireland largest building society, having said that building societies are thin on the ground as most have graduated up to fully fledged banks. They have branches and franchises, the franchises look and feel like any other EBS but they are owned by a franchisee. As the EBS is not a bank it doesn’t offer current accounts, but it does have ATM’s via AIB and credit cards via MBNA. Their investments are tied to Irish Life. In 2007 they launched a broker only channel called ‘Haven’. Traditionally EBS were known as a ‘first time buyers’ bank however, they have left that moniker behind and are known

6. Irish Nationwide Building Society: This firm is one of the smaller players on the market, historically their rates are also amongst the highest in the market, for this reason they are often seen as a lender of last resort in the mortgage market. Having said that, Irish Nationwide continue to remain profitable in the market and they seem to have escaped the sub-prime debacle, they also have a range of attractive deposit products.

7. ACC Bank (Agricultural Credit Corporation): Is primarily a commercial bank which focuses on agriculture and SME firms, typically when you wanted to borrow to buy land for farming ACC were the only lender who would look at this, they hold a strong niche in that respect. In 2002 Rabobank bought ACC and they are now a fully owned subsidiary. There are about 40 branches of ACC bank in Ireland, the firms focus going forward is to move into the business banking sector. If RaboBank decide to pursue a residential lending arm to their business then it is likely that ACC will be the conduit for this.

8. Bank of Ireland: BOI shares have taken one of the most severe hits in recent months, formed in 1783 Bank of Ireland is the oldest bank in Ireland. Bank of Ireland offer a full range of financial services, from credit cards to mortgages, they have an extensive branch system and they are a major lender in the residential market and they have exceptional market share in the commercial property section. Bank of Ireland are not generally dealt with via brokers because they never developed that channel fully, instead they worked on developing their subsidiary ICS into a broker channel for the group.

9. Springboard Mortgages: This was a joint venture by Merrill Lynch and PTsb which focuses on specialist or sub-prime loans. The Irish market saw a swath of entrants into the lending market from 2004 including firms such as Fresh (no longer operating) and Stepstone (no longer operating). Springboard is almost exclusively a broker only channel. Merrill Lynch removed themselves from the JV in mid 2008 and Springboard is now a fully owned subsidiary of PTsb. The exact details of the move were not disclosed. Springboard continue to offer specialist loans and they are amongst the remaining four players in the specialist market.

10. Start Mortgages: Despite being the second entrant to the market Start Mortgages actually took the largest market share in Ireland after commencing operations here, at the time they arrived the only lender offering specialist loans was GE. Start were owned by Kensington in the UK and later the group was sold to Investec. Start is an innovative lender and they championed many concepts in the Irish mortgage market, however, as is the case with all lenders, the crunch has resulted in a slowdown in lending levels.

11. Nua Homeloans: This is one of the newest players on the Irish mortgage market and they are also owned by Investec. Investec now have two players in the Irish subprime market so there is a belief among many that we will see either a sale of one of the banks or perhaps a consolidation or rebranding of both firms into one. In the interim Nua are gaining market share, they have embraced an electronic platform which makes dealing with them exceptionally easy, they are amongst the front runners in the Irish market to have achieved this.

12. GE Money: GE were the original sub-prime lender in Ireland, they entered the market back in 2003 with their first proposition. At the time they were basically consolidating ‘near prime’ loans and for this reason they left the niche open which gave Start Mortgages the opportunity they took when they entered the market. GE have since made aggressive inroads into the market on several fronts from mortgages for people with bad debt to personal loans and car finance (they had been in personal loans and finance all along). GE is one of the worlds largest companies and they are active in almost ever facet of business known.

13. Leeds Building Society: Leeds is the newest entrant on the market and they are a British Building Society (7th largest in the UK) and they came to market with a tracker/LTV proposal financing properties with a ‘one size fits all’ tracker for properties of 80% or less LTV. They operate on multiples which limits their ability to lend to many highly geared Irish properties however, their market share was impressive in their first two years of operation and they are a welcome competitor to the market. Their rates are hugely attractive at present as they offer trackers at ECB + 1.45% in a market where everybody else seems to be pushing for margins of 2%.

