Irish Mortgage Brokers Blog

In the first quarter of 2010 there were c. 62 business days, and from this time frame we have gotten the most recent lending figures from the Irish Bankers Federation on mortgages in Ireland. Those figures stated that there were 6,954 mortgages drawn down in the first quarter of 2010 equating to €1.22bn in lending.

Those are the hard facts.

Then come the contradictions. AIB claim to have about 40% of the mortgage market - that headline is from last November but we can assume it should still remain at above 30%, an institutional contraction of 25% would be known because it would definitely make headlines (the 40% of the market AIB has is 100% to them so if it fell to 30% that would be a 25% reduction on their single institution figures). Back on topic - if we accept that AIB is holding at least 30% of the market then that means they were responsible for 2,086 mortgages.

EBS are saying they have about 28% of the market, up from 21% last year. The bit I like best is where they say that one in two people who go direct to a bank for a mortgage went to EBS. Sadly, this doesn’t factor in the reality on the ground - every broker in town has a back door with the EBS via one of their agent branches and clients are regularly sent to them for loans when their more conservative broker wing won’t do the mortgage [EBS are loose on policy when you go direct].  A 28% market share would mean EBS were responsible for 1,947 mortgages.

We didn’t find statements of market share from the other banks, but I think it would be fair to say that between PTsb, Ulsterbank, NIB, INBS and KBC that they were jointly responsible for perhaps 15% of the market? (1,043 mortgages).

So we are now looking at a picture like this: AIB 2086 mortgages + EBS 1947 mortgages + everybody except BOI 1,043 mortgages = 5,076 mortgages

Nothing spectacular there until you get back to the fact that we had about 62 banking days in the first quarter of 2010, because during that time Bank of Ireland were claiming they were doing 100 mortgages a day. That would equate to 6,200 mortgages.

BOI figures 6,200 + everybody else’s figures of 5,076 = 11,276 mortgages

Reality = 6,954 mortgages.

Difference between the two? About 4,322 mortgages or in the region of €870,000,000 in lending.

In a nutshell, somebody somewhere is telling porkies. Who even cares any more.

I should state from the outset that I am against a banking enquiry if it is the ‘9/11 style public enquiry‘ it was originally billed by Patrick Honohan as (pic related). I also believe the primary failure in Ireland was one firstly of regulation and governance over and above what went on within the banking system, it is after all, the responsibility of regulators to exert their control over the systemic aspects of banking rather than vice versa, however, it seems to be the popular choice to have an enquiry and thus I have outlined how a relatively cheap investigation might be set up.

The people of Ireland are calling for blood and it is no surprise that various powers now want to deliver on it, they join other leaders from antiquity such as Titus, Nero and Caesar in wanting to please the masses with blood-letting, sadly, we have a history of making any investigation extremely expensive (it would actually be cheaper to have a real life gladiator tournament than a tribunal) often with little result - the tribunals are largely testament to this, in particular when they involve white-collar issues and not criminal ones. The fact is that in Ireland after an investigation find you guilty, that if you are rich enough you tend not to go to jail, and the only hardship might be having to cover your own legal bills.

So in advance we have several aims.

1. clearly define what it is that we are trying to ‘investigate’, much of the activity in banking is well documented and there is a large and clearly defined audit trail, for this a knowledgeable auditor can do
the job if there are specific issues known in advance that need to be considered. So if the issue is that ‘bad loans were intentionally placed’ or that ‘underwriting requirements were avoided’ or ‘legal requirements circumvented’ then it is all right there in the audit trail, oddly though, the feeling I get is that people want a general ‘explanation’ with a motive attached, I don’t know that we will ever get one, even if we stopped the entire nation to focus only on this enquiry.

2. define the parameters of relevance, is this about breach of regulation, irregular practice or outright illegal activity, depending on what you opt for (or indeed if we opt for all of them) it may be a case that we don’t need to do much research at all. This ties in with point 1, because banking is such a paper-trail intensive industry there is very little that cannot be uncovered with relative ease, if however it has more to do with conversations in board-rooms and the like then we get into a softer brand of evidence.

3. set a time frame and make the results public, something the Government fails to do, and when they do they don’t stick to it, not even when its a fairly set infrastructure project (think LUAS, Port Tunnel etc.).

