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.

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

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

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

Huh?

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

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

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

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

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

We have just been informed that one the lenders we deal with are only getting through applications received by the 4th of March, that is a near 20 day delay on new applications they are considering. Why the backlog? Has the market suddenly recovered? Are they being flooded?

No, rather it is a case that in banks nearly everybody has been enlisted to work in ‘collections’ and the staff were taken from every other department, in particular the ‘new business’ section. The bank we are talking about today merged their direct channel with brokerage so even going via a branch makes no difference, the whole company has only four working underwriters.

So inasmuch as the credit explosion saw too many resources being thrown at lending and the expansion of same, the crunch is doing the exact opposite by overshooting the mark in the reduction of resources. For a publicly quoted bank to be 20 days behind means that the market is facing yet another hurdle in reaching its rational level. Lending hasn’t frozen, people are still borrowing, the rules have changed but the game has not.

Banks will lend on good collateral, at good margins and with strict criteria. This is not punitive, it is intelligent, if loose credit got us here it won’t get us out any more than you could burn healing onto a fire victim. Having said that, a twenty day delay for a preliminary response is a worse turn around time than we had in the 1970’s. So somehow lenders have found a way to reverse the efficiency of their operations by up to 35 years. If it wasn’t so tragic it would be interesting.

Criteria is also a moving target, what goes one day doesn’t the next and this is causing difficulty for any people who wish to transact, if some semblence of consistency can be brought into the market it would be an aid to the adjustment and allow bottoms to occur where they should rather than where they will, we say this because it is our belief that property will overshoot the bottom in a downward trend in the same way that it overshot the true values during the bubble years.

Banks don’t have a corporate responsibility in any of the areas discussed in this post, but if they have any common sense they would ensure that criteria is consistent and understood, as well as ensuring processing is done in a timely manner, if you are getting a ‘yes’ or a ‘no’ it shouldn’t take three weeks to find out.

I have read several articles in this week in our  national papers and in them the authors said ‘banks are not lending’ and in one it was implied that this was somehow wrong. A point of order must be raised, firstly, it’s not wrong and secondly they actually are lending, just not freely or irresponsibly.

The frustrating thing is that even after all of the fallout, all of the crashing property prices, all of the international crisis news, that so many people still don’t get it. Cheap credit and easy lending is what go us here to begin with, we won’t fix the Irish economy with more mortgages being freely available.

Lobbyists take note: While you might strong-arm or influence the Government (I don’t know which method lobbyists use but either way they are effective) into supplying money for mortgages via recapitalisation or Homechoiceloan or any other plan, the fact is that reasonable people will not sign up to it, they will buy when they are good and ready, and when they have some confidence.

Are banks lending? In short they must be or Irish Mortgage Brokers wouldn’t exist, nor would any other mortgage broker. We are successfully helping our clients who do want to borrow in the current environment to find the best deals and these loans are drawing down. The common thread however, is that banks are reapplying traditional standards.

What does that mean? It means that getting a mortgage is not an ‘entitlement’ it is not a ‘right’ nor will it be ‘easy’, nor should it be, it is ease of credit and the large supply of it, when matched with extremely low interest rates that were kept down for too long that fuelled the Irish property boom, I now refer to it as the ‘ka-boom’ because we are now at the second stage of the explosion, only this time its a downward trajectory.

Lend freely, at high margins, and on good collateral with adequate security. That is what must be done in order for banks to survive. The laughable issue is that the state made a big song and dance about ensuring loans were provided to first time buyers! In fact, businesses need the money more, the first time buyer market is quiet at the moment for the very reason that confidence, job security, and a falling market don’t normally result in lots of transactions, the adjustment is natural, our reaction to it however, is far from that.

There is no ‘entitlement’ to credit, anybody who goes down that road is only setting us up for property-crash 2.0. The explosive mix of easy credit, historically low interest rates and a wall of liquidity with a glut in savings is the precise combination that brought us here, if anything, banks are doing the sensible thing in paring back lending at least to some degree.