14. Bank of Scotland Ireland (BOSI): This is a firm that was brought to Ireland by brokers, they introduced tracker mortgages, and in essence it was BOSI who shook the market up, most of the public don’t really think about the fact that BOSI was a broker only bank that introduced Trackers to the Irish market, trackers are the most transparent and best value long term loans available, other banks soon followed suit and copied the BOSI proposal. Recently the firm has had difficulties because their mother company HBOS is having issues, they also started a retail only channel in Ireland Halifax, the move to retail has not proved as successful as they had hoped for and brokerage still accounts for most of their business.

15. ICS (Irish Civil Service) Building Society: This was once a state owned lender exclusively for use by civil servants, it was later sold to Bank of Ireland and it is a wholly owned subsidiary, they distribute mortgages almost exclusively through brokers and they tend to have a product offering that is slightly better (historically) than BOI, their direct sales branches are branded as ‘The Mortgage Store’ however, clients entering their premises can only be offered an ICS loan, on the life front they would be able to broker different products from institutions such as New Ireland or Eagle Star.

16. National Irish Bank (NIB): This is the southern version of ‘Northern Bank’ (of robbery fame). They were bought by Danske Bank in 2004 from National Australia Bank who had bought NIB in 1987. NIB are best known for polar opposite events, on one hand (long ago) they had helped clients open accounts under false names and evade tax, they overcharged customers, their ex-head of financial advice is barred from being a company director. However under Danske they have become known for positive reasons, namely their ‘LTV tracker’ which has been and remains one of the best value loans on the market. Mind you, their variable rate is amongst the worst in the market, but for the client who knows what they want and how to spot value their LTV tracker is unmatched. In a nutshell NIB can’t be touched by any other lender when it comes to trackers, the main gripe brokers have with them is that we can’t place loans with them!

17. Ulsterbank: This bank is owned by RBS and like its sister firm First Active their rates are amongst the most expensive in the market. They had a broker proposition and then in 2008 with minimal notification they informed the market (by email) that they would pursue a ‘branch only’ model, they had a competitive offering from 2004-2006 but since that time their loans have not been popular within the intermediary channel.

18. Allied Irish Bank (AIB): AIB has the largest branch network in the country, only BOI is near them, they are one of the ‘Big Four’ in banking in Ireland. They offer insurances via Ark Life and they are involved in every major facet of banking, from commercial lending to residential. On the residential front their primary distribution is via their branches, AIB do deal with brokers, it used to be via a channel called AIF (Allied Irish Finance & Leasing) but this was merged with the main group in 2005. The bank was only formed in 1966 by the purchase and merger of three other banks. Poland is a large area of AIB’s operations in the new millennium. Their lending policy is considered by many to be ‘profile’ based rather than strictly ‘underwriting’ based, and for that reason they are not the lender of choice for many cases, but for the type of business they do want they are a lender who demonstrates total flexibility and service.

That is a basic run down of the mortgage providers in the Irish market. No broker can really claim to have agencies with ‘all of them’ for residential lending. If you have any questions about this or any of the posts you see here be sure to call us! 01 6790990

Just a quick note to readers, Irish Mortgage Brokers is an intermediary, we go between you and the bank to arrange finance. You can go direct yourself and get the same mortgage, however, over half of the market uses and intermediary to arrange their finance, this is normally because they don’t really how to get a mortgage in Ireland or because they find using a broker easier than dealing with the job directly. And some people just prefer the personal touch of a broker over that of call centres and branches.

If you want to find the best Irish mortgage rates you can do so in a simple phone call or online application, click on the ‘home’ button above and apply over the web or call us on 01 6790990 and an agent will be able to assist you. The people we tend to work with are clients looking for a First Time mortgage in Ireland, people who want to find out how to remortgage a property, commercial lending, and trading up/down.