Process: The first thing to do would be to remove the onus of discovery from the regulators alone, they don’t have the resources and it would take far too long, instead we should have a two phase initial inquiry which encourages people to rat out the wrongdoers.

I know (only anecdotally) that there is a huge amount of rage within the rank and file banking staff, they would all be only too happy to make sure that any people at the top that they can expose are given what they see as their comeuppance. There is a precedent there too, most of the public don’t know that former BOI chief Michael Soden was vigorously paring down BOI’s IT department just prior to the precarious information being found on his PC, odd that… You go to chop the IT department then suddenly the IT department brings you down?

There might be a ‘cosy cartel’ or ‘golden circle’, we see that kind of language used to describe many things if you look at some of the books out this year, or the tv/paper headlines, but in these ‘circles’ their strength lies only between themselves, every other rank and file member of financial institutions are likely more than happy to see these people brought down, and they want vindication for the regular Joe’s, this is one course where they might achieve it.

Phase 1: (60 days) anybody who worked in finance within the last decade can send an affidavit into the regulator, they can turn whistle-blower on any activity they know about within any field they have worked within, giving names, rough dates etc. equally, anybody can write in a confession in advance, stating their version of events upon any activity that may have been done with bent rules or contrary to regulation/law. This will provide a large body of evidence for the regulator to read through, they can then tie together the various affidavits to the organisations they relate to and that will be the foundation of further investigation. The obvious flaw is that perhaps nobody will whistle-blow, but this could easily be worked around by ensuring that professional bodies will get involved if any wrongdoing is uncovered

Phase 2: (30 days) The Regulator reads through the statements and filters them into criminal, very serious, serious, breach without serious implication and non-serious strata’s, then they set to work on the biggest ones first.

phase 3: (40 days) there would need to be some precedent set so that people implicated in the affidavits from phase one are placed with a burden of proof in phase 3, all the people implicated from phase 1 will have to defend their position from any implication placed against them in phase 1, rightly or wrongly, the people who come clean in the first instance should be given a precedence of ‘truth’ so that there is no reverse investigation based solely upon their affidavit, so they can’t ’self incriminate’, however, they can eventually be investigated if they failed out outline their own role, if they do confess and help then you do the standard treatment of greater leniency for them.

Finance isn’t like the Mafia, people won’t protect each other, perhaps if there is guaranteed anonymity for the people who make statements in phase 1 (not anonymous submission, but within the investigative process if their identification is protected) then it will encourage a full disclosure from within industry. The fact is that getting people to dob each other in from within is far more effective than trying to get in and pry answers from without. It works in breaking drug rings, criminal gangs, it is cornerstone of the RICO act and history tells us that people have an innate desire to not live in prison, so even the biggest criminals rat others out, they might be competitors or former bosses, it doesn’t matter, its effective.

phase 4: 6 months: All of the information is studied and investigated, the most pertinent being dealt with first and the less important either going into later investigations or thrown out altogether depending on the gravity of same - but with a formal warning issued as a precaution.

The regulator must then have a set level of fines which is relative to the size of the firm and or individual in breach, and professional bodies must also be involved - to the degree that any criminal breach or high level regulation breach results in the removal of professional recognition (eg: Institute of Bankers/ LIA would strip people of QFA, ACCA, ACA, CFA etc.) would all endeavour to do the same, and the regulator would create a ‘black list’ of people from the investigation so that it is known publicly, a further move would be that these individuals cannot be directors of financial firms, or become regulated personally, effectively we need to ‘clean out’ the system, in one fell swoop, not via the slow grinding attrition that we have seen thus far where the culpable are creating their own terms of termination.

The end result is that criminals would graduate to jail, and serious offenders are dealt with in a variety of different punitive manners, but if it must be done, then it must be done quick, with a set agenda. We shouldn’t put the uncovering of some ‘higher truth’ that we won’t ever really obtain above that of running a cost effective investigation in a timely manner.

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.

It was announced yesterday that First Active is going to close operations in Ireland. This will start with 750 job losses coming into effect via voluntary redundancies, 550 of which will be in the Republic. Unions in Ulsterbank/First Active have said that bank workers are ’scapegoats’, we spoke about the coming job losses in April of 2008 here.

