Irish Mortgage Brokers Blog

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Below is a press release from the Financial Services Authority in the UK. This is how they deal with executives who cross the line, while we can praise reform in Ireland it is clear to see that we do not come anywhere near the standards set in the UK when it comes to discipline in the market, while over 90% of complaints are against banks, they have the fewest sanctions and yet this is the same banking system which nearly pushed the nation over the edge. The people in charge now are the same people that lead us here and it is shocking that we laud ‘new regulation’ when in fact we are still behind the times.

It is becoming evident that our own banks may have not been totally forthcoming in how they presented their own statements of affairs in the past, will similar sanctions therefore follow?

SA/PN/126/2010

27 July 2010

FSA bans and fines former Northern Rock finance director £320,000 for misreporting mortgage arrears figures

The Financial Services Authority has fined David Jones, former finance director (FD) of Northern Rock PLC (NR) £320,000 and prohibited him from performing any function in relation to any regulated activity [emphasis mine].

Jones’s misconduct started in mid January 2007 when he agreed, along with David Baker (former NR Deputy CEO), to allow false mortgage arrears figures to appear in explanatory text published with the 2006 annual accounts. Reporting correct figures would have either increased arrears by over 50% or possessions figures by approximately 300%.

For nearly a year, Jones was responsible for the continued misreporting of arrears and possessions figures on a monthly basis to NR’s assets & liabilities committee (ALCO) and, on a quarterly basis, to the Council of Mortgage Lenders (CML).

Margaret Cole, FSA director of enforcement and financial crime, said:

“Even though other senior directors within the firm were involved in the misreporting of arrears and possessions figures, as a senior director himself and as an FSA authorised person, Jones had a duty to reveal the true position to the public and to important internal committees. He had numerous opportunities to put things right, but failed to do so.

“This is a message to all FSA approved persons, that they must take their individual responsibilities seriously at all times, or suffer the consequences.”

Background

From 2005, NR staff were under pressure to report arrears figures at half the CML average. To achieve this, a series of improper actions were taken which were outside NR’s stated policy. For example, cases where a possession order had been made against a property, but where physical possession had not yet been taken (pending possessions cases) were excluded from all arrears and possessions figures. Although Jones was not involved in the actions that gave rise to their existence, by January 2007 1,917 such cases had been omitted.

Jones was FD (designate) between 10 January 2007 and 1 February 2007. During this time, David Baker informed him of the existence of the pending possessions and asked whether they impacted the firm’s stated provisions for bad debts. Jones assured himself that the provisions were correct and agreed not to reveal the pending possession cases.

As FD from 1 February 2007 to 22 February 2008, Jones was responsible for the debt management unit (DMU) and the credit management information unit (CMIU) at NR. Amongst other things, these units were responsible for reporting arrears.

Jones received a 20% discount for settling in Stage 2 of the FSA’s executive settlement procedures. Were it not for this discount, Jones would have been fined £400,000.

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

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

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

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

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

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

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

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

In the last twenty years there has been a huge increase within the financial services industry of ‘anti-money laundering’ and ‘anti-terrorism’ legislation, the trend started almost 20 years ago - the initial Irish take on the theme started with the Criminal Justice Act 1994. In the USA the rules go back further but the primary modern foundation is the Money Laundering Control Act 1986.

This week the new Criminal Justice (Money Laundering & Terrorist Financing) Bill 2010 passed in the Dail, and likely it will be signed off within days by the President and thus become Law. Then everybody in industry has three months with which to train up and become compliant. Yet another hidden and embedded cost in the financial system that will be offloaded onto customers via reduced service/turn around times as well as higher costs.

The fundamental question however, is this: Has all of this legislation and additional regulation achieved what it hoped to achieve? And to that the answer is no.

Bernie Madoff operated the worlds largest ponzi scheme while all of these rules and laws were in existence, the Al Qa’ida flew planes into buildings via an operation that was financed through the same ‘bullet proof’ system, and the perpetrators were in the USA on legal grounds with normal visas. Ireland specifically has seen drug related crime sky-rocket in the same time period.

Crime hasn’t been reduced by creating these laws, rather, during this time it has increased! And the emphasis is constantly that the law helps to prevent drug dealing, trafficking and terrorism.

I work next door (literally) to a methadone clinic, trust me, we are not winning the ‘war on drugs’ (as an aside: the prohibition actually creates the market). There are not fewer murders, there world has not become a better place by any tangible metric, nor can any government body provide statistics giving a gauge of success that AML (anti-money laundering) legislation has brought us in real terms.

It is all based upon the premise that anything that reduces crime is good irrespective of cost and therefore worthwhile, minus the litmus test of being based on reality or having measurable results.

Having asked several junkies to get out of our back-yard in work, sometimes with needles literally in their arm, I can tell you this - the illegality of drugs has no bearing on their addiction when it comes to how they live their lives, and equally, criminal gangs are not hampered by the banking system. When was the last time the cops hauled in a criminal gang and kept them interned for money laundering?

They find huge stashes of drugs being trafficked, and then there is the CAB - but don’t forget the fundamental point - in both cases the money has passed through the financial system or has existed outside of it and already, CAB can only confiscate ‘after the fact’ and not before it.

If you work in finance and facilitate a person in laundering money - even if they deliberately trick you somehow into doing it - you are held as culpable as the criminal! By that rationale we should be suing gun makers who’s firearms are used in crimes! It’s a joke, and yet we line up for it year after year.

The underlying advantage to the state - the one they won’t openly talk about - is that AML/Anti-Terrorism laws don’t actually prevent crime or terrorism, rather it ensures that the true golden goose of revenue raising (the average citizen) has no way to avoid having all of their money accountable and therefore they are not able to avoid any taxes.