We are regulated by the Financial Regulator as a mortgage intermediary and also as a multi-agency intermediary, so we can advise you on mortgages and investment products such as pensions, PRSA’s, bonds, and life assurance.

If you want to learn more about tracker mortgages we can let you know about the offers in the market, and we keep people up to date when we get an ECB rate increase or decrease. We believe that some time soon the banks will rationalise their market proposal and move to Euribor mortgages, or Euribor tracker loans. Brokers are not the solution for everybody, however, our clients come back time after time so that is testament in itself. We hope you enjoy the serious articles we normally focus on in our blog, this is just a quick note to tell you something about ourselves!

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’.

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

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

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

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

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

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

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

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

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

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

It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of light, it was the season of darkness, it was the spring of hope, it was the winter of despair.

Some of you may recognise this line from ‘A Tale of Two Cities’ by Charles Dickens, however, I am not a classical scholar, instead it sums up my monetary sentiments for 2008. On one hand we are seeing property prices [the very foundation of the majority of Irish wealth] wither away, as global conditions worse, especially in the USA where house prices are now falling quicker than they did during the Great Depression.

There has been more than a few articles in this blog about the current issues in the broker market, the description I would use to describe it at the moment tends to modulate between ‘ugly’ and ‘awful’. Banks have really made great inroads into destroying the intermediary market, first of all they cut commissions, during a time when the market is slowing down, and then they brought in dual pricing, and that is disgraceful because it breaks the accepted norms of practice that have always existed.

Brokerage is being forced to find margin where it doesn’t exist, we weren’t making 50% profits so a 50% cut in commissions doesn’t mean that operating profit went from (for instance) 10% to 5% instead it came off the gross, and put any profit into instant negative figures, that’s the financial equivalent of the chainsaw scene from ‘Scarface‘.

The thing that many brokers will not be able for though, is the area of clawbacks that may occur in the future, our ongoing cashflow will be based (if all of the lenders follow suit) on incomes of 0.5% which is minus 50% but clawbacks from banks will come in at the level they were paid at which is 100% (or 1% of the loan amount). This can hit a broker for up to 5 years under the ‘revised’ structures by banks, so in 2013 (assuming we will have found a way to survive on half incomes) a broker can still be faced with clawbacks based on the traditional full income system.

That means there is a dilemma on many fronts, and brokerage is facing assault on many fronts and we have no Schlieffen Plan in place. The analogy is fitting because the squeeze in the current market is indeed on two fronts and that’s not
dissimilar to the situation the Germans found themselves in during World War 1 (they devised the plan to deal with a war against Europe and Russia simultaneously) in the case of the mortgage brokers in Ireland we have two fronts as well.

The first is Banks, they have cut commissions, introduced increased levels of clawbacks, and now they are ‘dual pricing’ too. The second front is that of the market, the Irish property market is in decline, the cumulative drop thus far would indicate that we have witnessed a crash but naturally the CSO and anybody else will only be able to give us the actual statistics after the fact, the second front is more palatable for the simple reason that the market has no agenda other than playing out as it will, it doesn’t mean anybody in the property game won’t feel its effect, however, it doesn’t have the intentional manoeuvres embedded in it the way that financial institutions do.

What to do? I get asked this all the time, and my response was, is, and will be ‘what can you do’? If you are driving down the road and the steering wheel comes off in your hand and nothing works but you are still travelling what do you do? Again, what can you do? Hang in there and trade through the hard times, that’s the only solution. A recession doesn’t kill people (putting aside economical situations that may foment war etc.), it’s just a period of hard times and there will be survivors just as there will be casualties.

Many brokers pegged their business model to a 1% commission system, Irish Mortgage Brokers have a business and cost model that is different than every other broker in town, and perhaps that is why (I am delighted to be able to say this) we might actually see growth in a time of a market that is being chopped up and shrinking, that indeed would be a trend breaking coup on our behalf.