RBS have made record losses, this lead to their bailout by the UK government. On the ground here it means that at 45 locations First Active will merge with Ulsterbank branches. The removal of First Active from the market will mean there is less competition in Irish lending, this will set the basis for increased margins on lending - at a time when the ECB is dropping rates. Having said that, First Active and Ulsterbank prices are amongst the most expensive in the market with variable rates of over 6% when market leading rates are under 4%.

In many cases the two banks operate in similar locations leading to the reasoning behind mergers of branches. First Active is the first prime residential lender to exit the market since the downturn, up until now it was only sub-prime lenders who shut down. This is a trend we will likely see continue, the contraction in the money market can only lead to one thing - less lending and therefore less banks, brokers, and property transactions. It truly does spell disaster for many people working in the industry.

First Active have set up a phone line for any enquiries 1800 303 068

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.

Mortgage rates are normally described as a percentage, be it 5% or 3.98% the important thing to remember is that it merely interprets the cost of that credit to you as a financial debtor to the provider. When you compare rates it is also important to have an understanding of where they came from.

For instance, which rate is better an ECB (European Central Bank) tracker of 5% or a standard variable of 5%? They are both the same numerically but the tracker has a guaranteed margin the SVR (standard variable rate) does not so if the ECB change rates, for instance the way they cut rates in mid-October the standard variable might not come down the full 0.5%.

To be fair most banks have decided to pass on the ‘full’ rate cut, but what they had done in the interim of rate movements was to increase the margin on their SVR’s when the ECB was actually standing still between June of 07′ and July of 08′. This meant that even though there was no move in rate the people on standard variables were paying more and more every month as banks decided to increase the margin on these loans-which they have every right to do.

Trackers had become (due to interbank money prices) unaffordable for banks because they were lending money out cheaper than they could but it in at. Apply this to something simple like a fruit shop, Joe buys apples for 20 cent and sells them for 15 cent, what will the end result be? This is the reason why tracker mortgages have been withdrawn wholesale from the market and we are now in a less transparent world of variable rates with LTV (Loan To Value) options and fixed rates.

An important point for consumers is this, when banks pass on the full rate cut it doesn’t mean you have automatically gotten ‘good value for your mortgage’ because of the disparity in variable rates to begin with. Take this example, the cheapest variable rate on the market is AIB currently at 5% the most expensive is from the two RBS (Royal Bank of Scotland) owned Irish lenders Ulsterbank, their variable rate is as high as 6.4%, if you looked at the ECB base rate the AIB one is ECB+1.25 the Ulsterbank one is ECB+ a whopping 2.5%! So where does the value lie? Easily it doesn’t rest with Ulsterbank mortgage holders on a variable rate that much is for certain. Remember, these rates are not actually tracking the ECB, that was only mentioned to give an idea of the difference in lending margin

So when a bank says it will ‘pass on the rate cut in full’ remember, its like if all the pubs in the country said they would give a 50 cent reduction on the price of a pint but in some bars a pint is €5 and in others its €6.50 you still need to look at what you are paying and not on the fact that a rate cut was take from your variable rate.

What would this mean to your monthly mortgage repayment? What difference would the prices be over time? We’ll take an example of a person borrowing €300,000 over 30 years using each rate, we won’t be factoring in tax relief in order to keep the example simple.

AIB
Monthly Mortgage Cost: €1,610
Difference per annum: —
Cost of loan in total over 30 yrs: €579,767

Ulsterbank
Monthly Mortgage Cost: €1,876
Extra cost per annum: €3,192
Cost of loan in total over 30 yrs: €675,546

How much worse off is an Ulsterbank customer in this example: €95,779 over the life of the loan! That means that if you choose to be loyal to this bank you are doing so at your personal detriment to the tune of almost €100,000! And yet there is no rush of people leaving Ulsterbank to get better value, the likelihood is not that they are pleased about an extra €3,192 per month but rather the fact that they don’t actually know what value is out there in comparison.

It is vital to know what rate of interest you are paying for your mortgage, especially in Ireland where the differences between lenders in like for like products can be so huge! That is an argument for using a broker or at a minimum to doing a good deal of research on your own in order to find value in a market where by law the person with the highest rates in the market can still legally tell you they are ‘competitive’.