The cost of money laundering and compliance across every regulated company becomes an additional cost to the end user, a cost that cannot be justified by any measurable means, nor one that has prevented violent crime, drug use, or terrorism. It is there solely to benefit the state by making sure regular citizens never have a way to keep any money hidden from the ever vigilant eye of the state.

I’d love to continue but I have some studying to do, I need to go learn all about something that has everything to do with nothing at all, and only three months to do it in!

Dan Mitchell of Cato (and the Centre for Freedom and Prosperity) is a guy I enjoy speaking and listening to as well, he is a great Libertarian thinker and regular commentator on Bloomberg, CNBC, CNN and Fox News. Here are two of his latest video’s, the first is on debt and the second is about money laundering laws.

CNBC are looking at an issue that is arising in the USA whereby 2nd lien holders are looking for a side ransom in order to allow a short-sale to proceed.

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

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

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

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

Legal Background: S117 of the Central Bank Act 1989

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

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

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

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

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

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

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

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

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

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

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

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

I have been asked several times ‘what would you change’ in the mortgage market in order to prevent serious financial melt-down in the future, the truth is there is no single thing that will ever do it, our issues are a perplexing intertwining of regulation failure, greed, banking errors, mismanaged risk, fundamental misunderstanding of money markets and national failure. There are key players within this, first and foremost is our government, after that is our central bank/ regulator, and finally financial institutions.

Anyway, the one thing I would change if I could would be the security on asset lending, in a nutshell I would just change one rule, therefore removing the need to revamp the entire system, the rule would mean that asset lending is non-recourse beyond the asset upon which the loan was secured.

In plain English, if you got a mortgage then the only recourse a bank would have wouldn’t be to you (currently you are on the hook for 12yrs and more) it would be to the property itself and after that the financial institution could go and hang if it didn’t work out. The positive benefits to this would be impressive.

1. Banks wouldn’t EVER offer 100% mortgages or other products where financial risk was high to the institution if the client didn’t repay.
2. Securitization would be evidence of a quality book being sold for future cash-flows rather than as a means to get risk off the balance sheet and over to somebody else, the due diligence would be much stricter and buyers wouldn’t step up if LTV’s were not in line with expected incomes.
3. Banks would charge higher margins, this would lead to a less leveraged institution - the old method (2000 to 2008) was to go out and borrow as much as you could at low margins so as to amplify results on lending, but when the interbank market went out of kilter it nearly caused the closure of banks across the world. Higher margins are a good thing and it removes the need for turning commercial banking into a den of gambling.
4. Borrowers would be more thoroughly vetted and loan to value offerings would come down, forever, this would mean that only people with a decent deposit and the correct lending profile would have access to lending, lending to ‘everybody’ isn’t about fairness, it isn’t evidence of a world where equality reigns supreme, because it’s not meant to, access to lines of credit should be based upon the worthiness of the individual, that’s how it used to be, that is how it should be, what happened at the end of the bubble was that anybody with a pulse who was willing to sign their name to a loan offer could get finance, that can’t be repeated.
5. Banks would know their contingent risks at any time, they couldn’t securitize easily and therefore loans would sit on their own book for longer periods, there would also be a deeper understanding of the ongoing performance of loans for the same reason, the system would be steady.
6. Only a foolish bank would explode lending if they had no recourse beyond the asset - that would help prevent property bubbles to a great degree.

Obviously this wouldn’t solve everything, it would likely lock huge swathes of the population out of home ownership, it would likely drive down property prices, but lower prices are not a bad thing, I don’t hear people complaining when there is a sale on LCD televisions! And carrying large debt is not necessarily a good thing for every person, home ownership does have a host of positive societal benefits, but when it is done at any cost, and to the detriment of the borrower then these benefits can rapidly be negated.

And of course, the objective of this post was to name just one thing, naturally a host of changes would be better, but if there was only one button that I could press and create a rule on the basis of it then it would be the one making mortgages non-recourse.

Today, buried on the inner page of the Independent Business section there was an article stating that an Oireachtas committee found that the responsibility for the financial crisis in Ireland was largely down to regulators and ratings agencies (the same agencies who down-graded Irish debt in 09′).

Sadly, it didn’t make massive headlines, nor will it… If you could get a picture of Sean Fitz, or some scandal element to tag on then it would be everywhere, but the humble work of one of the few independent studies done on the matter, lacking sex-appeal & scandal will be widely ignored by the public, meaning everybody will still only see ‘banks’ as the source of the problem rather than as the conduit, when in fact the source of the problem was the gatekeeper, the person with their hand on the tap of the conduit, who allowed credit to flow too quickly for too long.

I had coffee with a well known economist last April and we spoke about this matter, he felt that it was all down to Anglo, my position was that while they were the catalyst, that other banks perhaps knew the game was flawed but played on anyway because they couldn’t just walk away from the table, and that the real responsibility for this rested with the referee (Regulator/Central Bank) for how the game was panning out, that the only person with the tools required to stop the madness were not the banks themselves (whose allegiance is to the shareholder not the nation), but the Central Bank and Regulator. The person I met for coffee has since left academia for other pursuits so I won’t get to bounce ideas off them much any more, but the point remains that people largely feel the banks were the sole culpable party in the meltdown and it simply isn’t true.

There is a great post on Irish Economy about this, started by Colm McCarthy, and points on both sides are well worth reading, some of my bias is clearly rebutted, some of it is clearly supported, in any case, it is worth clicking through for a read.

This is the video taken at the Radisson Golden Lane in which Kevin O’Rourke of TCD delivered a talk about ‘The Great Depression to the Great Credit Crisis, similarities, differences and lessons’. It is a great video, well worth watching if you weren’t able to attend the event.

Kevin O’Rourke talks to CFA Ireland 26th Nov 09′ from CFA Ireland on Vimeo.