Presently every major broker in Dublin has had to lay off staff, we haven’t, and the nice thing about any downside is that it always must have an upside, for brokers this may be that the ones who survive will prosper and hold more market share for longer, it may be a redistribution of market share, or a move to the more efficient systems available. In any case every fall out has an equal and opposite reaction, it was the blow out of the dotcoms that brought about the capacity for cheap broad band, it was the telegraph crash that made telegraphs, and by extension, eventually, telephones, cheap and accessible.

It’s just a case of sitting out the turbulence, until that happens nobody can really tell what the future holds, for now the main issue is to get through to the other side, thankfully we are already 11 months into a crisis that many would be forgiven for thinking only started in 2008, historical information interprets events after the fact, the hard part is to determine the lay of the land when you are in that moment. For now low sentiment prevails.

We have seen headlines heralding the ‘death’ of brokers, however perhaps we need to look at the whole financial distribution market and instead of worrying about brokers take an objective view of enterprise, efficiency, and distribution in general. I did some research on this by looking at the American market, talking to other brokers, by looking at operational efficiency planning in other countries and markets, and lastly was by putting up a post on www.thepropertypin.com which is a site where regular folks who are bearish on property (and into economics) hang out.

There are a few sites out there that I like to browse in order to gauge public sentiment, but the ‘Pin’ as its referred to by the folks who frequent it is perhaps the most open and honest, and it tends to have some heavy economic technicians frequenting it. Granted, the tone of the site is not one that perhaps everybody agrees with but the calibre of the posters knowledge is well above the average Internet forum.

Regarding the title ‘Branch Distribution by Banks is Dead’, I will approach this from different angles, to start we need to look at the core activities and costs of the average banking branch. The activities tend to be (by and large) things that don’t actually require the level of staff, space, or cost involved, for instance: Lodging cheques doesn’t require human interaction, I know because I have been lodging cheques by post for years, and RaboDirect have built up a huge level of deposits having never met any of their customers face to face. So that means lodging cheques is stricken off.

Lodging cash: Do you need to have a whole branch in place to lodge cash? Night deposit boxes work perfectly well for many businesses, and if you really need to lodge cash then this could work well. So lodging cash is getting stricken off our list as well.

Withdrawing money: One issue I would have is with ATM limits, I think a person should have some ability to exercise the limit of what they want to withdraw from their own account, indeed I pay a charge to access my own money from an ATM, I pay that charge willingly, but one flaw is that it’s the same price for a withdrawal of €20 as it is for €200 and that is a mistake, or at least one of the few examples of getting penalised for

Coins: Money distribution requires coins and banks normally have a facility for that, however, it’s not a lucrative business and that ties in with the next point.

Foreign Exchange: On a branch level this doesn’t account for much of the turnover at all (except for the airport branch of course!), and if there was a facility online where you could get the money delivered or where you could pick it up at the airport would that work? In any case, one regional branch could cover a very large area and take care of many services that people may want to still do in person.

On that note, it would make sense in terms of efficiencies to have one regional branch do only the work that absolutely cannot be done via the phone or over the web, and to charge a high premium for entering the branch, if you knew it would cost you €5 to walk in the door no matter what you were thinking of doing it would cut down instantly on branch traffic, and that would save banks a lot of money because they wouldn’t have to pay wages for desk clerks. On top of the €5 you would have to pay for whatever transaction you chose, this would help to charge the higher maintenance customers and reward the ones who don’t require personal help.

Through the web, letters, and call centres, they could still promote other avenues of business and if required you may have a meeting at the branch, of course, those meetings would merit free entry!

Aside from this would be how to create a customer experience, and in order to do that one could perhaps have a team in a call centre with a ‘branch manager’ and this person would look after the clients of (for instance) three or four of the branches that no longer exist, along with the team. The bank would give the virtual branch staff performance targets for service and customer satisfaction and gauge things accordingly. One may argue ‘this would never work’ but the fact of the matter is that branches are closing, and it can work, just because you don’t accept it today doesn’t mean it won’t happen.