As a mortgage brokerage we are obviously feeling the pain of this more than most, but it is the medecine that must be taken in order for there to be a market in the future, if we fan the flames of the toxic tiger during its death knell we won’t resurect a healthy creature, we’ll merely reincarnate the beast that brought us here to begin with.

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.

If the State can’t organise a bailout effectively then what hope have they of running a bank? A simple and yet profound question: if the bankers who run banks for a living (many having survived the 70’s and 80’s) can’t find the answers then what hope have the state who have no track record in doing so?

This is not a simple situation, banks that survived the Great Depression have crashed and burned, given this, is it vital to save every bank? Is a bank going to make it even with a slush fund? Thus far I remain unconvinced.

Anglo Irish Bank was set to get a bailout to the tune of 1.5 billion Euro. This couldn’t be arranged in time to save the bank and they have been nationalised, the speed of their fall from grace tells us at least some basic facts:

Anglo were not the strongest bank in the bunch, I won’t get into balance sheets, loans, impairments or anything else, the mere fact that they fell first means they were the weakest bank. The state stepped in and saved them - but what will this mean for other banks and what are they hoping to achieve? They have put a guarantee in place that they cannot back down from because that would have a catastrophic result. They have tried to organise a bailout and instead had to change tack and nationalise them.

This has virtually ensured further bailouts, if you save the weakest member of the herd then you absolutely must save the strongest members who are likely to encounter similar issues as general confidence in our banks and national debt decline.

Constantly we are told that there can be ‘no bank left behind’, and while that works well in theory the reality is that reckless trading goes unpunished and remaining executives in other institutions will spend more time engineering their golden parachute than saving the ships they currently steer.

What should have been done is to allow Anglo to go under and instead prop up the stronger banks, the shareholders would be severely hurt but, I am heavily invested in Anglo shares and am acutely aware of the impact, laughable is the shareholder pay off being put forward, you simply cannot go down the route of also bailing out shareholders as well!

Other banks have already had that risk (of nationalisation) priced into their shares so why bother? Let happen what must, even though many of the shareholders are pensioners and the like, for the pension funds that held the shares the insurance firms should reconsider their choice of management. The ugly but true fact is that there will, and indeed must be suffering in order to get to the other side, otherwise we will enter into a fiscal realm of trying to throw every person a lifeline while the ship itself is burning.

The blame game doesn’t solve the issue, I was explaining to a friend that crystallising the failure into hidden directors loans is like fighting a forest fire, then blaming your subsequent lung damage on passive smoking from the guy beside you who was smoking a cigarettes.

Ask yourself this: What actually happens when a bank goes bust? What is the total process? One thing to remember is that the profitable sectors of the company will be chopped off and sold, if other Irish banks were capitalised (saving the strong rather than the weak) then they would receive the benefit of the profitable portions.

The state would have to ensure - as per the guarantee- that depositors are protected, the people who borrowed would remain as liabilities [and there are funds out there buying distressed debt for the toxic elements of the book - which we the people now own], deposits would move to the stronger bank/s giving them better capital positions, this puts a price on the loss and then you deal with the bill, instead we may see a long and grinding descent into a state owned zombie-equivalent bank.

Rather should focus on saving the strong, allowing the weak to close, that is the natural law of business, nobody said you have to like it.

The Euribor 3 month money is at 2.822% which means the margin on interbank money is now at 0.322% (the current base rate is 2.5%) over the base. The Credit Crunch by definition is a sudden reduction in the general availability of loans (or credit) or a sudden tightening of the conditions required to obtain a loan from the banks. One of the biggest hallmarks of the whole financial crisis was the disjointed relationship of the Euribor from the ECB.

Traditionally the Euribor (we are talking about the 3 month money generally) trailed the ECB at c. 0.1 to 0.2%, so if the ECB base rate was 4% then the Euribor was (approximately) 4.13% or something like that. In July of 2007 this all changed and margins on interbank lending shot through the roof, to such an extent that literally thousands of loans in Ireland alone turned into negative margin mortgages.