It is no secret that your author is anti-intervention, we speak at times about market distortions caused by government intervention. The recent finance bill was barely born when Irish Bankers chose to abuse some of the security and opportunities it brought about.

First of all we saw an email go out from Irish Nationwide in the UK going out touting deposit business because the bank was now fully backed by the government. One oversight we will see is that we are now going to do the job of HM Treasury. How? Simply put, the current bill backs Irish banks, not only here, but their branches abroad as well. What that translates into is the Irish state backing sterling deposits for sterling/UK based customers. Obviously there is no issue with clients themselves, they didn’t initiate the finance bill, but is it really the responsibility of the Irish state to extend this protection to other nations?

A further issue is that it will distort markets elsewhere, is it fair to UK banks that Irish banks are now operating in their markets with this guarantee? What would have happened to Irish banks if a foreign bank did this to us a few months ago? During the S&L crisis the banks offering the highest deposit interest rates were the ones in the most trouble, it is often a sign of a last ditch attempt to improve balance sheet positions. This problem was seen again with mortgage firms like IndyMac offering high rate CD’s (cash deposits) right before they went bang.

It would be reasonable to assume that several Irish banks were in trouble (it is the reason we are told the emergency finance bill is being done), and yet even now, with the guarantees we don’t know exactly who it was that was about to go under. Furthermore, there has been no cash injection to any lender, so the ‘liquidity’ issue was not addressed by this bill, instead it stopped an impending ‘run’ but there has been no more mention of this ‘run’ so where was it coming from? Surely now that the banks have 100% security the public has a right to know? Apparently not. And now that Irish banks are government backed it also means that they can trade recklessly and when push comes to shove they can fall back on the ‘guarantee’.

My issue is that we are rewarding bad behavior. What about the banks who didn’t make errors and who would have really won market share had other banks closed? That is capitalism, you either subscribe to it or you don’t, there are businesses out there who have won the right to gain market share who have had that opportunity stripped from them due to the new state backing and therefore there is no reason why they should not trade recklessly to catch up.

One of the issues with the market in the last decade is that many of the banks knew the game they were playing was flawed but at the same time you couldn’t step away from the table because other banks would win market share with their performance, some however, took that painful decision and the fruits of their prudence are to see their competitors thrive despite bad decisions.

I don’t accept Mr. FitzPatricks excuse that Anglo is suffering because of ‘world conditions’ as he said on the Marian Finucane show, that totally discounts his and his management teams responsibility, if worldwide issues are the sole determinant of Anglo Irish Banks performance then why does he bother showing up to work every day? If his firm performs only due to what happens elsewhere then it negates the need for him or his post to exist and it is this brand of management that can’t, or won’t, accept that they may be to blame, moral hazard in the making.

I wrote about getting into distressed stocks on Tuesday, it seems the Chairman of Anglo made the same decision to give ‘confidence’. I will be more honest, I did it as a vulture buy, no confidence required. Everybody accepts the asymmetry of information, there is no way that a regular Joe like me would have the information or access to vital information that the Chairman of a bank would have about their stock, and that means that you could say ‘anybody could have done this’ but at the same time ‘anybody’ didn’t, a huge share purchase in the knowledge of a government backing being likely to go ahead would naturally cause a significant share price move, if it was done in the full knowledge of the backing going ahead then this could amount to ‘insider trading‘.

The point is as follows: Our government backing of ‘all banks’ was a mistake because it instantly allowed several things to happen, it allowed competition abuse, it skewed the Irish banking market - there is now a strong case for Ulsterbank, NIB, and Halifax to be included - this means we’ll be covering banks that are fully owned by foreign firms, if we say ‘yes’ to them then why not to the Irish branches of Bank of America? Where does it end?

The responsible decision is to say ‘no’ from the start, the second most responsible decision is to say ‘no’ for any extension to other institutions, the more distortions the more unexpected results. On one hand Ulsterbank have strong backing from RBS in the UK, other local banks don’t have that, and they don’t have the backing of HM Treasury which is probably more reliable than our own Central Bank, it is better to let Ulsterbank seek an audience with British law makers.

The ’system’ does not collapse if a bank fails, what happens is that risk takers receive the reward of the result of their risk and that can be loss, the USA did not fly into a tailspin when Lehman crashed, the argument was raised for Bear Stearns that ‘it could cause a knock on effect’ and yet when we saw a failure many times the size of that the system is still there and figuring its way through the hard economic climate.