Even if we don’t move to ‘virtual branches’ the level of staff in branches is likely high compared to the possible efficiencies, I went into a bank branch today during the course of writing this article, and noticed that at least half of the people in the queue were not there to do anything that required a teller, and that is not a productive use of their own time, nor the tellers so an decent charge to speak to a person would likely eradicate this behaviour very quick in the same way that a simple levy on plastic bags has almost wiped out the plastic bag litter that was endemic in this country only a few years ago.

A small well trained team could look after the services that do require a person and people should have to pay more for that, equally, those of us who operate efficiently with the bank should be rewarded with lower fees and other advantages, the current system means that in a way by not using the branch I subsidise heavy branch users.

Another key point will be for banks to merge cash machines, they might complain about branding but in terms of efficiency why not just have a few machines co-owned/operated by banks thus giving them greater exposure and costs split according to the market usage of a particular machine, so if AIB customers used a machine then AIB pay more for the maintenance of that machine, and their customers are charged for using ATM’s so that would be fair.

Worldwide one of the fastest growing areas of financial commerce is MBanking (because mobile phones have penetrated second and third world markets faster than computers/broadband) and this doesn’t require branches either, this could be a case for seeing a market actually develop without a branch focus and arrive on the market with first world efficiencies already in place.

Banks will have to at least face a shifting public paradigm in order to stay put, with all of my Utopian talk one thing holds true, face to face dealings are better, and the web won’t replace that, but that doesn’t mean branches will remain in their present guise. One commenter who I know only by their internet handle BuyHighSellLow talked about seeing ‘lounge style banks’ with couches and coffee machines, and that the reason for this would be to reduce the austere environment in banks, this is already the case with ‘The Mortgage Store’ which are tied agents of ICS. Will it cross over into the standard banks? It’s unsure at the moment, one thing no bank has yet done in the Irish market is to ‘capture cool’.

In order to ‘capture cool’ you need to have a new offering and make it simple and workable, the company that did this best was Apple with thee iPod, iPods are cool, and you can’t really take that mantle away from them, iPhones are even cooler, no bank or financial institution however is ‘cool’ and much as I’d like to dream that here at Irish Mortgage Brokers we are cool, the fact is that we are still finance industry people and nobody in finance is cool. It could happen though, Eddie Hobbs gained public acceptance and popularity via the medium of finance and in the UK Martin Lewis, the Money Saving Expert is considered cool and is widely liked. Both of these men gained notice by being consumer champions, but the real realm of market change will be in the area of Financial Education.

Halifax had advertisements that were funny, and that’s the first step on being the next ‘big thing’ but for whatever reason, be it customer apathy or market circumstances, they now look much the same as any other bank branch and indeed they have not seen market share develop at the speed they had hoped. During the last decade there was unprecedented economic growth and cheap money which meant that many banks were actually trying to increase branch numbers ‘making hay while the sun shines’ as the saying goes, but now with deposits growth slowing it not be inaccurate to assume that banks will now go through a phase of taking customers from each other as opposed to enlarging the overall size of the market.

Current accounts and many deposits are an excellent income stream for banks, they use that money and lend it out to other people at higher rates, but there are other factors at play now, such as the interbank rate market and that is squeezing profits, branches are expensive, if the market isn’t expanding then one thing banks and indeed any industry will do is work at cutting costs, bye bye unprofitable branches.

The downside is that there is a certain correlation between bank presence and the wealth of the immediate area, while not tied implicitly they are related, and poor areas will likely see more job losses (if their inhabitants are primarily in unskilled/low end labour market/service sector workers) and thus have less money to put into the bank and those branches will be the ones that close first, however, it will be in neighbourhoods that actually needs a bank the most. Upmarket neighbourhoods have a much higher bank to inhabitant ratio than poorer areas.

You can do your own research on this concept, go to an area you consider posh, then go to an area you consider poor, count the number of banks in the area, and do a comparison, because wealthy areas tend to have larger houses/plots you will find that in neighbourhoods of equal land size that the population of the wealthy area per square kilometer is smaller than the poorer neighbourhood where houses tend to be smaller and closer together, and yet, the wealthy area will have more banks per head of population. Jessie James, when asked why he robbed banks, replied ‘because that’s where the money is’, and it would seem that banks in turn open in certain areas because ‘that’s where the money is’.