This caused a heavy financial contraction as banks struggled to both de-leverage, meet cash flow obligations, and trade while maintaining liquidity when their lending book that was performing was acting against them and the loans that weren’t were causing impairment charges! It has been a genuine damned if you do and damned if you don’t year for banks (2008). This process is far from over and it is the second wave, the Alt-A and the second group of ARM loans coming on stream in 09′ that will tell us just how far down the rabbit hole we are.

There was a huge deal of rate compression as well, banks were vying for deposit customers and offering high rates of interest, equally they were losing money on mortgages and recently being pressurised by the state to pass on rate cuts to clients who were not contractually entitled to receive them. This was likely done to curry favour with the government in the belief that their help would be required in the near future (and thus the bailout has already begun).

Now however, it seems we are seeing the end of the total uncertainty in the interbank market and we are entering the land of volatility, that will stay with us (and with the markets) for some time. However, one of the key symptoms of the Credit Crunch seems to be resolving and that can only mean that on some level the system is on the mend, it does not mean ‘cured’ but at least the signs for now are not getting worse. If the interbank market continues to stabilize it will go some way towards banks resolving their balance sheets and that will mean less of a cost to taxpayers in recapitalisation costs.

With the news coming out daily about prime lenders facing higher and higher impairment charges it begs the question of who will do better during a downturn, specialist/sub prime lenders or prime high street banks?

Banks stated that they feel impairments of up to 90 basis points were likely, some have revised this figure higher several times with NIB predicting impairment of upwards of 300 basis points. Sub-prime lenders on the other hand start off with predictions of high impairment and they price and gauge the risk accordingly from the outset. Given that starting point, could it be a case that Irish specialist lenders may come out the other side of the liquidity crisis with an overall book that fares proportionately on margins than other prime lenders?

To answer this question we must first consider margins, with many banks typical margin is from 1% to 1.5% on average, however, with many prime lenders this margin is  lower because of low margin trackers that were a point of heavy competition between 2004 and late 2007. Low margin trackers are loss making loans, some banks are said to up to 30% of loans that are loss makers, not because of the fact that people are defaulting but because of the low margins granted at the time the loan was made, which means that prime lenders are in a sticky situation because they are losing money even on good loans.

To clarify the reason many trackers are loss making, it is because the blended rates (that of depositors payable versus interest charged) combined with money market rates, drove the the price of funding higher than the actual interest rate being paid, the historically high interbank prices meant that assumptions made from the time of the introduction of the Euro were wrong: interbank funds would not always vary from 0.1-0.2% above the ECB.

Given that the worldwide financial crisis was initially termed the ‘Subprime Crisis’ it would be fair to wonder how specialist lenders are faring during this time. The answer, at least from an Irish perspective is that they are not doing very well at all, but this is as much a symptom of frozen interbank rates as anything else. Specialist lenders are not deposit takers and for that reason they do not have the benefit of a group of zero rated funds (funds on which they pay no interest to obtain).

This creates a unique situation, regular banks are getting hit by the Euribor because of low margins, specialist lenders were hit due to a lack of liquidity in the market, indeed, specialist lenders were feeling the pinch back in 07′, you would be forgiven, as a member of Joe Public if you thought that everything happening now really only kicked in after the summer.

Specialist lenders have the margin but not the money, prime lenders have the money (to a degree!) but not the margin. So now it comes down to impairment, sub-prime lending has stronger rules on impairment risk analysis and is priced with that in mind, for that reason their book tends to produce great margin on the loans that are paying. Prime lenders on the other hand have many loans with low margins and even one going bad can have a larger than expected knock on effect.

That may be why lenders like NIB are predicting impairments so much higher than some other lenders, if you are already losing on low margin tracker mortgages then default in a single loan, when combined with other loans that are already negative margin it creates the same effect as three or four loans going bad even though only one has.