Politicians are leaned upon by vested interest groups such as banks and told that Armageddon is about to befall all of us, that sets off the message of fear and in turn we see ill thought out acts affecting public finance get run through the houses of the Dail or Senate (USA is finalizing their scheme) at breakneck speed [Note: cancer drugs don't get rushed through and there is actual lives at stake in oncology medicine].

The belief in non-intervention is unpopular with the general public, it is fair comment to say that one reason is because the ethos of such is not properly explained and that people can understand and relate to fear much quicker than they can relate to the basis of market efficiencies. You won’t see it making headlines, but Irish Government bonds are reflecting this, we have to pay more as a country for money, and that comes at a cost, a cost to the taxpayer no doubt.

World GDP is 50 trillion, the derivative market is 500 trillion, those are frightening (but also true) numbers. There is already a massive unwind happening, I believe that the unwind is what is causing a strengthening dollar in a market where the dollar should be tanking. We are seeing the front of it and this credit crisis is far from over, the portion where liquidity is an issue may be over for the short term but for all of the acheivements of the bright new machine it has failed the test of the market and financial institutions don’t have a roadmap to get them back out. Bailout plans have had the same effect of giving a drug addict some drugs when they are in cold turkey, the symptoms may disappear but the problem remains.

There were several articles about this in the press recently, mentioning banks taking an ‘interest’ or ‘equity stake’ in certain developments. Something that the articles failed to talk about was the underlying cause? When property was booming banks were not taking an equity stake, they would finance the deals but they didn’t tend to get in on the action, so why is it that during the downturn they would start to do this?

There are two ways of looking at this, one is the way that a lender would have you believe, the others is to aim for fair comment on what is an objective view.

First of all though, it is important to look at how debt affects liquidity, if a bank is seen to have any problems people start to withdraw money, that’s not speculation, that’s fact, it happened to Northern Rock, IndyMac and several other banks since. So there is no part of the market that is fully convinced when banks say that ‘we are doing just fine’, in fact, that was the public statement Bear Stearns made only days before the Fed [along with JP Morgan] had to bail them out!

There is a part of the financial community that would say ‘taking equity stakes is simply a way of not facing up to your losses’, something even Nick Leeson would likely now warn against! By ‘working with’ developers in this way what is essentially happening is that issues are being kept off of the balance sheet, if a builder is going bust (and I do agree banks,builders, and developers need to all work together), it is one thing to help them, but a whole different matter to take a stake in a sinking ship in order to keep that ship afloat for a while longer.

This isn’t the first example we have heard of this either, there are several other developments where we have been told that the bank actually bought some of the properties for sale from the developer! That is astounding, actually purchasing the units, now it can be shown as an asset rather than as part of a bad debt! The same can be said of ‘taking an equity stake’, if you ‘own’ part of a development, even if a single unit is not likely to sell it doesn’t mean that the valuation of the development is nil. There is still some ‘value’ in it, at least to the degree that it is better than a ‘bad debt’ which is the other way to handle things if the banks chose to go that route.

The concern for the industry is that this may be an Irish example of banks doing what they did in the USA which is basically try to keep certain information from reaching the market when it should. If Ulsterbank were (hypothetically) to say ‘we have made X in losses’ how would that affect the greater RBS group who only last week announced the second biggest loss in UK Banking history! (€883 million to be exact). It’s just as well that they (RBS) raised €15.3 billion in a rights issue in June to help them through this period

Ulsterbank told the Irish Times ‘The capital we raised means we are one of the best capitalised banks in Europe’, which sounds like a boast - but remember they are doing it on borrowed money, that’s like me boasting about having a million Euro if I had borrowed it all. When looked at for what it is that claim doesn’t seem so brilliant.

Lenders are correctly saying that it doesn’t make sense to force builders or developers to sell in the current ‘illiquid’ market, but does that imply that it makes better sense to move those same ‘illiquid’ assets onto their own balance sheet even further by taking physical product in? They are already exposed on the finance, now it seems they want to ‘double down’.

Only time will tell if this move pays off, suffice to say, one one hand ‘Mothership’ RBS might be a port in a storm, but they could equally turn out to be a ‘wicked stepmother’.

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