We have also seen banks sell on their assets (head offices etc.) in lease back schemes such as AIB and several others did. Is this a sign they could see a dark cloud on the horizon given that it occurred at the height of the boom? Possibly, because financial institutions have the best people in the country in the area of financial forecasting working for them, if anybody could see a turn in the market coming it is them. Another thing that is hurting the deposit market is the reign of internet banks. NorthernRock (who despite turmoil still have great rates) and RaboDirect both operate successfully and never meet clients. The absence of all associated costs (and a good treasury department to get returns for the deposits) means they can out match most of the banks who are supporting high street costs.

There is a contrary argument, that branch banking will make a return, and Bank of Ireland clearly feel that way as they have embarked on a €30m investment in their Dublin region branches. In the 1990’s they were mercilessly chopping branches, so why change direction now? Does an economic slowdown represent an opportunity that the rest of us are not seeing? Especially when the slowdown now is expected to be ongoing for quite some time?

One obvious answer is that banks would close more branches if it weren’t for competition, PTsb has made big inroads in the general banking market and NIB is trying to do the same (although they closed their city centre branch on O’Connell St. in Dublin), and it may be this competition that keeps branches alive, but in a future of cost base efficiencies will the expenses of multiple locations and the higher overheads (in comparison to centralised overheads) be justified? I think not, and I think that like many of the economical shifts in history, the majority of people -myself included- only realise something has happened after they have passed through it and not while they are in it.

Branches, financial institutions, brokers and bank advisors make a living, at least in part, by the majority of the population not being financially literate, and this is the next area of education that will probably face the largest change. Financial education and financial literacy is not taught in schools, you might leave school being able to speak Irish (and I acknowledge the value of that from an educational and cultural standpoint) but unable to understand simple financial transactions that will affect you for the rest of your life.

It used to be the case that a bank would boast about the number of branches it had, and that was a primary indicator of the size, strength and efficiency of the operation, but as more and more people tune in online that will change, if you could log in and talk to a person over a webcam and get the information you need, print off a page with the instructions/order and then go to a common centre and simply drop it into a box or have a person there sign it in then that would create efficiencies for both banks and customers. The same could be done by telephone although the advantage of the online system is that it has the opportunity for more intelligent interaction than a telephone service does.

How would that work? Well, banks would have to open (for instance) a few centres in different areas, the costs of which are shared, it isn’t dissimilar to the idea mentioned before of universal ATM’s except that this would be a place with financial services workers in it, the efficiency for the customer would be that they could opt not to queue (if it was for something that just required a drop off, and for the institution it would be better because people would be arriving in knowing in advance exactly what had to be done if they did require interaction for the transaction.

To elucidate further, imagine you have to deposit cash, then you could log in, and print off your cash lodgement cert, and go to a centre, if you wanted coins you could order them online and choose your pick up point, then print off your order form, once the order is placed a person in a bank could get it ready and for this you’d need to go to the window and talk to who ever takes care of these orders, show them your order form and be gone, with the amount of coin you needed -fast. My ideas may be the biggest white elephants ever mentioned, but the idea that branch banking is in decline is not.

The increased opportunity for information harvesting would also give banks and financial institutions a better ability to market specifically to the right clients, the more that a person enters their information the better able they are to profile a client and then target their specific needs.

The things mentioned in this article are hypothetical, however they are trends that we may see develop eventually, it will require a move from banks perhaps more so than from bank users in order to effect it, but if a move in this direction can create profitability then that will be the onus for banks to embrace the concepts. The time-frame? That’s anybodies guess, right now many banks internet banking doesn’t work on Apple Mac computers! We will need to see a world where every last thing is not tied to certain technologies in order to get the morphing open systems mentioned thus far.

If I had to choose between branches and direct banking I would opt for direct if there were alternatives like the ones in this article, certainly the changing face of the economy will likely flex its influence on how business is done rather faster than the other way around.