Sub-prime lenders have also taken a more market based approach to their number of staff and operations, they have shed the required numbers and cut costs to the bone, they also have strong credit control teams that are already veterans of the collections process while many prime lenders are turning to broker consultants to take up extra positions in collections.

It could be a case that specialist lenders do much better than many are giving them credit for (in this article it is focused only on the Irish Market), their high margins and expectation of impairment could have them adequately prepared for the storm that many prime lenders only seemed to realise was happening in the latter half of 08′.

As we await what is being described as a ’savage’ budget, it is important to remember some of the ideas being thrown about may appeal prima facie. One disappointing suggestion I heard today was a call for tax bands of 50%
(this came from an economics professor too!). In this blog we have said for some time that there are only two solutions to the deficit, firstly taxes must go up, secondly we have to stop spending. However, there is a point at which higher taxation actually reduces the tax take (more on this later in the article)

One thing that we need, in light of what will likely be testing times is to consider the impact of tax changes and also the need for a simplified bankruptcy system. There are currently (so we hear) thousands of well to do ‘non-dom’s’ in the UK who are planning to leave because of changes to the tax system. Ireland is a small country relative to Europe, so what could we do in order to make our shores more attractive to the superclass who, despite all of the tax breaks, are still huge contributors?

We could consider changes that mean that income earned in other jurisdictions is not taxed for non-domiciled people living in Ireland, obviously rich people living here spend money and that brings in a significant amount of economic activity as they purchase goods and services within the country they inhabit, this would mean we get the benefit of their wealth (likely local investment in property etc. ensues) and even though the tax on their foreign earnings would not enter our tax system it is better than not having them here at all! Obviously there would have to be some condition that at least part of their income is derived here and taxed appropriately.

Has nobody ever noticed that ‘recessions’ don’t affect Switzerland, Monaco, Lichenstein and other havens in the same way that they get the rest of us? If we had a world class finance centre -and we do, its the IFSC- and world class education and finance professionals -this can be achieved- then there is nothing stopping Ireland from doing many of the jobs currently performed in the City. Currently we only get the scrappings of the table in the form of administrative operations.

Bankruptcy is another thing that needs to be reviewed, Ireland’s laws are harsh and borderline cruel, risk taking entrepreneurs represent the enterprise function in this country which is actually the largest employer. While being mindful of large multi-nationals the Government have failed time after time to seek out more positive conditions for enterprise, currently the incentives for business creation are insufficient, the problem is that we have a nation of gifted and skilled workers who could innovate into new markets if there was conditions which met two simple criteria. Firstly that starting a company doesn’t mean facing unrealistic financial hardship, and secondly that if the firm does go bankrupt that the process is simple (so they are not also burdened with massive legal bills) and fast (so they can recoup and try again).

Part of what makes Americans so competitive is their view of business failure, the expression ‘fail your way to success‘ originated there and often if you haven’t fallen at least once in the past you are considered ‘green’. Failure brings lessons, and those lessons create better business practice and efficiency - one of the reasons that capitalism must have failure embedded in its ethos as not being the ultimate evil, instead, meddling with failure such as governments are want to do so rapidly is the greater mischief.

Immigration should be reviewed (not in the budget but in general terms), because if you are a doctor from a non-EU country it is harder to get into this country and live than it is for a hardened criminal from Central Europe, something in this equation doesn’t make sense.

Taxation should also be carefully considered, I would urge readers to examine the Laffer Curve which is a theory well known but made popular by Arthur Laffer (economic adviser to Ronald Reagan). It shows that the overall tax take can actually decrease when taxes are raised beyond a certain point, taxation can reach a position where it becomes more viable to make every effort at avoidance and even evasion in certain circumstances. In fact, when understood and effectively used the Laffer Curve can cause unexected economic uplift.

Desperate times call for desperate measures, and there is nobody saying that responsible public spending is a bad thing, it is the irresponsible spending, or the prospects of such that concern the financial community the most, and at a time like this easy answers are not necessarily the wisest.