Irish Mortgage Brokers Blog

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.

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

In Ireland each staff member of the regulator costs 23% more than the international average, their cost to the taxpayer is 88% greater and yet they have responsibility - as a ratio toward population- which is only half that of other countries (to be exact its 96% less).

If that isn’t enough, our regulators deal with 15% fewer firms in terms of the number of actual regulated firms per employee, yet it is 26% more expensive to regulate a company in Ireland than elsewhere, and in terms of regulator staff to financial services staff they are dealing with 17% less than in other countries.

We are overpaying for under-service, in fact, in only one other country does the tax payer foot more of the cost of the bill than in Ireland, and for that we get the statistics above based on the figures below. Angry? You should be.

(the breakdown)

Cost per employee: In Ireland it is c. 23% more expensive for every staff member of our regulator than the international average

Cost per 000′ of population: The cost to our individual taxpayer is 88% more expensive versus the international average.

Population v.s number of regulator staff: Our Regulator staff have 96% less of a workload in terms of their ratio versus the general population compared to the international average, essentially they are responsible for half of the amount of people (per staff member) than regulators in other countries. For example, each French regulator has a national population ratio of 25,000 people to each of them, we have about half that amount.

Number of regulator staff per regulated firm: Our regulators deal with 15% less.

Cost of Financial Regulator per regulated firm: It is 26% more expensive to regulate a firm in Ireland (and we hope to grow a knowledge economy of which the IFSC is part of?!).

Ratio of people to Financial Regulator staff: Our Regulators cover 17% less people than their international peers.
Note: The Financial Regulator’s internal audit was the subject of an article by Charlie Weston of the Independent on the 7th of October, it was also covered in the Times today. We saw some of the figures from the report and thought it would be a good idea to put them in perspective.

The internal report was covered in a presentation on the 7th of September, this report is like kryptonite to any shred of faith many of us may have had in our banking and finance regulation.

Roger Bootle notes that markets do quite well at the end of a recession and at the start of a recovery by drawing the benefits of the future down into the present. Roger has a lot to say on the topic of banks, in particular that of banker bonuses - he states (and we agree) that when banks become ‘too big to fail’ they essentially are oligopolies and hence they are able to pay so well. From an Irish perspective the domination of AIB and BOI put some stock in this theory.

Yesterday the National Asset Management Agency (NAMA) legislation was brought out in the Dail (that’s the Irish Government buildings for our international readers) . We have put some of the developments into simple graphs to give an idea of the way NAMA will work and what the prices are as well as what they mean (for the pedants out there- they were drawn by hand to demonstrate the point).

So the total value of the loans is €68 billion, adding on €9 billion in rolled up interest - development accounts often had this factored into the end sale price, generally showing c. 15% profits (as a minimum) with the roll up included.

The €77 billion in loans will receive a 30% haircut (across the board) meaning the price paid will be €54 billion. It is important to note that different institutions will see larger haircuts than others, so it might be that BOI gets 20%, AIB 25% and Anglo 37% / INBS 42%, the 30% represents a varied pot in which individual loan sizes and haircuts will vary, having said that we know already that the biggest discounts will need to be applied to INBS and Anglo.

Brian Lenihan stated that the original value of these assets was €88 billion, of which the loans were €68 billion (before rolling interest was added on), an average LTV of 77% applied (which is over standard commercial lending levels so some more digging may be needed to see if there were cross-security/cross collateral considerations or cash flow producing securities for additional lending involved). These loans will being bought for €54 billion imply a 40% drop in the values of the assets on an economic basis (not today’s market price basis).

Each loan going to NAMA will have 185 queries/questions required on the property itself, and a further 300 on the loan, that means the diligence will be c. 500 questions that must be answered for each property. The staff of NAMA (c. 50) can’t cope and thus the banks are taking people out of credit and having them go to work for NAMA but on the bank payroll, so in essence NAMA has outsourced the work at no additional personnel cost which was a smart move (one of few).

The actual value of the assets in today’s market is (we are told) €47 billion, this means that there is an upfront shortfall of €7 billion, so no matter what happens there has been a potential tax payer cost of €7 billion at a minimum, obviously that is the market value though and not a long term value which assumes that prices will eventually rebound (the estimate is 10% in 10yrs), that point can be argued for and against, the issue will be (in my opinion) the ongoing cash flow to ensure loans are serviced. There isn’t any information put forward about expected default rates and that could easily skew the numbers.

The debt is also predicated on Euribor and while Liam Carroll’s case was tossed out of court because it relied on low interest rates, we have pegged the NAMA on the same hopes! It tells me that this plan probably wouldn’t stack up if it was provided judicial oversight, then again, fairness was never part of the plan.

Having said that, of the assets going across c. 40% of them are cash flow producing assets - in some cases this is blocks of apartments that were retained by developers and let out or other commercial rents. The banks will have a big job ahead of them in the near future: they will have to raise some capital quickly to avoid dilution of their shares/potential nationalisation (or at least majority state ownership which is effectively the same thing), if today’s share price performance is anything to go by the appetite is back so this seems likely to be a working solution. NAMA isn’t about fairness, and in that respect it is a massive failure, it is about a plan with a chance and in that respect it has a better chance of success than the alternatives put forward.